Volume 19, Number 3 Article by Srinivas Ainavolu September, 2007
Leveraging the Outsourcing Wave: Performance of the Indian IT Services Industry :
The Indian information technology (IT) industry has caught the attention of researchers with its exceptional growth and performance. While the IT industry’s growth and profitability are above par when compared with the general economy, it has been observed that within the industry there are wide variations. This is in line with the argument that while inter-industry average performances differ and are interesting, studying intra-industry performance is academically and normatively more useful as it distinguishes between poor and good performers. To uncover the potential factors determining the performance of Indian IT companies, Srinivas Ainavolu studied the profitability of ITS firms in relation to the variation in other parameters of interest (economic effects, business model effects and long term effects). Could variation in profitability be attributed to the variation in other characteristics of firms such as size, manpower costs, export orientation, off-shoring, capability and brand building efforts, and so on? Data pertaining to 110 Indian IT companies (from CMIE’s Prowess database) for a six-year period (2001-06) on a common sample basis was used in the study. Performance, measured in terms of return on capital employed, was regressed on various characteristics of interest.
The study found that larger companies are more profitable, on account of their ability to take on larger projects and the economies they reap in terms of savings derived in overheads. Export orientation helps companies in improving their performance. While offshoring has the inherent potential of cost savings as work is transferred to low cost locations, counter-intuitively, the study found that extent of offshoring was seen to impact performance negatively, possibly as a result of increased coordination costs. Due to lack of sufficient data, the relation between capability building and profitability could not be tested. The paper concludes by discussing future directions of research.
Reprint No 07305
