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Outsourcing: What concerns most? - Views on News from Equitymaster
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  • Apr 21, 2004

    Outsourcing: What concerns most?

    Business process outsourcing (BPO) has emerged as one of the most important facets of the globalisation process with great benefits to low-cost developing nations like India. However, the transition that has accompanied this process has created enough disturbances in the US (the largest outsourcer) where the loss of well-paid jobs to relatively low-paid Indians has attracted ire of the administration and of labour unions. The results can be seen in the increasing noises of backlash against outsourcing of work from the US to India. However, this is not the only threat that poses a big challenge to the Indian software companies that are at the forefront of this outsourcing revolution.

    In this regard, we recently conducted a poll on our website, asking our readers what they considered as the biggest challenge to the Indian outsourcing story - outsourcing backlash, competition from the MNCs, or other competitive destinations. The results have indicated a mixed feeling.

    The response...
    Out of the total number of respondents, the largest chunk (36%) voted for outsourcing backlash as the biggest challenge for Indian software companies. This was very closely followed (at 35%) by concerns relating to the emergence of other low-cost destinations (like China, Ireland, the Philippines) that might give Indian software companies a run for their money. Last but not the least (with 29% votes) was the concern relating to increasing MNC competition that might derail the Indian advantage.

    Our view...
    While there is no denying the fact that Indian software companies really face these grave challenges, one needs to understand that all these have varying implications. What we mean by this is that while these factors are likely to affect the flow of outsourcing contracts to Indian software companies, the duration and the consequences of their effect will differ. Let us study these challenges in detail.

    Outsourcing backlash
    In one of our earlier stories, we had mentioned that while the outsourcing backlash might see some strong noises across the developed world, it would only be a medium term phenomenon. In the long-term, however, economic sense is likely to prevail as global corporations, in their bid to remain competitive, would continue to outsource their non-core operations to destinations like India. The present backlash, especially emanating from the US, seems more guided by political reasons then economic. However, benefits like cost savings for American corporations and availability of quality manpower in countries like India would continue to outweigh the concerns regarding transfer of jobs.

    Competition from the MNCs
    Over the past few years, global companies like IBM, EDS and Accenture have started bases in India to take advantage of the Indian offshoring model. These companies have hired Indians in key positions and have targeted clients of Indian software companies. What more, they have been partly successful in their endeavors as can be seen by the increasing attrition rates and rising compensation levels in Indian software companies. This has then led to reducing advantages for these Indian companies on the cost arbitrage front. Also, the need to retain key employees has led to rising salary levels for these companies and this has dented their operating margins further.

    Now, while these global corporations have entered the territory of Indian companies by replicating the offshoring model, the only way to retaliate for Indian software companies is to march into their (MNCs') territory. And this would be done when Indian companies continuously move up the software value chain through providing high-end services like package implementation, IT consulting and systems integration. While some Indian majors like TCS, Infosys, Wipro and Satyam have put a foot forward in this direction, they still have a long way to go.

    Other competitive destinations
    Well, this seems to be a major concern for Indian software companies, and this is a direct consequence of their losing the basic advantage of cost arbitrage over other destinations like China, Ireland and the Philippines. Over the years, most of the Indian software companies have benefited on this (cost) account. However, the need of the hour is to improve domain competencies further, as the services currently offered by Indian software companies are increasingly getting commoditised. And this has further aggravated their problems as some outsourcing work is going straight to these 'other' competitive destinations. This challenge (to move up the value chain), if not given heed to, might have grave consequences over the long-term.

    In conclusion...
    As we have mentioned earlier that these challenges have implications over varying periods of time, what is more important to understand is that Indian companies cannot continue blaming these external factors for all their grievances. Rather, they need to put their own house in order. This means that they need to continuously move up the software value chain. This would not only help them in garnering high-end contracts but would also aid their cause of maintaining relationships with global companies. That aside, concerns like offshoring backlash are more likely to see the end of time eventually. Keeping these factors in consideration, investors need to give more weightage to a software company's management because it is the lot at the top that can take a software company to greater heights.



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