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India as an Oustourcing Destination: A Comparative Analysis
For
multinationals, outsourcing is a business imperative. According to a
Forrester Research study, nearly half of all companies surveyed
stated that they used offshore providers to avoid high labour costs in
the US and Europe. And two-thirds planned to send work overseas this
year. The trend is not just in the area of outsourcing software
development work but business-specific back office processes. A
recent paper by consultancy group AT Kearney discusses key
attributes and characteristics of 11 countries - including India and
China - to examine what makes them good or not-so-good candidates for
offshoring business processing. While India continues to be an
attractive destination for outsourcing projects, other nations are fast
catching up, as countries continue to scout for the perfect BPO
destination.
The good news is that India has top of mind recall among
corporations all over the world when it comes to offshore business
processing. The not-so-good news, from India's perspective, is that
increasingly companies are following multi-country strategies to ensure
business continuity. This is done to minimise risks in the event of a
natural disaster or other events. Again, companies find it useful to
"identify sub-categories of countries" that are most apt to meet their
specific needs, says the AT Kearney report. For instance, top US
companies often begin their offshoring decision-making by shortlisting
nations with specific language capabilities before choosing the
offshore destination.
The three key factors that go into selection of a country as the
offshoring destination are:
- Costs: this includes cost of labour, management and
infrastructure and tax and treasury impact.
- Environment: economic and political risk, country infrastructure,
cultural compatibility, geographic proximity and security of
intellectual property.
- People: BPO and IT process experience, size of labour market,
education level of workforce, language barriers, employee retention.
The Cost Factor: Currently
India is the top rated country in two of the three factors - costs and
people. On the costs front, India scores the maximum points (3.4 out of
10) compared to China, Russia, Hungary, Brazil and Czech Republic's 3.1
each, Mexico's 3, the Philippines' 2.9, Australia's 2, Ireland's 1.8
and Canada's 1.5. Says the AT Kearney report: "Although India is
expected to retain its leadership position for the foreseeable future,
its strong ratings may be tempered gradually rising labour costs (so
far offset by reductions in telecom rates) and geopolitical concerns.
In the long run, India is likely to become the location of choice for
high-value analytical tasks, while more generic commodity processes
will eventually move to lower cost environments such as China."
The Environment Factor: On the
environment scores, India is a medium performer, scoring merely 1.6 as
compared to high ranking countries such as Canada (2.6), Ireland (2.5)
and Australia (2.3). The second level countries include Brazil (1.8),
Mexico (1.9), Philippines (1.7), Hungary (1.6), Czech Republic (1.6)
and India (1.6). Russia with 1.4 points and China with 1.1 are at the
bottom of the ladder. The major chinks in India's armour are its poor
score on intellectual property, country infrastructure, geographic
proximity and cultural compatability.
The English-speaking countries like Canada, Australia and Ireland
perform well on this factor and have better infrastructure and lower
economic and political risk. However all three countries fare poorly in
terms of labour costs. Canada is increasingly becoming a favoured
destination among US companies due to superior employee retention
rates, business process experience and proximity to the US compared to
Ireland and Australia. Canada is being considered for complex business
processes that require close proximity to home office operations are
being. Latin American countries, on the other hand, offer relatively
low labour costs and similar time zones with the US. They also
score well on the employee retention count. While both Brazil and
Mexico rank higher than India on environmental factors, India ranks
higher than these countries in terms of workforce ranking. Brazil and
Mexico have been investing in software and IT and telecom
infrastructure and this has led to improved ratings for these
countries.
The Philippines is a prime candidate for offshore business processing
due to its cultural affinities with the US and American style English
speakers in its workforce. Low employee turnover rate is also a plus,
though given its smaller workforce pool and high labour costs, India
scores over this country.
For countries that are based in Europe, the Central European countries
like Hungary and the Czech Republic are attractive offshore
destinations. Cultural similarities, language skills and high levels of
engineering and technical capabilities are major plus points. Russia is
also emerging as a potential offshoring destination, thanks to its
large pool of technical talent ranging from scientists to engineers to
programmers. However the key constraints are language barriers,
employee retention problems, poor IT and telecom infrastructure,
political instability and corruption.
The People Factor: India is top
rated on this factor, scoring 2.3,with only Canada coming in at a close
second (2.1). Ireland and Australia with scores of 1.5 and 1.4
respectively are the next on the people ladder. The Latin American
countries of Brazil and Mexico score 1.2 and 1.3 respectively, while
Philippines, Hungary and Russia score 1.1 each. The Czech Republic and
China are at the bottom of the ladder with 1 each.
China's greatest advantage is in terms of its large low-cost workforce
pool. Asian language skills and the potentially vast low cost labour
pool are likely to increase China's prominence as a top location to
perform transaction-processing functions as well as for overall support
of multinationals' Asia business operations, says the report.
Conclusion: Clearly then as
the report points out: "Companies at the forefront of the offshore
movement will continuously look for potential opportunities across the
next border". It is evident from the report that even though India
continues to rank higher on the cost and people factors, many of the
other countries are catching up. If India has to maintain its
leadership position, it would do well to focus on elements such as
its intellectual property regime, greater employee retention and
skills upgradation, and provide more attractive management and
infrastructure costs.
[icfdc.com
, 2 May 2005]
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