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December 5, 2006

Yet another worry for Indian offshoring companies

It was recently reported that various problems with the Indian outsourcing industry are forcing UK and European firms to look elsewhere for their offshore provision. The issues cited include big wage rises, skills shortages, and incidents around data security. Such problems threaten to topple India's leading offshoring position, and come as rivals are growing ever stronger.

By CBR Staff Writer

Although India remains the leader in IT offshore services, China is second in the race to secure offshore services, and it has moved quite quickly up the rankings in recent years. The high attrition rates, coupled with wage rises of around 15% per year experienced in India, have led to the challenge by China, which has a large pool of labor and lower costs. China is also a tried and tested destination for offshoring from the likes of Japan and Korea, and uses these examples to tempt new customers.

As is often the case with offshore destinations, there are the usual issues of language capabilities, western business understanding, cultural fit, and location suitability to consider. The way in which business is done in the West is different to India, which again is different to China, and so on. Only when an offshore location can demonstrate that it understands the methods and meanings of its customers will it be able to deliver on requirements.

Location suitability is also another important issue – Hong Kong and mainland China are approximately 12 hours flying time away from the UK, and further for East Coast America, and around eight hours flying time from East Coast Australia. No matter what one thinks or is told when setting up a contract with an offshore organization, contract management dictates that at least some of the time and budget will be spent visiting the offshore location.

The wage rises in India have been going on for some time now – talented individuals tend to move companies approximately every 12 months, substantially increasing their salaries with each move. This, of course, has had an effect on the companies using providers based in India, making their costs higher. In turn, this has reduced the attractiveness of India as an offshore location.

In October 2006, the National Outsourcing Association (with Russian software services vendor Luxoft) undertook a survey of UK financial services organizations and found that sub-continental Asia (including mainly India) was seen as the easiest region to do business with, for the outsourcing of complex IT functions. However, central and eastern Europe (notably Poland, Russia, the Czech Republic, and the Ukraine) came a close second, demonstrating the fact that, as well as China posing a significant threat to India, nearshoring is also becoming more attractive to UK organizations.

It is not only the geographical proximity that appeals – the lack of a ‘yes’ culture so often cited as a problem in Asia is not so prevalent in central and eastern Europe. Furthermore, compliance yet again looms large as a particular concern for the surveyed financial services sector, but also affects organizations in other industries. Regulatory proximity is very important to organizations with worries over data protection and general financial compliance issues.

With the rise in wages, the skills shortages, and an increasing number of data security incidents, it is clear that India needs to watch not only countries out to its East, but also back towards the West, to fight its corner and retain its major market share.

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