Perspective: The end of India's offshore dominance?

Is India yesterday's news? Will China, Russia, Vietnam and Brazil become the future of information technology offshore outsourcing?

Some are making that argument, and there is an argument to be made. After all, the cost advantage of doing business in India has come under pressure as salaries for qualified Indian IT professionals reach record heights. Average Indian salaries in the field rose 12 percent last year, and they are expected to rise by about 15 percent across the industry again this year.

And as Indian salaries climb, many speculate that this presents opportunities for other offshoring hot spots, such as China, Eastern Europe--and even upstarts like Vietnam and Brazil. Some even speculate that rising salaries in India will erode the cost advantage over U.S. IT workers, ultimately returning offshore jobs to American soil. But that's only one side of the story. To paraphrase Mark Twain, the reported death of Indian outsourcing is greatly exaggerated.

The counterargument rests on two pillars: productivity and scale. Salaries may increase, but there are offsetting factors such as experience, infrastructure, high productivity levels and economies of

Some people even speculate that rising salaries in India will erode the cost advantage over U.S. IT workers, ultimately returning offshore jobs to American soil.

scale to consider. Let me put it another way: The cost of doing information technology in India is falling, as the range and complexity of projects that can be offshored to India is increasing.

How can that be? If you subtract the salary advantage, what makes India different than China, Russia and the myriad other countries chomping at the bit for IT work?

One reason is that India has a multiyear experience advantage over other nations. First-generation IT offshore providers cut their teeth on mainframe legacy code maintenance--the gritty work that few IT professionals in the United States care to do anymore. Now Indian IT companies are hitting the sweet spot of the enterprise application package market, offloading many of the high-volume, routine tasks that chief information officers struggle to maintain with high-cost U.S. resources. Countries like China and Russia simply don't have the experience to handle these tasks, and it will take years for them to come anywhere close.

Better backbone
Another reason is that India has vastly improved its IT infrastructure. A few years ago, large-scale projects required mirrored offshore hardware/software environments that were expensive to set up and a nightmare to keep in sync. That's no longer the case--distributed system development is now the de facto standard in many IT shops. India's IT infrastructure improvements enable Indian businesses to match salary increases with productivity improvements.

What's more, India has achieved global leadership in adopting continuous quality improvements that guarantee mature business processes and ongoing productivity improvement. By creating real software factories, Indian companies leverage the power of doing it right the first time. The leading software quality methodology in the world today is the Software Engineering Institute's Capability Maturity Model, or CMM. It is no accident that two-thirds of the world's CMM Level 5 organizations are based in India. Other countries will get there, but it's going to take time.

In addition, many India-based companies have discovered the leverage in India's university system to achieve increased efficiency. While it's unrealistic

Countries like China and Russia simply don't have the experience to handle these tasks, and it will take years for them to come anywhere close.

to expect "freshers" to be highly productive the day they receive their sheepskins, Indian businesses with strong training programs quickly supplement their new college graduates' strong theoretical IT foundations with the practical skills needed on their projects. College graduate salaries start at less than $5,000 per year, which is about half the salary or less of a seasoned Indian software developer.

Finally, India is rapidly creating huge economies of scale in IT offshoring, which further offset the inflationary pressures of salary increases. To counter wage increases, many offshore outsourcers are implementing large team sizes and long-term projects to help maintain utilization levels at above 75 percent. With larger teams comes the ability to include new college graduates in the mix, enabling them to train on the job.

While Indian IT salaries are undeniably on the rise, don't think that this will derail the offshore-to-India IT locomotive. Offshore service providers continue to find ways to provide their customers with increased productivity and scale, thus ensuring that India will not easily cede its current dominant share of the global IT offshoring market. And with the Indian government's focus on dramatically upping the supply of technical graduates over time, it ensures that India keeps moving up that steep productivity curve. That's the power of productivity--and India has figured it out.

Biography
Marc Hebert is executive vice president of Sierra Atlantic, a Silicon Valley-based application development company that has a branch in India.

More Perspectives

Agree

Well I m totally agree to yr statement. The potential still lies with India and continue to be for atleast nxt 6years.

Agree

Well I m totally agree to yr statement. The potential still lies with India and continue to be for atleast nxt 6years.

[EmbSysPro]

Sound Assesment - But can I make another comment.

I believe that you are correct concerning the offshoring issue; India is still a great place to find value.

But I would like to emphasize that the "high-cost U.S. resources" that many "Experts" in your field fail to fully explain is just as much a cause of the "high-cost" of living here in the U.S. rather than the perceived self-indulgence and lack of skill of the American IT worker.

Being a victim of the 2001 downsizing trend and subsequently a casualty of the offshoring phenomenon, I was initially very upset. I, like many other American IT workers had to struggle and suffered quite a bit.

I have since started my own IT business and I can better understand and relate to the bottom-line issues that senior management faces. Offshoring is a reasonable alternative in many situations.

I just wish that somewhere in the text of these types of articles, someone would have the wherewithal to mention that the American way of life is extremely expensive. And a large majority of the companies that are offshoring are doing so the sell products and services to the very same people that they have laid off.

[MilleB]

Where lies competitivness ?

Both article and comments are right and ask the following question. Where does competitivness come from ?
It seems that training software people is relatively easy and capital investment to get started is relatively small. Software tooling and PC's are extremely easy to get and standard world wide.

Intelligence is extremely well spread around the world unlike oil. Still need good education but knowledge is extremely difficult to hide in the internet days.

So low-wages and good education are attracting businesses. But why do people have low-wages ? Most often because people are forced into low-cost of living. Why?
Because they are forced into a sober life.

What if European or American programmers would chose for a different life-style ? Would they become competitive again ?

I know it's a kind of strange however it is as if : "sober life-style" is the source of "competitivness"

[EmbSysPro]

Sound Assesment - But can I make another comment.

I believe that you are correct concerning the offshoring issue; India is still a great place to find value.

But I would like to emphasize that the "high-cost U.S. resources" that many "Experts" in your field fail to fully explain is just as much a cause of the "high-cost" of living here in the U.S. rather than the perceived self-indulgence and lack of skill of the American IT worker.

Being a victim of the 2001 downsizing trend and subsequently a casualty of the offshoring phenomenon, I was initially very upset. I, like many other American IT workers had to struggle and suffered quite a bit.

I have since started my own IT business and I can better understand and relate to the bottom-line issues that senior management faces. Offshoring is a reasonable alternative in many situations.

I just wish that somewhere in the text of these types of articles, someone would have the wherewithal to mention that the American way of life is extremely expensive. And a large majority of the companies that are offshoring are doing so the sell products and services to the very same people that they have laid off.

[MilleB]

Where lies competitivness ?

Both article and comments are right and ask the following question. Where does competitivness come from ?
It seems that training software people is relatively easy and capital investment to get started is relatively small. Software tooling and PC's are extremely easy to get and standard world wide.

Intelligence is extremely well spread around the world unlike oil. Still need good education but knowledge is extremely difficult to hide in the internet days.

So low-wages and good education are attracting businesses. But why do people have low-wages ? Most often because people are forced into low-cost of living. Why?
Because they are forced into a sober life.

What if European or American programmers would chose for a different life-style ? Would they become competitive again ?

I know it's a kind of strange however it is as if : "sober life-style" is the source of "competitivness"

[mwadeeb]

Sounds like old information

This article reminded me of reading an Asian economics magazine from the mid-1970's. Interesting, but not too focused or heading towards anything more than a speculative dead-end.

[mwadeeb]

Sounds like old information

This article reminded me of reading an Asian economics magazine from the mid-1970's. Interesting, but not too focused or heading towards anything more than a speculative dead-end.

Marc Hebert, can he back his words?

Marc Hebert must not be brave enough to back his own words or he would have an email address to respond to the incorrect dribble he had posted on this fine new organization.

Marc Hebert, can he back his words?

Marc Hebert must not be brave enough to back his own words or he would have an email address to respond to the incorrect dribble he had posted on this fine new organization.

[SmBizMan]

He doesn't need to back it,

It's just true. Its basic economic theory in action...

[SmBizMan]

He doesn't need to back it,

It's just true. Its basic economic theory in action...

The new age debate

I have read so many articles from so many so called professionals and none of them seem to uplift the thought tht in the ongoing battle, India would also improvise on its ability to cut cost in the near future.

Its seems that the core of the debate is not loosing out the war of IT outsourcing or new age competitors coming up as a threat, its more about digging the jem which has established India as a reliable and affordable Outsourcing destination.

Aanywaz, none of the my comments would either be appreciated or taken heed off, as these guys would comeout time and again giving suggestions and methodologies to unroot something which is out of their scope.

The new age debate

I have read so many articles from so many so called professionals and none of them seem to uplift the thought tht in the ongoing battle, India would also improvise on its ability to cut cost in the near future.

Its seems that the core of the debate is not loosing out the war of IT outsourcing or new age competitors coming up as a threat, its more about digging the jem which has established India as a reliable and affordable Outsourcing destination.

Aanywaz, none of the my comments would either be appreciated or taken heed off, as these guys would comeout time and again giving suggestions and methodologies to unroot something which is out of their scope.

[b2bhandshake]

Interesting article

This is surely an intersting viewpoint. However, if not India, offshoring is sure to stay.. and Indians who have built epxertise in this are bound to be key players.
- Mohan babu, Author/Consultant
<a class="jive-link-external" href="http://www.offshoringmanagement.com" target="_newWindow">http://www.offshoringmanagement.com</a>

[b2bhandshake]

Interesting article

This is surely an intersting viewpoint. However, if not India, offshoring is sure to stay.. and Indians who have built epxertise in this are bound to be key players.
- Mohan babu, Author/Consultant
<a class="jive-link-external" href="http://www.offshoringmanagement.com" target="_newWindow">http://www.offshoringmanagement.com</a>

re: The end of India's offshore dominance?

I understand the points raised about why India is still a quality place to do business. But, I have read two articles in the past two days stating the superiority of India's capabilities, both of the articles were from people that have a vested interest in the growth of business there. China will in the next 3-5 years over take India in offshoring capabilities. This will happen because of the quality of product will be higher and the cost less. It is a simple formula. China has the infrastrucure, technical tallent, and contrary to some peoples beliefs the management capabilities.

re: The end of India's offshore dominance?

I understand the points raised about why India is still a quality place to do business. But, I have read two articles in the past two days stating the superiority of India's capabilities, both of the articles were from people that have a vested interest in the growth of business there. China will in the next 3-5 years over take India in offshoring capabilities. This will happen because of the quality of product will be higher and the cost less. It is a simple formula. China has the infrastrucure, technical tallent, and contrary to some peoples beliefs the management capabilities.

Marc has good undersanding of India

I fully agree with the points expressed by Marc. No doubt he has an interest in India as he has an office in India. The advantages, challenges etc are quite well brought out. I am sure this is as a result of his experience with India.

Ramesh Krishnamurthy

Marc has good undersanding of India

I fully agree with the points expressed by Marc. No doubt he has an interest in India as he has an office in India. The advantages, challenges etc are quite well brought out. I am sure this is as a result of his experience with India.

Ramesh Krishnamurthy

[a2lgo]

economies of scale

I agree with Marc's view, economies of scale is very strong key word in any industry. rising salary will not affect the growth in short span of 10-20 years but in long run it will definitely have an effect simillar to what happened with steel and auto industry in United states. Indian Software companies need to ba aware of that reality.

[a2lgo]

economies of scale

I agree with Marc's view, economies of scale is very strong key word in any industry. rising salary will not affect the growth in short span of 10-20 years but in long run it will definitely have an effect simillar to what happened with steel and auto industry in United states. Indian Software companies need to ba aware of that reality.

[ltphu]

Outsourcing to Vietnam? Are You Kidding?

"With the characteristic energy of youth, this young nation is pushing hard to build a future where Vietnam is a global competitor-and America is a top trading partner. One area in particular is in providing outsourcing services to American businesses looking for faster, better, cheaper ways to make their products from apparel manufacturing to clerical support centers, from software development services to contract computer product manufacturing to integrated circuit production. Outsourcing to an overseas company may not be appropriate for every situation, but when it does, clearly the Vietnamese want to prove that they have the capability to be a worthy business partner."

Ed Carroll, former VP of Engineering for Egghead.com

[ltphu]

Outsourcing to Vietnam? Are You Kidding?

"With the characteristic energy of youth, this young nation is pushing hard to build a future where Vietnam is a global competitor-and America is a top trading partner. One area in particular is in providing outsourcing services to American businesses looking for faster, better, cheaper ways to make their products from apparel manufacturing to clerical support centers, from software development services to contract computer product manufacturing to integrated circuit production. Outsourcing to an overseas company may not be appropriate for every situation, but when it does, clearly the Vietnamese want to prove that they have the capability to be a worthy business partner."

Ed Carroll, former VP of Engineering for Egghead.com

[ali.zaidi]

Innovation or Disintegration

Like any other boom that is unplanned and lacks long term approach, bubbles burst and markets crash. There are a multiple reasons why India might be left following the race after winning the lap. In the past and current century US and Europe have remained as the leaders of innovation and creativity. Institutes like MIT and Stanford continue producing graduates who not only are technically sound but innovative. To have a sustainable growth technology needs to be followed by ideas and needs, instead the other way round. Companies and countries which follow ideas with technology often face this crisis. As US and European companies feed on their technical skills, while the flag of innovation remains beached on their lands resulting in great products and profits. Indian companies made great efforts to fulfill the technical demands of US and European companies and when the price margin didn't remain competitive they began to offshore to China. What India needs to realize is that companies are not nationalist in the current times; they are global and would not waste a second thinking for better places to offshore or outsource. To sustain growth, innovation and creativity are the vital elements for organizations which keep them attached to a particular region. India needs to focus on producing and hiring graduates with not only technical skills but also entrepreneurial skills who know how can they establish and develop companies like Google, Facebook, Microsoft, Amazon, e-Bay, Oracle, IBM and Cisco. Companies that feed on their own ideas, creativity and research. During this process instead of focusing on outsourcing and off shoring opportunities Indian companies should have focused more on partnerships and alliances that are mutually beneficial not just in terms of material but also in terms of knowledge sharing and true development of organizations. This can be best achieved by practicing the agile model fairly as it spotlights on collaborative teams. In agile mind set from the project manager to the junior developer are involved in communication with the client that results in business understanding and knowledge growth. Coming to the financial and economic factor Indian companies need to operate their cash flows in Euro's as USD is losing its value swiftly and Euro is the next global currency. This can even worsen the condition if Indian companies do not modify their pricing model. The pricing model needs to be based on the project scope and complexity rather than rigid pricing which is usually based on the popularity and reputation of the company itself, this again requires business analysis skills along with excellent expertise of requirements gathering, analysis and design phases while estimating the RFP's or requirements. The best solution for this is the agile framework, as pricing done through agile framework offers better ROI for both the vendor and the client. But agile framework essentially requires business analysts, project managers and technical employees to have both business and technical know how, as the agile model requires day to day based communication of the development team and the client. This brings us back to the need of technical human resource with economic and business knowledge. India is not the only country that has faced this crisis, we should not forget the Indian capitalists were the ones who wisely benefitted from the dot com crash resulting in a great growth to Indian economy and also they most efficiently utilized the 10 flatteners mentioned in the book "World is Flat:? by Thomas Friedman. But the new 11th flattener is Innovation and Creativity for sustainable growth. Its not too late as Indian companies are moving towards the Question Mark from the Cash Cow quarter after enjoying a money-spinning time period as the Star. I am sure Indian think tanks have a back up plan to safe-guard their strength.

Ali Zaidi
Business Development Executive,
Ephlux

[ali.zaidi]

Innovation or Disintegration

Like any other boom that is unplanned and lacks long term approach, bubbles burst and markets crash. There are a multiple reasons why India might be left following the race after winning the lap. In the past and current century US and Europe have remained as the leaders of innovation and creativity. Institutes like MIT and Stanford continue producing graduates who not only are technically sound but innovative. To have a sustainable growth technology needs to be followed by ideas and needs, instead the other way round. Companies and countries which follow ideas with technology often face this crisis. As US and European companies feed on their technical skills, while the flag of innovation remains beached on their lands resulting in great products and profits. Indian companies made great efforts to fulfill the technical demands of US and European companies and when the price margin didn't remain competitive they began to offshore to China. What India needs to realize is that companies are not nationalist in the current times; they are global and would not waste a second thinking for better places to offshore or outsource. To sustain growth, innovation and creativity are the vital elements for organizations which keep them attached to a particular region. India needs to focus on producing and hiring graduates with not only technical skills but also entrepreneurial skills who know how can they establish and develop companies like Google, Facebook, Microsoft, Amazon, e-Bay, Oracle, IBM and Cisco. Companies that feed on their own ideas, creativity and research. During this process instead of focusing on outsourcing and off shoring opportunities Indian companies should have focused more on partnerships and alliances that are mutually beneficial not just in terms of material but also in terms of knowledge sharing and true development of organizations. This can be best achieved by practicing the agile model fairly as it spotlights on collaborative teams. In agile mind set from the project manager to the junior developer are involved in communication with the client that results in business understanding and knowledge growth. Coming to the financial and economic factor Indian companies need to operate their cash flows in Euro's as USD is losing its value swiftly and Euro is the next global currency. This can even worsen the condition if Indian companies do not modify their pricing model. The pricing model needs to be based on the project scope and complexity rather than rigid pricing which is usually based on the popularity and reputation of the company itself, this again requires business analysis skills along with excellent expertise of requirements gathering, analysis and design phases while estimating the RFP's or requirements. The best solution for this is the agile framework, as pricing done through agile framework offers better ROI for both the vendor and the client. But agile framework essentially requires business analysts, project managers and technical employees to have both business and technical know how, as the agile model requires day to day based communication of the development team and the client. This brings us back to the need of technical human resource with economic and business knowledge. India is not the only country that has faced this crisis, we should not forget the Indian capitalists were the ones who wisely benefitted from the dot com crash resulting in a great growth to Indian economy and also they most efficiently utilized the 10 flatteners mentioned in the book "World is Flat:? by Thomas Friedman. But the new 11th flattener is Innovation and Creativity for sustainable growth. Its not too late as Indian companies are moving towards the Question Mark from the Cash Cow quarter after enjoying a money-spinning time period as the Star. I am sure Indian think tanks have a back up plan to safe-guard their strength.

Ali Zaidi
Business Development Executive,
Ephlux