the global reality for outsourcing

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Subject: the global reality for outsourcing
  Is India´s outsourcing honeymoon over?
Report: Labor shortage and wage inflation in outsourcing market has other countries in hot pursuit.
August 24, 2005: 10:08 AM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Surprise! India´s reign as the world´s "Outsourcing King" may be slipping, even with its rock-bottom call center costs.

A new report from market research firm Gartner, Inc. warns that a labor crunch and rising wages could erode as much as 45 percent of India´s market share by 2007.

Indian industry watchers acknowledge that the country´s outsourcing industry -- its golden goose of the moment -- is indeed facing a "serious" problem.

In an interview with CNN/Money from New Delhi, Kiran Karnick, president of the National Association of Software and Service companies (NASSCOM), said he´s concerned that these challenges could stymie India´s strong double-digit growth in outsourcing services.

NASSCOM is the trade body representing India´s information technology (IT) software and services industry.

More importantly, the Gartner report cautions that a host of emerging countries such as the Philippines, Malaysia, Vietnam and Eastern European nations including Hungary and Poland, are also starting to challenge India´s leadership in offshore business process outsourcing (BPO.)

Many U.S. and international companies maintain that outsourcing business processes such as customer service call centers, administrative and accounting processes to low-cost and low-wage countries like India helps to keep down their own cost of doing business.

Analysts say India´s "go to" status as a premier outsourcing destination is a function of the country´s vast pool of about 2.5 million mostly English-speaking graduates that are ready to enter the workforce annually.

But India can´t afford to rest on its laurels, said Sujay Chohan, one of the authors of the Gartner report and vice president and research director of offshore business process outsourcing with Gartner in New Delhi.

Unless India devises a long-term roadmap to improve infrastructure and consistently grow its skilled labor force, he said India will see some of its offshore BPO clients shift business elsewhere.

"Although India´s infrastructure is improving, it is not keeping pace with the rapid growth of the industry," the report said.

The Gartner report pointed out that while no single nation yet poses a direct threat to India as a high-quality/low-cost location, over the past two years, more than 50 other countries have emerged that together could pose a viable challenge to India in the months ahead.

Gartner estimates that India´s current 85 percent ownership of the BPO market share could dwindle to about 45 percent by 2007.

In dollar terms, that would be a significant blow to India, Chohan said. In 2004 India raked in more than $2 billion of an estimated $3 billion global offshore BPO market with more than 250,000 workers.

He estimates that the worldwide offshore BPO market will grow to about $24 billion by 2007 of which India will earn about $13.8 billion.

Rising labor costs
Given that India´s been doubling its outsourcing operations every year for the past four years, Chohan said he´s not too surprised by the current imbalance in the labor demand-supply equation as well as the onset of wage inflation and high levels of attrition.

"Four years ago, a typical call center employee would have earned between 5,000 to 6,000 rupees ($114- $136) a month. Now it may be up to between 7,000 to 9,000 rupees ($159 - $204) a month," he said. "The rise in labor costs isn´t significant yet. What´s more important is that these increases so far have not been passed on to clients in the U.S."

But if these costs continue to escalate, he predicts that Indian outsourcing firms will take a hit to their bottom line and eventually start to pass along the increases to their international clients.

Chohan said India could learn from Ireland´s mistakes more than a decade earlier.

"This is exactly what happened in Ireland in the 1990s," said Chohan. "As a result, companies that were outsourcing to Ireland began to look elsewhere and discovered India for the lower-level work," adding that Ireland today still attracts what´s considered to be "high-value" outsourcing such as R&D and software development.

Chohan isn´t worried about India losing it lead in IT outsourcing. "India dominates now and will continue to do so in the future because of the sheer scale of skills in the country at low costs. The only exception is China which has become very visible in this space within the last six months."

Moving beyond call centers
Ashank Desai, chairman of Mumbai-based Mastek, said one way for Indian companies to maintain their competitive advantage and ensure their international clientele is to upgrade their services by offering more sophisticated back office functions in addition to the basic call center services.

Mastek is a provider of offshore IT and BPO outsourcing services. The company logged annual sales of $130 million in 2004.

"At Mastek we´re already looking into merging BPO and IT services so that our clients get double the advantage,´ Desai said.

He gave an example, "We can reconfigure IT used for processing insurance claims to make it more efficient and then process these claims more efficiently for our customers."

In order to emerge as truly global players and undercut the competition, Chohan said Indian outsourcing companies should also think about expanding their brand globally by setting up delivery centers outside of India.

Indian vendors depend too much on the U.S. market. India has to make inroads into non-English speaking markets as well, "similar to what Ireland has done to successfully service the European market," he said.


[24-08-2005,14:38]
[***.20.170.23]
sharon
(in reply to: the global reality for outsourcing)
Sounds like sour grapes to me.
[24-08-2005,14:43]
[***.109.34.92]
GQ
(in reply to: the global reality for outsourcing)
Now what is your point Sharon?

I´d not trust your source even though it is CNN. I just have a copy of BUSINESS WEEK which has done a special double issue on prospects of India and China.

They and many experts in field project China to surpass US as a power in year 2020 and India to surpass all in year 2050.

Now which one shall I say ye to?

Even in your article read...

"... Chohan isn?t worried about India losing it lead in IT outsourcing. "India dominates now and will continue to do so in the future because of the sheer scale of skills in the country at low costs. The only exception is China which has become very visible in this space within the last six months..."

[24-08-2005,14:53]
[**.244.29.100]
starwars
(in reply to: the global reality for outsourcing)
when you phone 1-800 for MSN technical support, there is chance you talk to person from U.S, Canada, mostly Indian.

I have friends working in a telecommunication centre here in Nanaimo,B.C

They told me in India, same job duty, same stuff, workers only get paid 25cent Canadian/hour, compare with 10bucks/hour here.




[24-08-2005,15:07]
[**.66.36.59]
departure bay
(in reply to: the global reality for outsourcing)
just thought it was interesting. No doubt India and China are booming economies.

India may discover some of our Canadian and US reality when it comes to IT services. You might have the skills but there is always someone out there willing to do it cheaper. The days of guaranteed IT jobs is not so guaranteed.

[24-08-2005,15:13]
[***.20.170.23]
sharon
(in reply to: the global reality for outsourcing)
The cost of living in India is also much lower than it is here. Everything is relative.
[24-08-2005,15:14]
[***.109.34.92]
GQ
(in reply to: the global reality for outsourcing)
There are two things happening:

1) Yes India is cheap and that makes it interesting, but
2) New generation is getting education, skill set and training compared to newer generation in the US or Canada.

Now that is powerful and interesting to all the companies in the US and Canada. What would you choose an engineer in US for appox 50-70K a year or in India for 7-10K a year?

However these are the facts of todays world.

[24-08-2005,15:17]
[**.244.29.100]
starwars
(in reply to: the global reality for outsourcing)
ALl that is fine. But the ground reality is -

1. Largest Pool of English speaking graduates
2. A strong technical orientation - (Over 400,000 engineers graduate every year)

The two factors, would still ensure India is on the BPO map for the next decade (at least).

The model might change - from outsourced BPO to Offsourced, remember GE (an MNC) was amongst the pioneers of capitalising the arbitrage opportunity. More and more global corporate would start planning their own setups in India, to have better controls over critical aspects such as Information and Data security and integrity, Process Quality outages, etc.

individually comparing the competition -

Phillipines - Filipinos were the first choice of American Companies for outsourcing, even today Filipinos get preference and higher salaries in the US. But the cost is way beyond. Compare $30 per hour to $7 per hour (Call centre per hour rates on offer)

Malaysia/Vietnam - A small country, English capabilities are no where near what India has to offer.

East European Countries - The countries do not offer the sheer numbers. compare the population of these countries - Delhi´s population (over 15 million) would give you an idea. most east european countries would only compare to Delhi in terms of population.

I am not saying that there is no competition! What I am saying is that there will be no fall in BPO revenues to India. These countries will only affect a reduction in the growth of the industry in India.


[24-08-2005,15:19]
[***.224.54.159]
MK
(in reply to: the global reality for outsourcing)
MK I agree with you...

The sheer market size of India itself will ensure its growth..

[24-08-2005,15:28]
[**.244.29.100]
starwars
(in reply to: the global reality for outsourcing)
just thought it was interesting - nothing more.
[24-08-2005,15:33]
[***.20.170.23]
sharon
(in reply to: the global reality for outsourcing)
I am currently reading ´the world is flat´ by thomas L friedman. It dissects holistically how the world is becoming levelled and how ppl from every part of the world are benefiting from this new form of e-globalization. If you guys are interested, this book gives a better perspective on outsourcing.
[25-08-2005,02:09]
[**.24.90.85]
lazy tea MATE