The Bottom Line: Companies with offshore outsourcing experience should mitigate offshore outsourcing risk by moving beyond India in 2005.
What It Means: India will remain the safe choice for companies considering offshore outsourcing. Its leading service providers offer quality services and maturing processes for managing the transition of work from in-house to the offshore location. Companies with minimal experience using offshore services should capitalize on the Indian service provider expertise in order to minimize the risks associated with developing in-house competencies for managing offshore relationships. See the AMR Research Report "Successfully Outsourcing IT Work Offshore Is in Your Hands" for advice about transitioning work to an offshore service provider.
However, India is not the only alternative, and companies with experience in offshore outsourcing should consider other countries for the following reasons:
- Overheated labor market in India is driving up labor costs and attrition rates for service providers -- High attrition rates results in higher costs for the outsourcing customer. The smaller IT services industries in Latin America, Eastern Europe, and Russia have more stable IT work forces.
- Better cultural fit -- One CIO interviewed both Indian service providers and Luxoft, a Russia-based IT service provider. The CEO felt that the Russians were more likely than the Indians to push back and say no when asked to perform against unrealistic expectations. He wanted the bad news at the start of the project and not at the end.
- Establish a relationship within an emerging market -- One company selected Objectiva, a China-based service provider for Web development projects in order to gain experience in China in preparation for developing products for the China market.
- Non-English language skills -- The Indian service providers offer strong English skills, but have limited non-English capabilities. Latin America-based Neoris was selected by one company because of its Spanish and Portuguese capabilities, as well as its experience with supply chains and J.D. Edwards. Note that the language issue works both ways and Russian, Chinese, and Latin American service providers have weaker English skills than their Indian competitors.
- Hedge geo-political risk -- Although India is a stable democracy, many companies are concerned that India's relationship with Pakistan and China, natural disasters, and cultural and religious diversity may destabilize the country and are looking to non-India locations in order to minimize the risk of geo-political destabilization.
India strikes back: The major India service providers aren't resting on their low-cost, high-quality laurels and ignoring their foreign competition. Take the following for example:
- They are expanding globally and expanding their non-English capabilities. TCS has opened Spanish and Portuguese-centric development centers in Brazil and Uruguay.
- They are investing in innovative service delivery models. Wipro working with a large automotive manufacturing company is creating a factory model for delivering application integration. The factory model puts a strong emphasis on code reuse and the customer expects code reuse to grow from 15% to 50% as the model matures resulting in higher quality and lower costs.
- They are investing in expanding their consulting capabilities in order to provide higher-value transformation services. Infosys in 2004 created Infosys Consulting and is staffing it with big five ex-consultants.
Recommendations: Companies need an effective global IT sourcing strategy in order to remain competitive. India service companies offer the greatest breadth of services and have the most experience and as a result, India is the preferred starting point for developing an offshore relationship. But once a company has established relationships with one or more Indian companies and gained experience in managing an offshore outsourcing relationship, they should look to other geographies as they expand their IT sourcing strategy.
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