What Drives Offshoring: Just Low Cost or Other Factors?
In advanced economies debate rage about offshoring IT services – such as software and Web development, technical and customer support services, data analysis, customer relationship management and business intelligence (BI) activities – and other business processes and functions to countries such as India, China, Brazil, Philippines and Ireland. For instance, in Australia, recently there were debates and media rumblings about major Australian companies such as the national carrier Qantas and banks Westpac and NAB moving some of their software development to India.
But, despite protests from the employees, dissatisfaction among the general public and potential political and social fallouts, and risks in outsourced projects (see Communications of the ACM, November 2006, pp 75-79) many enterprises continue to offshore some of their activities. And this trend is not going to stop soon. Why? What drives this trend? Is it just low cost of getting things done overseas, or are there other factors?
As Graeme Philipson wrote in the article, IT welcomes its Indian summer, published in The Sydney Morning Herald, 5th December 2006: “It's not just about money. Increasingly, it's about capability. Cost remains a factor - there is a worldwide trend towards outsourcing and a search for lower cost and more efficient business processes.” “The most common reason companies now go to India for software development is because of the vast talent pool afforded by the sheer size of the place.”
The IT industry in India “employs millions of people. The top five software houses alone are looking to hire 150,000 new programmers over the next 12 months. Across the whole industry, demand is expected to exceed 750,000 new programmers.”
Most Indian software companies are high quality providers and realize they must deliver first rate services and products. They barley mention lower cost any longer as a factor in the industry's success. It is all about things such as capabilities, support, discipline and performance.
The Indian IT industry is matured, delivers quality products and services at low cost, and meets or even exceeds its clients' expectations. And, it has vast potential and has capabilities to meet the varied and challenging demands of software, IT and other services required by clients all over the world.
Nevertheless, in advanced economies such as the US, UK and Australia, there is strong negative perception about and opposition to outsourcing (offshoring). Their major concern is job loss, though other issues such as privacy and integrity of customers’ information and intellectual property take prominence. As a journalist wrote in an Australian newspaper recently, for enterprises that offshore its service needs, it is the question of their survivability, improving their competitiveness and providing better customer service in cost-effective ways, rather than how and where it gets services accomplished. If they don’t offshore some of their services, some of the enterprises can’t remain competitive and sustain their business contributing to further job loss and strain on economy and the society.
In this context, it is important for everyone to recognize that we are living in a ‘flat world’ (see The World Is Flat: A Brief History of the Twenty-first Century, by Thomas L. Friedman, Updated and Expanded edition, April 2006) and to adopt to it. In a flat world, the national boundaries become less significant, and the winners are those who capitalize on capabilities available globally.
While offshoring may be bitter for enterprises and the nation that offshore their activities, the alternatives could be more damaging. It is, perhaps, the question of choosing a better evil (swallowing a lighter bitter pill)!
Your thoughts on pros and cons of offshoring, from multiple perspectives – enterprises’ perspective, national perspective, social/society’s perspective and others – are welcome.
Is offshoring good or bad, or both?
San Murugesan
Comments
Let me start with saying in today’s world of global economy I think the words offshoring/outsourcing/ should be removed from the dictionary. Politicians have made a living with these two words.
I’ve taken immense pleasure in reading the following books “The End of Poverty the economic possibilities of our time” written by famous author Jefferey Sachs the great economist and “The commanding heights: The battle for the world economy”
If everyone where to read these books they would at-least come to the reality that globalization always does not have to be a Zero sum game.
Now my take on offshoring/outsourcing which I prefer to call globalization or global sourcing is defined by none other than Narayana Murthy himself as “Procuring capital where it’s the cheapest, manufacturing where it’s most cost effective and selling it where it’s more profitable”.
In today’s demanding business world where some in Alaska decides to call their credit card company about a transaction they don’t care whether their call is picked up next door or half way on the other side of the world in India they want their call serviced as long as they get prompt quality service. This phenomenon is becoming more common across different industries where emphasis is placed on 24/7 “Follow the Sun model” where businesses need to be able to provide services to clients/customers anywhere anytime. These kinds of pressures are placed on businesses all over the world in some shape or form. The only way to service a global economy would be through globalization.
Posted by: Kumar Chandramohan | December 15, 2006 10:07 PM
Dear Professor San Murugesan,
Thank you for an excellent article that says some things that need saying--and quite elegantly, if I may add.
We are a software Development Center located in the Philippines and I second your observation that companies no longer say "how much" first, but they do say it, eventually. The first question we get is "how good" followed by "how fast," and then "how much."
What we have also noticed recently is that Project Management has taken a giant turn for the better. In the past one of our biggest problems was keeping the client interested; they wanted to set it and forget it. Sir, you cannot get there from here. We are very happy to tell you that offshore software development is maturing, companies demand more (and get it) and they now expect to be very involved in the process.
As you can attest I am sure, globalization is tricky business. Just as we no longer compete with just India (we have China, Eastern Europe, and South America to deal with), so Western companies must now be aware of what the world is doing to solve such problems as poor English in their call center, or worse, an attitude that needs serious adjustment.
We are fortunate to have a labor pool of Software Engineers, Customer Service reps, and F&A personnel who have tolerated Americans for a century now and have learned enough about our culture to become friends with us quickly and quietly; honestly that's pretty cool for an expat such as I.
Thanks again for a very cool article.
Posted by: Jerry C | March 6, 2007 6:09 AM