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Thursday, October 28, 2004

Outsourcing's future in India

    Posted by Adam Crouch

John Edwards has an article in CFO magazine about the new frontier in outsourcing.

The thrust of his article is that outsourcing is moving away from India and towards other locations:

As wages increase in one region, companies move farther afield. This search for new lands spells trouble for India. Admittedly, the subcontinent remains the most popular information-technology offshoring location for U.S. companies. But observers say India's period of competitive advantage may be waning. In fact, with local wages rising at a 20 percent annual clip, executives at companies from Bangalore to Brahmapur are reportedly beginning to shop out some of their own operations. "This outsourcing to India is definitely a very short-term phenomenon," insists Phil Fersht, an analyst who covers offshoring for The Yankee Group, a Boston-based technology-research firm. "Other countries are maturing and getting involved with the global economy," he adds.

Edwards then goes on to cite a few anecdotes of companies outsourcing elsewhere, but doesn't provide any real figures to prove that India is beginning to take a back seat in outsourcing.

While companies are increasingly outsourcing to other countries in the world, this is a case of the pie getting bigger, rather than India losing much of its share of the pie. According to Gartner, Business Process Outsourcing Services grew 38% last year. IDC is forecasting a 20% compound annual growth rate for the next 5 years. You have to take the expected growth figures with a grain of salt, as you do for any industry that's full of hype, but I think it's pretty clear that this industry will continue to grow at a good clip. Outsourcing providers will get better at addressing quality issues, improving technology will make things more seamless, and providers will be able to do more high-end work than they currently do. I expect the political controversy over outsourcing to die down, at least in America, once the economy further improves, and resources freed up by outsourcing are worked through the rest of the economy, thereby creating new jobs to displace the old. The outsourcing issue will also lose a great deal of political momentum once the election is over.

Regardless of what the future holds for the outsourcing industry, India will continue to be a compelling hub for IT work (even if call center jobs leave). It's important to note that this should hold even without a wage differential. There's a reason that Indian nationals make a large part of America's IT workforce. The Indian Institutes of Technology are comparable to some of the best universities in America, and graduate around 20,000 students each year. There are many more universities that also produce top-notch graduates.

Many of these graduates currently come to the US, but if they could make as much money in India, many would prefer to be home. This is already beginning to happen. When I visited Infosys's Bangalore campus in July 2003, there was a surprising number of American and European workers, who came to India because of the lifestyle that can be afforded there on IT worker's salary.

Keep in mind that when most US companies outsource their work, they outsource it to domestic locations, where there is a much smaller wage differential. Many of the reasons for this also apply to India.

Outsourcing low-end work was never meant to be an end-state for India. India's goal is to leverage the outsourcing experience to help it become a center for innovation, not to continue doing simply backoffice functions. I've seen no evidence so far that suggests that goal is any less achievable now than it was before.

Note: I don't think this is necessarily a bad thing for the US, or for US high-tech workers. The important thing is to make sure that the US remains an innovation leader, through things like promoting more R&D, removing barriers to small business development, making student visas less burdensome to obtain, etc.

Business Process Outsourcing is on the rise elsewhere though. Here is >AT Kearney's ranking of the top offshore outsourcing locations for 2004:

1. India
2. China
3. Malaysia
4. Czech Republic
5. Singapore
6. Philippines
7. Brazil
8. Canada
9. Chile
10. Poland
11. Hungary
12. New Zealand

Note that Eastern Europe is doing quite well. I was pretty surprised by this. The EU's new entrants have seen a surge in manufacturing growth, now that they have full, tariff-free access to Western European markets. There aren't really tariffs on information though, so being part of the EU doesn't have the same clear benefit for outsourcing. Maybe Western Europeans feel more culturally connected and comfortable with Eastern Europeans now, or maybe visa-free travel helps. Any readers know more about this?

Edwards also mentions that Africa is an up-and-coming outsourcing location:

Indeed, executives who are considering outsourcing their corporate IT functions are hearing from some unexpected quarters. At the top of the list: Africa. Experts report that several African nations, including Uganda, Senegal, and South Africa, are getting into the outsourcing game. To date, though, Ghana seems to be the destination of choice for U.S. technology companies setting up offshore operations in Africa. Case in point: Affiliated Computer Services, a $4 billion (in revenues) outsourcing company headquartered in Dallas, is building a new data-input center in Accra that will employ 2,000 workers. Three years ago, the company employed only 65 workers in Accra.

I've been bullish on South Africa as a call center location for quite a while. To Americans, the South African accent sounds like a British accent. We associate British accents with class and refinement (silly, I know :P). Many Americans like dealing with someone with a "classy British accent", so outsourcing may lead to a better customer experience.

A positive point on the article: Edwards managed to work in a mention of HavenCo, which is located in The Sovereign Principality of Sealand:

The truth is, the Internet has made it easy for businesses to outsource vital technology functions to some very remote outposts. In the North Sea, for instance, a former World War II anti-aircraft military fortress now serves as a server co-location center for dozens of companies.

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