India and Outsourcing: Today and Tomorrow

Not so many years ago, the question for many companies was, Should we outsource to India? Today, that question is more likely to be, How much do we outsource? “IBM now has over 50,000 employees in India,” says Gunjan Bagla, principal of Amritt Ventures, a sourcing consultancy. “Add that to the broad success of HCL [Technologies], Infosys, Tata Consulting and Wipro and it is clear that the question of whether to outsource to India is no longer relevant,” he says. “Outsourcing—or its cousin offshoring—is a matter of survival for most major American companies today.”

India remains the top outsourcing destination, according to a report released in January 2007 by NeoIT, a globalization consultancy. Despite concerns over India’s rising wages, attrition and infrastructure issues, and competition from China, Canada and others,  outsourcing markets in  Bangalore, Chennai, Hyderabad,  Mumbai and the National Capital Region of Delhi will grow at a steady pace. 

India’s Signs of Growth

Revenue from the Indian IT industry has grown tenfold in the last decade—from $4.8 billion in 1998 to $47.8 billion in 2007, according to the National Association of Software and Service Companies’ (Nasscom’s) Strategic Review 2007. Services and software exports, the mainstay of the industry, are expected to register a 32.6 percent growth for a total of $31.3 billion in revenue. Looking just at exports, India saw its revenue grow from $12.9 billion in 2004 to an expected $31.3 billion in 2007.

Other signs of India’s growth: India’s top outsourcing companies—Consultancy Services, Infosys Technologies and Wipro—all reported strong revenue and profit growth for the quarter ending Dec. 31, 2006. That same month, Infosys became the first Indian company to be included in Nasdaq’s prestigious top 100 companies. In an interview with InfoWorld’s Paul F. Roberts, Infosys CFO V. Balakrishnan said, “By 2010, [technology imports from India] will be close to $60 billion, including services and products.”

All three layers of IT outsourcing—infrastructure, applications and business processes—are growing, says Gartner Analyst Frances Karamouzis. But measured in terms of the number of venture capital deals, rather than in dollars, infrastructure services is “growing like gangbusters,” she says. When Indian vendors experienced huge success in applications, they invested that money into building new offerings, some of which went to remote network monitoring.

Even in the United States, network monitoring had largely been done remotely, so it was a likely candidate for outsourcing. But to entice companies to send this work overseas (which had largely been the domain of heavies like EDS and IBM) required offering something unique. Historically, remote network monitoring had been reactive; service level-agreements promised to have a downed network up in a certain amount of time. To compete, Indian vendors developed a proactive approach: They invested in tools, automation and predictive modeling techniques to determine which servers are likely to go down and fix them in advance.

Cost savings were realized much sooner in the field of infrastrucutre than they had been in applications, since the teams were smaller, and it took fewer people initially to train and make the transition to work that was managed offshore. Infrastructure outsourcing is still in the growth stages, says Karamouzis. But this growth, as well as the growth in other areas of outsourcing, is “an important bellwether that [outsourcing] is going to continue to grow and expand beyond where it started,” she says. “It’s growing up and down the chain.”

The Expanding Global MarketMuch media attention has been given to the growth of outsourcing destinations other than India, such as China and Russia. But analysts say this is simply evidence of the growing global market. Two or three years ago, India had about 80 percent of the outsourcing spend, says Karamouzis. That number is now down to about 60 percent. But the outsourcing “pie” itself has grown and India’s outsourcing sector has grown right along with it, although its slice looks smaller.

Karamouzis, like most analysts studying the trend toward globalization, believes this phenomenon is here to stay. “This is what we know for sure: The amount and volume of outsourcing will increase,” she says. “The ability to deliver services from different parts of the world works. This is not a cyclical thing.”

Yankee Group analyst Mindy Blodgett agrees. “The push for globalization means that enterprises are doing business anywhere. Vendors have to answer to that,” she says. Increasingly, this means taking the appropriate blended approach to sourcing work, distributing work to various countries both near and far as it makes sense. Pointing to India’s rising attrition rates and wage inflation, Blodgett says, “You can’t put all your eggs in the India basket.” Even the leading Indian outsourcing companies have expanded into such places as Eastern Europe and Latin America.

Outsourcing Considerations

Close scrutiny should be given to the processes you are sending out, says Blodgett. For instance, outsourcing sensitive business processes such as human resource functions, finance and accounting present security issues and possible cultural disconnects. Educate yourself about regions you are considering and make sure that these areas will work with your corporate culture, and with your goals for sending off this work.

Can the vendor assure you that competent people are doing your work? Attrition rates can be quite high in India, since people tend to move from job to job. Address issues such as these by discussing with the vendor and writing assurances into your service level agreements.

Infrastructure can also present a challenge. India’s traffic jams and the difficulty of getting flights may give you cause for concern. “You may need to press a vendor on why they chose a particular city in India to work in. What are the advantages and disadvantages of having your work done there?” says Blodgett. These are just some of the issues you need to address to successfully globalize.

And then there are issues of culture. Forty-four percent of 919 senior executives cited “understand[ing] local customs and ways of doing business” as a top challenge to building global enterprises, a recent Accenture survey found. No doubt, the challenges are many, but outsourcing and globalization is today’s reality. It pays to understand how to find the advantages in it. Concludes Blodgett, “If you’re still resisting globalization and business transformation, you’re going to be obsolete pretty quickly.”

Associate Online Editor Diann Daniel can be reached at ddaniel@cxo.com.