News: Outsourcing to India Losing its Charm

New Delhi: India as a ‘plum outsourcing destination’ is losing its brand value thanks to deteriorating quality, substandard work, and increasing costs. According to a latest survey by global management consulting firm A T Kearney—the total compensation costs for office services employees in India, China, the Philippines, and other offshore hot-spots increased as much as 40 per cent in 2006.

Labour cost advantage associated with offshoring information technology services to countries like
India, China and the Philippines, is declining says the survey. At the same time, key emerging markets continue to improve their attractiveness in terms of access to talent, industry experience, quality certifications and their regulatory of environment.

More at IBN link

I've worked with and for outsourcing/offshoring companies, working directly with clients who have chosen this path for their IT. The problems created by these practices often outweigh the advantages created.

Cost savings almost always drive the decision to offshore selected IT functions as, currently, an Indian working offshore costs the end client approximately $30/hour total package, while an "equivalent" American employee can cost between $50 - $75/hour, including overhead and benefits. On the surface, this certainly looks attractive, but then the hidden costs, all of which are derived from communication or the lack thereof, begin to emerge, including:

• Translation of business requirements - This has traditionally been a problem in IT, as programmers are often not conversant with the details of the business they are modeling. With a staff of Indian programmers whose native language is other than English, the problems are magnified and additional time (and, therefore, money) is required for this task
• Remote communication - Managers tradtionally manage face-to-face, something that's impossible in the offshore model. Managing staff remotely requires significant adjustments in a business' entire managerial model. Networks and the internet, the great enablers of offshoring, have accomplished what air-conditioning did for Florida, providing e-mail, document sharing, and video-conferencing to address this requirement. However, effectively utilizing the tools requires significant adjustment in style
• Time zones and other logistics - Most Indian data centers/campuses are +9.5 - +10.5 hours ahead of EST. This means that when it's 9:00 AM in NYC, it's 7:30 PM in Hydrabad. Moreover, most Indian IT employees travel to work by bus, thereby constraining and, given the quality of the bus service in India, reducing their working hours. This simply makes the communication challenges worse

All of these factors increase the cost of offshoring. Many offshore companies have responded to these issues by including in their model a significant onshore component of personnel to effectively act as intermediate managers. However, these personnel end up costing $75-$85/hour due, in part, to the costs of transportation and housing, thereby negating much, if not all, of the associated cost advantage.

Interestingly enough, the article also notes pressure on the model mounting from the other direction. As demand has increased and Indian inflation has raised the cost of living, wage pressures are eroding the key advantage of the offshore model, costs. Indian programmers are demanding and getting higher wages which, given that the existing margins are not huge, must be passed onto the client. In the last seven years, I can remember when $22.50/hour was the standard charge for an Analyst; now, it's risen to at least $27.50 and will rise further and more rapidly as these competing pressures mount.