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The Future of IT Outsourcing

Some analysts are predicting a dark future to IT outsourcing.

The reasons commonly advanced are:

  • A depreciating dollar versus an appreciating Indian Rupee with no sign of recovery for the US dollar

  • India, the current industry leader is suffering from skyrocketing attrition rates and salary increases. Tier-1 companies which already have established a significant presence in countries with cheaper labor rates like China or Eastern Europe can mitigate these risks; however the bulk of Indian providers cannot afford to go global and are left with little options; a situation that negatively impact the quality of their deliveries.

And these same analysts to conclude that with overall cost savings under the 20%, and a mediocre quality level, the goods days of outsourcing are over.

This reasoning might apply to India as a destination, but definitely not to the industry. The demand keeps growing in the USA, but ot new destinations, most to the advantage of China.

Outsourcing is not to fade away in the USA any soon:

  • The tier-1 Indian companies are becoming global players; their cash situation (Infosys generates over $ 1B in profit each quarter!) associated to the favorable exchange rate between the rupee and the dollar give them a significant purchasing power, which they are eager to use. By becoming truly global players, they have the capability to adjust their offerings to every single market’s conditions

  • The tier-2 and tier-3 Indian companies have lost their competitive edge, and do not have the breadth to go global. The future I can envision for them is to become either very specialized or privileged subcontractors of tier-1 Indian companies. I am sure that Indian leaders would prefer to tap into a domestic pool of talents, even if no longer at the best quality/price ratio

  • The client base of the tier-2 Indian companies has started to move to other destinations, and China is leading the pack by far. Other booming destinations include Eastern Europe, Latin America, and Vietnam. These countries offer overall savings that are still over the 50%

  • That said, prices in China and the others countries are also increasing rapidly. These newcomers must create a sustainable model, or they will likely face a situation similar to India’s.

    China for instance can certainly take advantage of the vast discrepancies that exist between its provinces to balance the prices in Beijing or Shanghai with the more affordable ones available in cities like Chengdu or Hangzhou, a luxury that many other destinations cannot afford, either per the small size of the country or per the poor country’s overall infrastructure.

  • Unfortunately, there is another factor, and that is the decline of the education level in the USA. The country does not only produce enough engineers, but more tragically the overall education level is decreasing rapidly to say the least.

Each party involved is faced with a major challenge:

  • India is faced with a profound reorganization of its IT outsourcing industry, both a flagship industry and a major source of revenue for India

  • China is yet to create its own unique outsourcing model to accommodate the growth of its tier-2 providers. Since the Chinese industry is still very fragmented, China has no heavy-weight leader, and therefore this new model should be aimed primarily at tier-2 and tier-3 companies

  • The USA must rethink their educational system entirely, a long haul and very complex task.

IT outsourcing will remain a growing industry in the coming years, and certainly for as long as the country does not produce enough engineers to cover its own needs.

  • US large companies are likely to continue using the services of tier-1 leaders, that include the Indian ones

  • US smaller size companies are likely to continue to massively redirect their sourcing to China and to a minor extent Vietnam or other emerging destinations.

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Posted by Remi on Monday, April 14th, 2008 at 7:00 AM.

7 Responses to “The Future of IT Outsourcing”

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Left by Reena on April 16th, 2008

china has been amazingly competitive. That’s what makes a country when they are bombarded with poverty due to communism and equality of rights… people tend to work far more harder for a better meal in their kitchen plus the chinese attitude of being thrifty… all these years they have saved so much in the financial sense of it to be called the “silent dragon” and now even being competitive in the global market. looking through it closely, i think they deserve it… but somehow, i think everything that happens for a reason, and the continuous need to outsource doesn’t limit that to china alone. after all the language barrier can be a bit of a problem, somehow india can still compete but this time it’s tough call on their part. they have to be very industrious…double than they used to… chinese people are known to be industrious… so let’s just seek for the best for us all…

Left by jefferson faudan on April 17th, 2008

Hi,

As i could gauge from this very informative post, China doesn’t seem to have Tier 1 firms. So how long do u think it will take for outsourcing projects to reach china (instead of India) – basically i am talking about the shifting of the Indian Outsourcing biz to China? China needs to develop its Tier1 firms before it can capture US bizness.

And dont u think that Indian Tier 1 & 2 firms like Infy, HCL, Satyam etc will maximize efforts to deal with the falling USD- such that profits are maximized and business is not lost- as this outsourcing business seems to be on the cards for a long time to come.Or Else will the T2 and 3 firms shut down because If T1 firms suffer, they wont need much help from T2 and T3 firms.

Left by Kavitt S on April 18th, 2008

Large US corporations have already been pouring large projects into China for the past few years. Companies like Google, Intel or Microsoft are making their China centers even larger than the India ones.

The main difference with India is in the market approach. No Chinese outsourcing company can go compete for the large deals in the USA or Europe. The Chinese leaders certainly knew the “Art of War”, and instead of fighting a lost battle, they created the conditions to attract foreign business to China, and they have been quite successful at doing that.

Bottom line is that it is hard to compare the paths to market chosen by the 2 countries. China aims at becoming the world favorite destination for building software, like it has become the manufacturing center of this planet. India surfed this wave a few years ago, and it yielded to the emergence of a few world-class giants (TCS, Infosys, HCL, etc.). The challenge of these giants is now to compete with their US and European counterparts.

Left by Remi on April 18th, 2008

Here’s a comment that the future of IT outsourcing in the Philippines is a successful one and I just want you to know:

Filipinos are disciplined and skilled workers, these characteristics that we have helped us to be known in the other countries. Countries such as India, US, Canada, China are looking for IT people coming from our country because they know that Filipinos are creative, built-in with technical knowledge and fluent in English which is qualified for their works. IT professionals are on great help especially in the outsourcing business here in the Philippines and even outside the country.

Outsourcing established good marketing resources and able to have a cheaper production cost. Internet is mainly the source of media that help every small and large companies in advertising and marketing their business. In a certain company, web developing teams are the helper in up warding the business. Outsourcing is the most in demand job online that requires skills and techniques. Doing an outsource work is easy but technically sensitive. Outsourcing needs enough patience and handwork in order to have a good output. When it comes to outsourcing, expectedly there more than a million of searches every just here in our country and yet search engine optimized the traffic. The IT people focus their skills and ability in doing online presence; such of this are from design, to content, programming code and researches and because of this Filipinos are competent and confident enough to work not only here in the Philippines but anywhere around the other countries.

Left by Reyn on April 18th, 2008

Your blog is a great read!

I’m preparing myself for a call center job by May 22. I’ll be with Convergys.

I agree with what Reyn said, the Philippines also has a pool of globally competitive workforce.

I’m afraid I have to disagree with you on China. I don’t think they are ready. They’re culture is a lot different than Westerners and they are not accustomed to the English language yet as much as we do.

Left by bendz on April 21st, 2008

Great thoughtful blog with some very interesting analytical comments from readers.

Somehow the changing economic field, reducing dollae value, rising gas prices etc is making outsourcing less and less attractive and brining back the outsourced jobs to western countries. Also the concept of time to market and nearness to the customer is increasing awareness with outsourcing companies. I see more and more Indian outsourcing companies opening recruitment centers in western countries or merging/buying western companies.

In fact new trend is to outsourcing to south american countries due to nearness, ease to access, similar culture and English speaking recruits,

Apart from this the economic forces will shift the outsourcing everywhere and world is and will keep growing as global village due to internet, mobile access to applications and increasing cost of gas/energy,

Let us see how this landscape shape in next decade. :D )

Left by Phoenix2Life on May 3rd, 2008

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