Thursday, August 30, 2007
Offshoring's Cost Advantage Slips from India
Offshoring's Cost Advantage Slips The cost advantage of offshoring declined in 2006, found the Global Services Location Index released by A।T। Kearney,a Washington-based global consulting firm. The report found that although the wage advantage of offshoring locations for office services is set to last for another 20 years,it is on the decline as offshore wages for IT, business process and call center services have risen। But even under the most aggressive projections of wage inflation and currency appreciation, however, offshore locations will still have the price advantage for the foreseeable future, found the report. The changes in labor cost are the result of both accelerating wages and currency appreciation in offshore hot spots as well as downward pressure on wage in impacted sectors in developed countries, according to the report. Still, markets are keeping up their competitiveness by continually improving their talent, experience, certifications and regulations. "What is most striking about the results of this year's Global Services Location Index is how the relative cost advantage of the leading offshore destinations declined almost universally, while their scores for people skills and business environment rose significantly," said Paul Laudicina, managing officer and chairman of A.T. Kearney. "These findings reinforce the message that corporations making global location decisions should focus less on short-term cost considerations and more on long-term projections of talent supply and operating conditions." The report found that even as the cost-saving appeal in offshore hot spots may be declining, the competition is intensifying. Nevertheless, "on-shore" and "near-shore" locations in developed countries fell in rankings, although their absolute scores improved. "While total compensation costs for sample positions like IT programmers or call center representatives rose by 5-10 percent in most developed countries, average wages for similar positions in India, China, the Philippines and parts of Eastern Europe and Latin America grew anywhere from 20 percent to 40 percent," said Martin Walker, senior director the Global Business Policy Council at A.T. Kearney. Walker said that, at the same time, he has seen telecom costs in many emerging markets drop by 25 percent or more as competition and volumes in the telecom market increase. He also said he saw double-digit growth in university enrollment in countries like China, Brazil and Egypt, and the number of firms with quality endorsements like Carnegie Mellon's CMMI certification and the ISO 27001 data-security certification almost doubled in several emerging markets. For the 2006 report, the Index added 10 new countries that had established themselves as remote services locations: three Baltic States and the Ukraine in Eastern Europe; Sri Lanka and Pakistan in South Asia; Uruguay in Latin America; and Morocco, Senegal and Mauritius, all francophone locations. India and China continued to take first and second places as globally located service providers by a wide margin. Declines in cost advantage were offset by further improvements in talent supply and business environment, found the report. Southeast Asian countries including Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam remaining primary alternatives to India and China. All six of these countries made it into the top 20 locations. Contenders in Central and Eastern Europe such as Bulgaria, Slovakia and the Baltic States increasingly outshined more established players such as the Czech Republic, Hungary and Poland. In the Middle East and Africa, Egypt, Jordan, the United Arab Emirates, Tunisia, Ghana, South Africa, Israel and Turkey all improved or maintained their rankings. Maurituis, Morocco and Senegal made their first debut. Source from: eweek
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Offshoring/Outsourcing is a business model that is here to stay. And, India is likely to remain the dominant player in this. In particular, the long-term potential of India as an Offshoring/Outsourcing destination is likely to be very attractive given that India's age pyramid is very young (i.e., India is likely to be amongst the few countries that over the next 10-20 years will still have a predominantly young workforce).
However, I do believe that over the near to medium term (2-4 years) India's current dominant position as an Offshoring/Outsourcing destination might get eroded. I see three key forces at work:
1. Talent squeeze in India leading to difficulties in recruitment, rising wage costs, and continuing high attrition
2. Many of the ITES/BPO companies who have grown very fast without building the necessary processes and capabilities might face Quality issues
3. Increasing maturity of newer offshore destinations especially China and Eastern Europe
The key imperative for India to retain its dominant position in this industry is to rapidly scale up its education and training infrastructure. This will enable a large part of the population that is currently not deployable to upgrade and enter the talent market.
I believe that in general - NO, but if we look into details, some aspects might be interesting:
- India is still the top leader of technical services outsourcing, like maintenance, development of applications etc. plus Asian region CC/Helpdesks/Businees Processes outsourcing provider.
- However (and no offence, guys - this is what I hear on corporate meetings) - due to cultural differences or time differences - some of projects dedicated for US/EMEA are being deployed in CEE region (Poland, Czech, Ukraine etc.), where costs are a bit higher than in India, however non-financial values (Customer Satisfaction, Responsiveness etc.) are achieved. My personal opinion on any outsourcing projects is that Customer-facing ones, or these involving knowledge of local legal regulations should be located as close as we can get to the target market, and for back-end you can choose any location in the world. I believe that this way of thinking is expanding through corporates, and that's why in some areas you can observe degradation of volume of projects (to be perfectly honest - similar is happening in Europe - some projects located before in UK, Ireland, France etc. are being now moved to both CEE and Asian countries).
There seem to be some gross errors in the calculation of cost with regard to outsourcing that are being re-examined. If the overstating is indeed accurate, I would suspect it would decrease outsourcing to everywhere.
the overall rates in india have been going up considerably. staff charges are higher, rental cost of real estate is also higher, the rupee has strengthend considerably and bangalore is bursting its seams with no infrastructure development worth mentioning..
properties in bangalore are langushing so people belive that india itself is slowing down.
chennai has been getting large facilities and now smaller places like mysore coimbatore and madurai are sharing in the growth.
the new SEZ policy also gives additional benefits if companies set up shop in SEZs. i am toild that all these benefits when factored work out to almost 0.5 U S Dollars per sq ft of space per month (needs checking though). this is a huge coushion and will spur further investment in india.
the SEZs also will have schools and all state of the art facilities. in time they will become extremely popular.
In fact, the way I look at current situation, India has already taken one step. First, IT outsourcing then BPO and now more intensive work like market intelligence, business anlaytics is being outsourced by most of the european/western companies to India.
In fact, this is a chain reaction, take an example of a firm which outsourced its BPO operations to India in 2002, if it met its projected savings due to outsourcing as planned and the offshore vendor is meeting all quality paramters as per agreed SLA. The firm would now like to offshore more value added processes to save on costs and to follow the principle of 'let experts handle".
It's bound to happen sooner or later. The growth of off shore out sourcing in North America exploded because the wages in India were far lower to North America and there was a perception - right or wrong - that the overall job could be done in India cheaper. The cheaper price leverage for out sourcing to India is going away due to wage increases, higher standards of living and poor performance. The cost of off shore out sourcing from a customer service perspective was often not taken in to account. Customer back lash in North America has been costly in some industries. I think its only a matter of time before a lot of off shored work comes back to North America or Europe. Also, the Chinese market is opening up more and more to the west and I think in the near future movement of out sourced business to China will start to impact India.
Messages from Stephen McPherson (2):
No way, else top Indian companies like TCS, Wipro, Infosys will not be growing at 30 to 40% CAGR - the story is similar for any other companies - sustained high growth rates
I am sure there is still a huge opportunity for growth in India for outsourcing. What I have started to see here in the US is a re-evaluation of the cost benefits and what are the future plans.
Not yet, but the writing is on the wall. We are not able to educate + train people fast enough. This slack is going to take a heavy toll before we catch up, as we always are too slow to catch up to realities.
Yes, indeed it is. I see more and more companies looking at setting up near shore operations in US and Eastern Europe. In the US, states like North Dakota and Virginia are becoming increasingly popular destinations for BPO/Call Center type of activity. In Eastern Europe countries like Russia, Belarus and Czeck republic are already popular destinations. Some of these countries might not have the numbers to compete with India, but are cleverly positioning themselves as knowledge & technology centers. India in the short term will not have much competition due to its numbers.
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