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India's offshoring faces a new competitor - Views on News from Equitymaster
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  • Jul 13, 2010

    India's offshoring faces a new competitor

    In economics, the law of comparative advantage stands tall. It refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another party. A party can include an individual, a firm, or a country. Well, thus far India has managed to rule the roost in terms of outsourcing. However, a new low-cost destination has been coming up slowly but surely in the last decade.

    We will be discussing the new trend of 'rural sourcing' or 'rural outsourcing'. If you were thinking about a remote village in India, Philippines, or China, you would be wrong. This time the location of these rural areas are further West, instead of further East. We are going be to be discussing 'onshoring' or outsourcing to rural America.

    A new opportunity...
    America has an unemployment rate of close to 10%. Around 8 m jobs were lost in the recent crisis. It takes 35 weeks on average to find a new job, after losing one. That works out to almost 9 months without a paycheque. Semi-skilled labours are being forced to work in fast-food joints or gas stations.

    Now, rather than shipping more jobs offshore, American companies are realizing that they can keep jobs onshore. This is by outsourcing them to cheaper locations within the country. According to an article by CNN Money, companies that send work to these rural areas can expect to pay much lower rates. These rates would be almost 25-50% lower as compared to hiring urbanites with similar skills. This is almost similar to savings achieved through outsourcing to a low cost hub like India. The average IT salary in rural Arkansas is US$ 35,000. It works out to almost US$ 65,000 in a large metro area.

    The main reason for this difference is the low cost of living. Compare this to living expenses in a metro such as Mumbai or Delhi to Tier 3 or Tier 4 cities such as Surat, Kochi or Mangalore.

    Whenever there is a new opportunity, there are providers that latch onto it immediately. Around ten years ago, these small companies started offering low-cost IT services from rural areas. And they provide similar services as to what our majors provide.

    Some of these players include Onshore Technology Services, and CrossUSA.

    ...at a cost to India

    The Indian IT and BPO industry boasts of over US$ 60 bn in revenues. It is growing at a rapid pace. It employs millions of people in India and around the world. However, there are certain benefits from 'onshoring' that India cannot replicate. The main difference is that the onshore location is geographically very close to the client. This proximity allows ongoing interactions between the two parties. This is a big difference versus occasional business trips with partners. Or long distance communication. Cultures, languages as well as time zones are similar. This leads to a better working relationship with the vendor. Also some companies are sensitive about outsourcing sensitive data to offshore locations. Having the option to cheaply outsource handling of such data within the country itself are beneficial to some American firms.

    A major point is that jobs do not leave the country. The US President Obama has also stated that MNCs shipping jobs to India have an unfair tax advantage. He stated the following about the current US taxation policies, "It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

    Companies such as AT&T have already made some efforts to move 5,000 previously outsourced high-tech jobs back onto its payrolls in the US. These jobs have been located to low cost areas in Indiana, Texas, Nevada, Michigan and Arkansas.

    There is an increasing trend among some American companies to keep jobs within the country. Although costs may be slightly higher than outsourcing to India, some companies are willing to bear them. In a 2009 survey by consultancy firm BDO Seidman, which asked technology CFOs where they would expand outsourcing if they were planning to do so, the most popular destination was US at 22% and China with 16%. India came third with 13%.

    With America seeking new options and Europe under some pressure, we need to see our Indian IT majors move to newer geographies as well as expand service offerings. So, instead of being a replaceable 'low cost destination' India can be an irreplaceable 'knowledge destination.'



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