by Stephanie Overby

Eight Reasons Why Outsourcing to India Could Hurt Your Business

Oct 16, 200712 mins

Though India may be the leader for offshore IT outsourcing, there are many reasons why U.S. companies should consider other options.

“To outsource to India or not to outsource to India?” A smart and ultimately successful decision to outsource an IT function is rarely arrived at by answering such a simple (and Shakespearean) question. But it’s a good start.

India remains the undisputed leader when it comes to offshore outsourcing of IT services. In fact, Gartner recently reported that India’s top six outsourcing providers (Tata Consultancy Services, Infosys, Wipro, Cognizant, Satyam and HCL Technologies) were servicing 1.9 percent of the $672 billion IT services market in 2006, despite their smaller size. And Gartner predicts that two Indian companies (which grew an average of 42.4 percent in 2006, compared with a 4.3 percent growth of the market leader during the same period) will be in the global top 10 by the end of the decade.

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However, a confluence of adverse conditions, from rising prices to failing infrastructure to employee turnover, have caused some IT decision makers to shy away from the offshore outsourcing stalwart. In fact, by 2015, predicts AMR Research, India will be just one hub among many from which companies source IT skills, including other offshore, nearshore and onshore options. The following are a few reasons why you might want to make the shift away from India sooner rather than later. (For the other side, see “Seven Reasons Why Outsourcing to India is Good for Your Business.”

1. Pathetic Infrastructure. Still.

Ten years ago, if you were an IT pioneer offshoring to India, you had to deal with terrible roads, frequent blackouts and crumbling physical infrastructure. At the time, you wrote it off as annoying. Maybe even kind of exotic. Besides, the money you were saving by outsourcing the work was worth the trouble. Not much has changed today, except there are probably 10 times as many people taxing the systems.

“It’s an issue that seems to be progressively heading in the wrong direction,” says Paul Horowitz, partner and outsourcing leader for PricewaterhouseCoopers. “India has not made as much investment in its physical infrastructure. Also, the IT infrastructure needs to keep pace with other organizations. It’s an infrastructure breakdown.” It can take an hour to get from one point in Hyderabad to another point in Hyderabad. Or to make the mile-long trip from the Bangalore airport to your hotel. “The view from corporate America is that India may churn out more and more IT graduates every year, but if they don’t keep up on the infrastructure side, you absolutely have to look elsewhere,” says Horowitz. “Clients don’t want to deal with it. It’s the number-one reason people are looking at alternatives to India.”

2. Rising Costs

The economic laws of supply and demand are beginning to work against buyers and sellers of IT services in India.

Take the currency situation. For some time, the Indian IT services industry has collected most of its revenue in U.S. dollars. Today, the inflow of American greenbacks is at an all-time high, creating a surplus of dollars versus Indian rupees. The value of the rupee is rising. Good for the local population. Bad for IT leaders outsourcing work to India. So far this year, rupee appreciation has eroded about 11 percent of the dollar’s purchasing power in India. And although Indian outsourcers are touting their internal efforts to manage the ill effects of the currency situation, they will pass on the pain to their customers. (For more on how to deal with currency risks when outsourcing to India or elsewhere, see “The Rupee’s Rise, the Dollar’s Demise and You: Managing Currency Risk in Offshore Outsourcing.”)

The sinking value of the dollar isn’t the only reason for price inflation. There are also increasing salaries. “Demand has outstripped supply, causing labor rates to go up so dramatically,” says Horowitz. “Salaries in Bangalore are increasing at 12 to 14 percent a year and there’s no relief in sight.”

“Rising costs are inevitable, and the fall in the dollar (if it’s permanent) really changes the cost equation. Rising costs also reflect a crunch in supply, which is very real,” says Cynthia Beath, professor emerita at the McCombs School of Business at the University of Texas-Austin, who studies outsourcing. “I think the main issue is that ‘true costs’ are very hard to nail down. The savings in terms of lower programming wages may be eroded by the tangible and intangible costs of new managerial-level activities—communications, rework, contracting, coordination, learning, knowledge transfer, travel and equipment.”

Need more proof? Look at the Indian vendors themselves. “Major margin compression is occurring within the traditional India-based outsourcing model and is well recognized by these firms, says Steve Brown, IT consultant and former CIO of Carlson. “In fact, it is dramatic—so dramatic that these companies are looking to diversify their business models.” Indian IT service providers are also diversifying geographically to maintain their profit margins, setting up shop from Buenos Aires to Beijing, and everywhere in between. If Indian providers are shopping around, maybe you should, too.

3. High-Touch or High-Value Activities

If your IT work requires a lot of back-and-forth between the provider and a U.S.-based location, India is probably not the best choice. “Time zone differences impede the relationship when frequent meetings are needed to communicate requirements and to coordinate work,” explains Mary C. Lacity, professor of information systems at the University of Missouri-St. Louis’s College of Business Administration.

University of Texas-Austin’s Beath says hidden costs can really mount in India when you can’t do what she describes as “boning the chicken.” There are certain joints on a chicken that make dissembling it easy. But there are other spots where you’ll end up having to cut through bone, which is dangerous, difficult and makes a real mess. Outsourcing to India is the same way. “If activities can’t be easily and cleanly disaggregated, trying to outsource them can be incredibly costly and in usually unanticipated ways, for buyer and seller,” says Beath. But “a minimum of simple, clean handoffs to the outsourcer and back may not be realistic. And both buyer and seller lose if handoffs are messy.” Some infrastructure and back-office tasks are easy to break off and send to India. Complicated development work and Agile software development aren’t and may be better kept closer to home.

If you want to send high-touch activities to India, you may need to send an internal project manager, who not only understands your business but also the local culture, to India full time, says IT consultant Brown. Alternatively, you may bring the Indian vendors’ project managers onsite to act as liaisons. Unfortunately, the former are hard to find and H-1Bs visas for the latter are in short supply.

The problem with sending high-value IT work to India is also traceable to the distance issue. India’s more experienced IT professionals don’t want to work in the middle of the night to accommodate the U.S. time zone the way their younger, less experienced BPO counterparts are willing to. “Much of the attrition problem in India, especially in higher-value operations, can be attributed to professionals having to work the night shift,” writes Dana Stiffler, research director at AMR Research in her report “Time Zones Do Matter.” “Business analysts don’t want to work on remote campuses in the middle of the night, and with the Indian labor market as dynamic as it is, they don’t have to.”

4. Indian Vendors Are Busy Managing Their Own Growth

Take a look at the headlines for India’s top-tier outsourcing providers: “Tata Consultancy Services to Increase Consulting Workforce to 4,000.” “Genpact to Buy Citigroup’s BPO Unit.” “Satyam to Add Development Center in Australia.” “Wipro Buys Singapore Design Company.”

And that was just last week.

The Indian vendors are hard at work acquiring, hiring and expanding. In a recent interview, Wipro’s CMO said the IT services provider will add 15,000 new employees just this year. (For more on Wipro’s plans, see “Indian Outsourcer Wipro’s Strategy: Innovation Push, Global Hiring, Acquisitions.”)

There’s nothing wrong with growth. But all that acquiring and integration requires management oversight that, perhaps, might otherwise benefit outsourcing customers. “Management of the vendor companies are stretched thin,” admits M. M. Sathyanarayan, president of outsourcing adviser Global Development Consulting. “It’s harder to get an Indian supplier’s attention and best resources due to their rapid growth,” adds Lacity of the University of Missouri.

5. Offloading IT Assets

One traditional reason for outsourcing was getting those pesky, expensive IT assets off your books. But Indian providers don’t want to take on the cost of your data center or your rather expensive human resources the way IBM or EDS might have done back in the day—it kind of gets in the way of their double-digit margins.

An Indian vendor will offer to manage your data center, but it’s what they call an “asset-light” option. They’ll run it remotely. You still own it. They may hire and rebadge some of your workers, but not a whole department.

This may not be a deal breaker anymore. But it’s something to bear in mind.

6. You Don’t Speak CMM

If you’re outsourcing to India, you don’t need to worry as much about whether vendor employees speak English (they do), but whether your employees are fluent in the Software Engineering Institute’s Capability Maturity Model (CMM).

CMM processes are the holy writ for Indian IT service providers, and if your IT department doesn’t have a few believers on board, you’re in trouble. “CMM is what this offshore supplier delivery team is trained in,” says the University of Missouri’s Lacity. “They are expecting requirements to come over in that form. That’s the start of their work processes.” All those rigid processes can frustrate clients who want to walk down the hall to ask a developer to make a change. Do you really need a 20-page impact analysis before moving a button in the latest release? In India, you do.

The client organization can sharpen its CMM skills to make for a smoother transition of work to India. But it takes time to get certified. It’s a long road from CMM Level 1 (where most U.S. companies might be) to CMM Level 5 (where most Indian vendors are). And it’s an investment that may benefit only the provider. “If you look at some of the key process indicators and CMM, they’re really geared towards the benefit of the supplier organization,” says Lacity. “For example, there’s all kinds of processes that deal with tracking defects. Well, those reports aren’t going over to the customer. The supplier is using them internally.”

7. Staff Turnover Is Increasing and Widespread

Remember what it was like trying to hold on to an SAP consultant in the 1990s? That’s what it’s like trying to retain IT professionals today in India.

Retention has always been a concern. And now it’s a widespread one. “Staff churn is absolutely increasing,” says Horowitz of PricewaterhouseCoopers. “We used to think it was just the call centers which were staffed by college kids. They’d get a few months of experience and move on to greener pastures. But we’re seeing it across all staff levels. It’s a really big issue.” HR anxiety keeps global delivery executives up at night, says AMR’s Stiffler. Sure, India-based operations are hiring thousands a year, but they can’t hold on to them.

Some vendors and multinationals are setting up shop in so-called second-tier cities like Jaipur, Ahmedabad and Kochi. “That’s an indicator that Bangalore and Hyderabad and Mumbai are saturated,” says Horowitz. “It’s an attempt to protect against staff churn, but there are smaller resource pools there.”

“With demand increasing, you’re going to see a lot of turnover, just as it happened during our own dotcom boom with people jumping jobs,” says Joseph Rottman, assistant professor at the University of Missouri-St. Louis, who researches offshore outsourcing best practices and trends. “Turnover affects the knowledge transfer. It affects the protection of the capital expenditure for training.”

8. India’s Not the Only Player

Once upon a time, if you wanted to try to shave as much as 20 percent off your IT delivery costs, outsourcing to India was the only option. Now the story has changed. “Three to five years ago, there weren’t a lot of viable alternatives,” says Horowitz of PricewaterhouseCoopers. “Now there are a ton.” Contenders for the offshore outsourcing buck are springing up in Latin America, Eastern Europe, the Caribbean, Asia and the Middle East. The bonus is that a lot of these new offshore outsourcing locations have learned from India’s struggles over the last decade and addressed some of the issues like infrastructure early on, says Horowitz. “It used to be India or bust. With China maybe second,” Horowitz says. “Now we do risk assessments and location analysis on a lot of geographical possibilities.”

AMR’s Stiffler calls it “India fatigue.” It’s palpable even in the global companies that continue to invest in India, Stiffler says. They’re growing tired of the attrition and rising costs and other issues. And they want to diversify their offshore portfolios. Thus, the question of outsource to India or not has evolved to a more nuanced analysis. Would we be better off sending the work to Mumbai or Manila or Mexico City? Or maybe some combination of locations?

Of course, all those options come with their own complications. You could just as easily be reading an article on eight reasons not to outsource to Costa Rica or China or the Czech Republic as you are reading this one on India.