Future of offshoring

[sasguru]

Yes it's short-termism of the kind that has plagued this economy for a long time. Very few people can grasp the strategic advantage IT can give a business. But the situation is not helped by tunnel-vision techies who just want to sit at a desk and program. They deserve to lose their jobs.

[oracleslave]

You've hit the nail on the head, the big outsourcing/offshoring jobs I've worked on were all knee jerk reactions by boards under pressure after tulip results. They announce a big outsourcing deal, juggle some figures and set the PR machine in action and then pay themselves a big bonus for doing a good job and saving a fortune. A few years down the track, IT is a big mess, the Co is well out of pocket but who gives a tulip as the genius CEO has long since moved on with bonus in pocket. The new board can then blame the outsourcers and move onto another useless bunch of outsourcers and pretend all is well for a few years.

Do you think this has something to do with middle managers being incentivised via bonus schemes etc that focus on cost cutting rather than revenue generation and growth? Cutting costs seems to be the path of least resistance i.e. they can hit the target, get a bonus and go and repeat ad nausem elsewhere.

[rootsnall]

Do you think this has something to do with middle managers being incentivised via bonus schemes etc that focus on cost cutting rather than revenue generation and growth? Cutting costs seems to be the path of least resistance i.e. they can hit the target, get a bonus and go and repeat ad nausem elsewhere.

I think it's senior ( board level ) managers being incentivised over too short a time frame. It's a snouts in the trough situation, they are all setting each others pay levels and incentives by sitting on so called independent Pay Committees.

[Francko]

I agree with this article.

http://www.forbes.com/2008/02/29/mit...outsource.html

The Coming Death Of Indian Outsourcing
Sramana Mitra 02.29.08, 6:00 AM ET

Sramana Mitra

BURLINGAME, CALIF. - India is riding high on outsourcing.

Information technology and IT-enabled services will employ 4 million people in 2008 and account for 7% of gross domestic product and 33% of India's foreign-exchange inflows, according to Nasscom, an Indian IT industry organization.

The death of this industry is far from anyone’s mind.

However, the reality is that wages are rising in India. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. Attrition is scary.

Jobs that are low value-added and easily automatable should and will disappear over the next decade.

People talk a lot about India moving up the value chain. Some of that has indeed happened. An industry that started gaining momentum when Indian software developers were tapped to help fix the "Y2K" problems in old software code has blossomed beautifully into one that offers a much more comprehensive spectrum of services.

Yet, India, for all its glory, is still the world’s back office. India's tech industry is a "services" industry. The Indians don’t do the thinking. The customers do. India executes.

As a result, India has not learned to invent technology products of its own. Barring a few exceptions, the huge amount of venture capital chasing India finds it difficult to be deployed. There is way too much money, way too few deals. Instead, tech-sector VCs are now diverting capital to retail, real estate, hotels and other non-tech sectors.

India's $30 billion IT/ITES services industry, meanwhile, is slowly and surely losing its competitive advantage.

Most of the 4 million people that the industry employs have now "arrived." They have breezed through the milestones that their fathers had to toil all their lives to reach. A phone. A watch. A TV. A car. A house.

They are complacent. They will not take risks. They have "outsourced" thinking to their customers.

As the 1:3 cost structure becomes 1:1.5, it will soon become inefficient to use Indian labor. Why not Oklahoma or British Columbia? For many Europeans, Eastern Europe has already become more compelling than India. The pure labor arbitrage equation will no longer balance.

ADP, the largest U.S. payroll services provider, has 45,000 employees worldwide, of which only 2,500 are in India. It has around 1,000 workers in El Paso, Texas, it's expanding a location in Augusta, Ga., and it's opening a facility in Jackson, Miss. It's also growing a location in Halifax, Canada. ADP isn't moving its workforce to India--it's hedging its bets geographically. On a recent earnings call, ADP's chief executive used terms such as "smartshoring," and "nearshoring" to describe the strategy.

The software as a service (SaaS) megatrend in technology also plays against India.

Here's an example: There's a tiny Silicon Valley start-up called InsideView. It helps customers to generate sales leads, qualify those leads and use technology tools to help find big sales opportunities for customers.

In November 2007, InsideView acquired a company called TrueAdvantage, which did the exact same thing manually with a team of 150 people in India. After the acquisition, InsideView moved all 2,500 of TrueAdvantage's customers over to its SaaS solution. All 150 TruAdvantage employees in India were laid off.

That's been a familiar tale in Detroit--but no so far in India. But that's changing.

Indian powerhouses like Infosys (nasdaq: INFY - news - people ) and Wipro (nyse: WIT - news - people ) must diversify their portfolios away from pure body-shopping and process competencies to technology-driven advantages. They, too, could build--or acquire--SaaS businesses.

So far that's not happening. Infosys is still hiring thousands of new employees in India every year. The mood is upbeat. Nasscom is forecasting 25% annual growth in the Indian IT services industry for the next few years. The golden goose is still laying large, warm eggs, enough to feed the 4 million and their families, servants, chauffeurs and cooks.

Meanwhile, the workforce is getting comfortable in their cubicle chairs, just as the turkey gets comfortable before Thanksgiving.

Forbes recently published some scary statistics on wage inflation in India. (See "Indian Employees Enjoying Swift Pay Hikes.") Salaries rose 15.1% in 2007, up from 14.4% the previous year. The 2008 forecast: 15.2%. This would be the fifth consecutive year of salary growth above 10%.

Add to that the appreciation of the rupee against the weakening dollar, and its impact on the labor arbitrage market.

Is the death of Indian outsourcing all that far off?

Assuming a 15% year-to-year salary hike rate, and a 2007 cost advantage of 1:3 in favor of India, if U.S. wages remain constant, India’s cost advantage disappears by 2015. Then what?

[sasguru]

That article is just talking about India's competitive situation. There are other cheaper countries that will be turned to. It will not stop the drain of jobs from the West

[zathras]

Has offshoring in IT peaked?

i.e. have all the companies that can offshore done so or does this trend still have more to play out and if so, for how long?

Many of the offshore agreements signed in the early days have not produced the savings promised. further upward pressure on wages and poor staff retention have eroded what savings there were.

In addition is the poor reputation BPO agreements have for completing the full term.

So in the medium to long term I think it will end, but in the short term it will continue; partly because of the few agreements which do work, but mostly from those who continue to offshore despite the reduced or non-existant savings.

[DimPrawn]

Many of the offshore agreements signed in the early days have not produced the savings promised. further upward pressure on wages and poor staff retention have eroded what savings there were.

In addition is the poor reputation BPO agreements have for completing the full term.

So in the medium to long term I think it will end, but in the short term it will continue; partly because of the few agreements which do work, but mostly from those who continue to offshore despite the reduced or non-existant savings.

I've seen figures that show, at best, all in, offshoring can save 15%.

If your product or service suffers (think DELL's Indian call centre that replaces proper technical support) more than a few % on the bottom line due to tulipe quality, that saving vanishes.

[TimberWolf]

But the situation is not helped by tunnel-vision techies who just want to sit at a desk and program. They deserve to lose their jobs.

^ in a room on their own full of high tech toys and devoid of any social contact.

[BrilloPad]

Yes it's short-termism of the kind that has plagued this economy for a long time. Very few people can grasp the strategic advantage IT can give a business. But the situation is not helped by tunnel-vision techies who just want to sit at a desk and program. They deserve to lose their jobs.

Are you trying to say we should code to assist the users?

No way Pedro!