India’s back office business faces a reckoning from Covid-19

India’s catastrophic second Covid-19 wave has become the ultimate real-life stress test for the global services industry, as companies work to keep back-office operations running amid widespread infections and an overwhelmed healthcare system.

India is the world’s leading back-office hub, with nearly 4.5m people doing everything from answering customer service calls to software development to mortgage processing, placing it far ahead of peers such as the Philippines, which has more than 1.2m workers.

Global banks and technology companies, from Goldman Sachs to Google, also run their own in-house operations there, with many more contracting work to outsourcers such as Infosys and Tata Consultancy Services.

But the country has been hammered by the second wave of the pandemic, reporting a seven-day average of 270,000 infections and a daily average of 4,100 deaths — both believed to be significant undercounts. The humanitarian crisis has been exacerbated by a severe shortage of hospital beds, oxygen and vaccines.

India has become indispensable to global companies but executives say this crisis poses risks to that model. Businesses have been forced to move work overseas, delay projects and even build their own treatment facilities for employees.

“I think with the second wave in India there’s going to be a big impact on industry,” said Vishal Sikka, former chief executive of Infosys and a board member at Oracle, the US tech company, which has 45,000 people in India.

The pandemic had already rattled the industry when India’s abrupt national lockdown last year forced the sector to shift to remote working practically overnight. “But now, with the disruption, this seems more serious. This feels like it will be worse,” Sikka said. “It’s just the sheer number of people getting sick.”

Executives and analysts say many companies have reported as many as 10 per cent of their employees are off with Covid-19. But that number does not include the workers who are busy caring for sick family members.

Vinod AJ, general secretary of Forum for IT Employees, an industry group, said the burden has become unmanageable for many workers. “The problem is that not only them but their families are getting affected,” he said. “Many companies are looking for 24 hours support for [clients in] the US and other parts of the world. They’re not able to give that much support.”

Sid Pai, a consultant, says that no business has been immune. “All firms, regardless of size and national origin, are impacted, whether you’re a Goldman Sachs, Accenture, TCS or Infosys,” he said.

Bangalore battered by the pandemic

Bangalore, the main tech and IT hub, has been one of the hardest hit cities even as the situation has shown some signs of improvement. The national caseload has dropped in recent days, although experts fear the virus is spreading in parts of the country with fewer testing capabilities.

Arvind Krishna, chief executive of IBM, the US tech company which has more than 100,000 employees in India, said the burden was manageable assuming the second wave was approaching its peak.

“It’s a concern but not something that’s a five-alarm fire,” he said. “I’m more worried about the long-term impact on some of the families. We’re getting back so many anecdotes of people in their 20s and 30s not recovering. That is a shock compared to the prior year.”

Pravin Rao, chief operating officer of Infosys, which employs more than 250,000, said India’s IT sector had weathered plenty of storms and was well equipped to survive this one.

“This industry has time and again demonstrated its resilience, right from the days of the dotcom burst to the global financial crisis,” he said. “There’s always been talk about whether this industry will survive, more so last year during the initial wave of Covid.”

A high-skill, low-cost business model

India took off as a hub for western companies to outsource call centres and IT work from the 1990s.

The country’s large base of highly skilled, low-cost workers encouraged banks and software companies to delegate an ever growing list of critical functions to India. The sector generates about $180bn in revenue a year, according to Nasscom, the Indian IT industry group.

The travel bans and lockdowns last year shook up a business model that relied on sending workers overseas and sprawling campuses. Spending on IT services fell 4 per cent in 2020, according to Nasscom.

But the cash-rich industry bounced back, as business activity picked up in Europe and North America. Net sales growth accelerated from 2.7 per cent year-on-year in the quarter ending in June 2020 to 6.4 per cent in the first quarter of 2021, according to CARE Rating, a rating agency.

India’s second wave poses a more fundamental threat if the government’s botched handling of the crisis — by failing to prepare health systems and procure enough vaccines — damages the country’s reputation as a reliable outsourcing destination.

In the UK, for example, regulators have been consulting with lenders about the possible effects on operations.

“It has dented that confidence in the resilience [companies] thought India delivers,” said DD Mishra, a senior analyst at Gartner, the research and advisory company. “The response has not given a good comfort level to everyone.”

Healthcare crisis put pressure on employers

One particular challenge is the enormous burden the second wave has placed on India’s healthcare system, which has left even affluent Indians unable to secure treatment. That has forced companies to take matters into their own hands. NatWest, the UK bank, is among many companies to have bought oxygen concentrators for its employees in response to severe shortages for medical use.

With hospitals full, companies including Infosys and TCS have also set up their own Covid treatment facilities.

To keep operations running, some have shifted work outside India, too. Shanmugam Nagarajan, co-founder of [24]7.ai, a customer service outsourcer, is redirecting calls from India to centres elsewhere.

“The wave hits different parts of the world at different times,” Nagarajan said. “When India is not able to take the calls, the calls are being taken by Colombia and the Philippines.”

Rao said Infosys was also hiring subcontractors and negotiating with clients to postpone projects “which are not very critical”.

TCS said the ability to keep its workforce productive and delivering for clients proved “just how robust and effective this model is”.

Pai added the latest disruption would increase costs and take a toll on productivity. “Clients have been understanding of that so far, but at some point the economics are going to kick in and clients are going to ask questions,” he said.

One challenge that companies have struggled to solve is vaccines. India changed its rules this month to allow the private sector to procure jabs directly but an acute shortage — expected to last months — has complicated their ability to do so.

Apparao VV, head of human resources at HCL, a Delhi-based outsourcer, said the company was able to secure a limited number of vaccines through a partnership with a private hospital but was struggling to obtain more.

“Nobody is able to provide you with the timelines and volumes that are required,” he said. “We approached all the manufacturers. They were very non-committal . . . Through no source are we able to get commitments.”

About 3 per cent of India’s population is fully vaccinated, compared with more than 30 per cent in the US.

One advantage could outweigh all others: people

For all the upheaval, executives say they believe India’s biggest long-term advantage is likely to outlive any pandemic: its workforce.

With fierce competition around the world for programmers and software engineers, they argue that nowhere else can companies find so many workers at the right price.

Both JPMorgan and Credit Suisse, which already have sizeable operations in the country, announced plans this month to hire 4,000 and 1,000 more India employees respectively in 2021 to boost their technology.

“Companies will go where the talent is,” said Sangeeta Gupta, senior vice-president at Nasscom.

Additional reporting by Nicholas Megaw in London