News Stay informed about the latest enterprise technology news and product updates.

Indian offshoring firms raise rates; costs often hidden

Despite inflationary pressure, Indian providers have kept rates in line, knowing that cost remains the chief draw for going offshore. That is changing.

For years, Indian offshore providers have dealt with rising wages, talent wars and the escalating cost of real estate on their native soil. Despite the increasing cost of doing business, however, India's offshoring industry has managed to hold the line on rates for its Western customers.

More on offshoring
Subprime mortgage mess not affecting Indian offshoring -- yet

Outsourcing to India: Smaller firms good bet
But that's all changing, according to a report from analyst Stephanie Moore, who covers the offshore industry at Cambridge, Mass.-based Forrester Research Inc.

As the rupee appreciates against the dollar, the pound and the Euro, Indian providers are beginning to charge their customers more, Moore reports in "Understanding Indian Providers' Margin Defense Tactics."

While hourly rates have increased only minimally, "important price increases are often embedded elsewhere," Moore contends, advising CIOs to pay close attention to contracts as they come up for renewal.

"Embedded" price hikes show up in the following areas: redefining what constitutes a workweek, relying more heavily on inflation clauses and higher-cost-of-living adjustments, including clauses allowing for currency inflation and charging more for travel and "substantially more" for on-site rates, which tends to get less scrutiny than the offshore rates. That last item can add up even when the worker ratio is 80% offshore to 20% onshore. Staff members sent by a provider to a customer site already command higher pay than the provider's offshore workers.

A week's worth of work

Kashyap Kompella, advisor, global service delivery at Technology Partners International Inc. (TPI), an independent sourcing advisory firm headquartered in The Woodlands, Texas, said his firm is definitely seeing more belt-tightening measures among the Indian providers.

Service providers are "trimming the fat by eliminating nonperforming employees," Kompella said. And he concurred with Moore that providers are also becoming more conscious of the number of hours an employee works. "They want to ensure that they are not giving away free hours like in the past." So managers are being asked to keep track of all the unbillable hours their teams spend on client work. Some providers have always charged for 8.75 or 8.8 hours per day, Kompella said. Now, more and more are asking for the 10% extra.

"By the way, it is not just the Indian providers who are doing this," Kompella said. "The foreign IT services firms operating in India have also started doing the same."

All that said, TPI has not seen a clear trend emerging yet regarding rates for Western customers. "Some providers have been able to get some small price increases when the contracts come up for renewal, while others have not been able to get any increases," Kompella said.

The redefinition of the workweek represents an interesting shift in how Indian providers are valuing work. In the past, Indian providers customarily billed clients for a set number of hours per week (40-45 hours), regardless of how many hours their salaried staff worked, Moore said. Now, however, providers are starting to either increase the number of hours counted as a week (from 40 to as high as 50 hours) or simply charging for the actual number of hours salaried staff members work.

India, back on the agenda

Indian providers are not standing still in the face of a U.S. meltdown. In the past, Indian providers have not focused on the opportunity in their own backyard, the local Indian market. "Mostly it was the multinational providers who were tapping the Indian market," Kompella said. But that, too, is changing, as margins erode with U.S. customers. "India is back on the agenda," he said, along with other parts of the globe. European markets, long resistant to offshoring, have warmed up to sending work overseas, but Europe "is still underpenetrated," and represents potential growth for Indian providers, Kompella said.

CIOs need to ask their providers point blank how they are dealing with inflationary pressures.

They want to ensure that they are not giving away free hours like in the past.
Kashyap Kompella
advisor, global service deliveryTechnology Partners International Inc.
"As sourcing and vendor management experts attempt to engage and negotiate with Indian service firms, it is important to make sure that these providers are at least trying to minimize the impact of inflationary pressures," Moore said.

The tactics used by the most adaptable of the Indian providers to minimize the impact of inflationary pressures include using tools to automate tasks that could be done manually by their billable employees; streamlining their methodologies in order to deliver value to the customer more quickly; investing millions of dollars in employee training to keep the pipeline of capable, efficient staff primed; building "reusable" code to cut development time; and offering outcome-based contracts, where customers hire the provider to deliver a service, for a price, instead of paying by the hour.

G.K. Prasanna, senior vice president, technology infrastructure services at Wipro Ltd., said the impact of the U.S. slowdown was constrained for most of 2007. That may well change in a recession, but Wipro has taken steps to "rationalize costs," including finding customers in new parts of the globe, such as Europe and Australia, and sending its work to cheaper cities in its own country and cheaper countries. Much of its business process outsourcing is done in the Philippines; Romania is a stronghold for infrastructure services, and Wipro has sent engineering work to China for a while, he said.

Operating margins are under pressure on both sides of the oceans, Prasanna noted. "It's not just India; the same applies to everybody else," he said, which means that Indian pricing, even under inflationary pressure, remains an attractive option for companies looking to cut costs.

"Pricing is an important point in companies choosing us, and we have no illusions about it. So as much as possible, we try to keep that part of the equation stable."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

Dig Deeper on Information technology outsourcing

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.