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"The report of my death was an exaggeration"

So wrote Mark Twain after learning that a reporter was sent to investigate whether he had died.  I was reminded of this quote after reading the latest in a recent spate of articles predicting the decline of India as the leading global sourcing destination.

Citing unnamed "experts" the article, like others of its ilk, blamed wage inflation, hidden costs, and rising demand for skills as the reasons why companies are pulling out of outsourcing relationships or shifting offshore operations from India to "newer" locations. 

There are a number of problems with this line of reasoning.  First, it assumes that global services market is static and cost-obsessed and that the labor arbitrage model will always rein supreme. 

Certainly, cost reduction is and will remain a principal goal driving companies to move IT and business process activities to offshore locations.  But, it is not the only reason.  Establishing market presence or supporting local business activities in emerging economies are among the others, as is the need mitigate geopolitical risks.  Companies also look to different locations for local knowledge and linguistic and cultural reasons, e.g., to serve East Asia markets from China or EU countries from Central Europe.

Second, the thinking is that the limit for cost reduction opportunities in India has been reached and that the only alternative is to find someplace cheaper.  In fact, experienced sourcing practitioners today are greater savings in India than when costs were lower. 

These companies have developed and adopted best practices.  They’ve moved beyond commodity transactional sourcing to strategic sourcing, shifting more and higher-value functions and activities offshore, not less; achieving quality, productivity, and efficiency improvements and changing operations models and strategies in the process.

Third, a result of competition from lower-cost locations is often a dampening of wage inflation in others.  Today’s labor cost gap is tomorrow’s level playing field.  Moreover, as demand for technology skills to serve domestic needs in countries such as China increases, wage inflation will follow, as it already has in manufacturing.

Finally, the ongoing debate about what location will be "the next India" is based on an outmoded "offshore outsourcing" model, not a global sourcing one that is increasingly about vendor relationships and efficiency improvements.  The fact is that today's mature practitioners are just as likely if not more likely to rely on current partners to fulfill their geography resource requirements than establish new relationships. 

Multi-sourcing isn't about promiscuous sourcing, moving from country to country, company to company.  Successful sourcing practitioners are looking to consolidate vendor partnerships, not add more. 

Does this mean that they aren't looking to benefit from having a larger geographic footprint?  No.  It just means that the sourcing industry, like the global economy, is undergoing fundamental changes.  In that regard, it's safe to say that reports of the decline of India as a sourcing destination are exaggerated.

Comments

You aptly pointed out the fact that it is not only the arbitration model which made IT outsourcing the most successful business strategy. A classic example can be from the Automotive industry - from the leader Toyota. There are manufactures who could sell cheaper cars, but Toyota could deliver more value to the clients, it provides matured and robust products and services. Another example is the Apple Ipod, though there exists many cheaper alternatives, the simplicity, ease of use and quality of the product takes it to the top.

The business corporations which strategically outsourced to India (for that matter, any other place) are not going to pack up and go, as they were are not here on a shopping hop. They are being benefited from the continuously maturing models, process and knowledge base and they will be gaining more.

The existing players will raise to the challenge further optimizing and improving to deliver more value to the client - which was happening with the leaders of the industry, will happen at an increased pace. Overall, the baseline has raised which offers more challenge for the industry - who ever responds will excel.

The death will be quickly followed by re-birth, what we call as transformation. The way the Indian IT leaders transformed themselves after the Y2K era and delivered more value to the client supports the point.

The main reasons for outsourcing are - CONVENIENCE (of getting a certain work done) and THE AVAILABILITY. After all why aren't people outsourcing work to China or a Latino country or Africa, the availability of quality personnel who provide convenient service is not there. India provides convenient services and has a lot of manpower willing to supply the service. This availability has created the market.

Agreed along with the cost advantage, there are some added advantages that most of the indian IT companies provide to their customers but do the companies really succeed in making the customers pay the premium for those added advantages they provide. I guess not. someone above gave an example of Apple Ipod. That's a pretty bad example because Apple has always been a pioneer in convincing the customer to pay a premium for their products than competition.
I doubt if atleast 20% of services provided by indian IT vendors get better (or comparable)billing rates from their customers than similar services from Big 4 companies

Hi Stephen,

There is some level of agreement and disagreement about the clause pointing towards the decline of India as a sourcing destination. As rightly said - India has adopted multiple level of high ground Industry best practices and standards, which puts it on a high level playing ground. Also the relationship building which companies have been employed and taken up in last 10-15 years, just cannot be replicated into newer destinations.

The fact of the matter is India is still coming to terms with its initial set of Infrastructural investments, and more and more Indian firms are trying to set up large scale global operations in versatile fields and domains; in addition the choice of being the New Enterpreneur. All these changes are still in their nimble stages and should not be pointing out into a niche field or sourcing destination.

India is still in the developing stage and has improved upon its technological advancements both in IT and Biotech and put them on a global standard platform. What this means for the Sourcing industry is, it can be more confident, assured and less risk dependent to take on the oppurtunities in India.

On the other side of the green, if you look, the stock markets have been very stable, but still unpredictable. Private Equity is putting in money at an exponential rate, but this started to come in only this year 2007. FDI have flown in but profoundly in non-IT frameworks, and off-course the INR appreciation against the dollar cannot be neglected. Taking all these factors and trying to link them with the Global outlook of the companies towards India as a preferred sourcing destination, will put us in a push-pull set up, where stints are still moving in to invest in the Indian Subcontinent, but the number of deals and the Investment will be determined only in the course of next two quarters, where some level of stable growth parameters and rating engines come in and point out India's True Stand up Quotient.

Mark Twain had a knack to discover exaggeration. India won't cease to be a outsourcing destination in near future. It's not just the cost benefits, that the Indian outsourcing partners provide to their cilents, that is responsible for the growth of outsourcing business in India. India provides an excellent talent pool and expertise required to serve the competitive service industry. This expertise, in coming years,will increase further.

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