Efficiency Measurement in the Indian IT Industry using Data Envelopment Analysis

Abstract

Abstract
India is the world’s largest sourcing destination for the information technology (IT) industry. The industry has increased its contribution to India’s GDP from 1.2% in 1998 to about 9.5% in 2015. India is now one of the biggest IT hubs of the world, and all the major global players in the IT industry are present in the country. The industry employs about ten million Indians and has contributed significantly to India’s social and economic transformation. The industry has not only transformed India’s image on the global platform, but it has also fuelled economic growth by energizing the higher education sector especially in engineering and computer science. India’s cost competitiveness in providing IT services, providing cost savings of 60–70% as compared to the source countries, continues to be its unique selling proposition in the global sourcing market. There is intense competitive rivalry in the Indian IT industry due to relatively undifferentiated services amongst the larger IT companies in the domestic market and low switching costs between companies. Further, the threat of entry is moderate/high, as it is relatively easy to set up a small IT company, and the capital required to set up the company is relatively low; however, due to the dominance of large players in the domestic market, small and medium players are generally unable to secure large deals. A major challenge for IT companies is that of achieving operational efficiency. Operational efficiency is necessary for IT companies to maintain their competitive advantage. This study proposes a model for efficiency measurement in the Indian IT industry using Data Envelopment Analysis. The inputs considered include operational expenditure, capital expenditure, number of employees/employee expenditure, research & development expenditure, and expenditure in forex, while the outputs considered include total revenue and revenue in forex.
Keywords: Efficiency measurement, data envelopment analysis, Indian IT industry