Another offshore outsourcing boom could harm India

IT outsourcing to India will grow by a quarter this year as Western companies seek to cut costs, but this could spell difficulties for the biggest providers, market researchers say.

A new report: 'IT Trends 2003: Offshore Outsourcing' from US-based researchers, Giga Information Group, says more Western companies than ever before will use remote programming and business processing resources to support their corporate goals in the coming years.

Giga's report follows a recent release from India's IT industry organisation, NASSCOM, acknowledging the rise in demand but voicing serious concerns that India's supply of qualified workers be exhausted by 2008.

Even more worrying for Indian incumbents perhaps, large Western outsourcers are intending to oust them from the market by undercutting them, Giga researcher, Will Cappelli, claims.

He said: "India's offshore industry will undergo a crisis during the next two years as IGS, Accenture and other global players attain quality/cost ratios similar to those achieved by TCS, Wipro, et al. Business process outsourcing (BPO) is no salvation here, because the global players will, of course, deliver that too. At the same time, as these ratios become the norm throughout the industry, the case for maintaining in-house IT operations becomes ever more tenuous."

Some of the other offshore outsourcing trends Giga expects to see this year include:

• Companies too dependent on one country's labour pool (India) will increasingly look to diversify their risk.
• Mexico will emerge as a strong nearshore outsourcing alternative for North American companies.
• The large top-tier outsourcing firms will continue to thrive and many will match or exceed industry growth rates, while the smaller, newer Indian vendors will struggle to survive.

Giga Analyst, Robert McNeill, said another trend seen of late is use of the term "co-sourcing" instead of outsourcing.

"Don't be fooled," he said. "Although the term co-sourcing has seen increasing use there appears to be no significant difference between outsourcing and co-sourcing. The principal reason the term is being used is that it resonates well with end-users who want to partner with service providers but have become indifferent to outsourcing, or end-users who find it hard to internally sell outsourcing."

Sudip Nandy, Vice President of Sales & Marketing in Europe for the Indian IT outsourcing giant, Wipro, said he was not concerned by the forecast worker shortfall, but admitted it was inevitable.

He told UKTECH: "We are currently seeing heightened interest in offshore outsourcing. The slowdown we were seeing through 2001/2002 is not here anymore, but opportunities are not as high as they were in 2000. There's huge interest in Indian outsourcing at the moment, but we are hardly experiencing explosive demand.

"The next major boom for Indian outsourcing will come from Small to Medium Enterprises and BPO - when it hits, there are a lot of qualified Indian IT workers currently looking for work and more than 200,000 software engineers and 250,000 diploma holders graduating from Indian universities, annually.

"If our worker levels fall and demand rises, then so will our rates, but by then many established Indian outsourcing providers, including ourselves, will have additional stations in Romania, China and Africa as well as in other places, in order to meet that demand."

Mr Nandy said it was unlikely large Western outsourcers like IBM and EDS would capture the market away from Indian outsourcers as the latter would always operate at a rate of 25 per cent or more beneath Western businesses.