The outsourcing industry grew by an estimated 50 percent in the financial year ending March 31, 2004 which would translate into revenues of 3.6 billion dollars, the report entitled "Offshore Outsourcing Survey" said.
The industry should grow at a similar blistering pace this year as the sector is in expansion mode, Ernst and Young forecast in the report released Thursday at an industry seminar.
"Growth is expected to exceed 50 percent in 2004-05 as well," said Ernst and Young partner Ranjan Biswan, one of the report's authors.
The expansion has been driven by existing customers increasing orders thanks to cost and productivity gains which have also attracted new clients.
There has been a rush by Western companies, especially those in the United States, to shift work to India to take advantage of its vast pool of less expensive, educated English-speaking workers.
But Biswas said there were clouds hanging over the industry, which employees around 200,000 people.
The huge growth potential could be hampered by rising staff attrition and absenteeism that is due in part to the monotonous nature of some of the work, he said.
"At any point in time these outsourcing units have around 10-12 percent of staff absent," Biswas said.
Employers are forced to keep extra employees on their payroll to fill in for absentee workers and those who quit suddenly and this increases their costs, he said.
The industry also faces challenges from leading global service providers setting up delivery centres in India. Expansion in India by US companies like Accenture Ltd., which pay fatter salaries than domestic firms, has driven wage costs higher and caused some Indian companies to lose staff.
"Even 200 rupees (4.50 dollars) make a difference for a teenager as that much extra money means that many more movies or coffees. And if a competing vendor offers him that, he would take it and go," Biswas said.
Outsourcing companies need to implement strategies to retain staff given the stiff competition emerging in the industry, he said.
"Hiring slightly older professionals would be good as the present lot" is largely made up of young people, he said. "Also providing higher bonuses and incentives, offering faster career progression and providing job rotation could be some of the strategies to retain employees."
Many companies, he said, were already contemplating such actions.
Biswas said a recent fall in the dollar had also squeezed earnings margins, "making it tough to be above water if costs aren't controlled."
The rupee has appreciated by over three percent since January against the dollar, affecting earnings of software companies.
He also said companies should target clients who operate during India's daytime hours. This means seeking customers in Europe and Asia.
"Vendors must focus on filling up their seats during daytime as most are working only at night to meet client requirements of the West," he said.
The move to outsource work has created huge public uproar in the West, especially in the United States during what is a presidential election year.
But Biswas said he did not believe there was much foundation to Western complaints that India and other countries were taking jobs.
"Indian vendors are employing just around 200,000 people while there are four to five million working in the US in such jobs.
"Where is the job loss?" he asked.