Offshore Outsourcing: India

Offshore outsourcing to India is one of the most popular management practices today. Though it is generally spurred by the cost reduction factor, this is just one of the reasons one should consider offshore outsourcing. Most parties who outsource are unaware that Indian Service Providers do not just offer cost effective solutions, but also value addition by improving productivity and quality.

One should understand the need for offshore outsourcing better before making a decision. Cost is definitely one of the main reasons for offshore outsourcing to India, but one should realize that this cost advantage may not be seen immediately. Initial investment in infrastructure, training, and other such preliminaries may make one believe that the cost advantage promised is just the illusory pot of gold on the other side of the rainbow.

However, this cost advantage is seen over a period of time in a outsourcing venture which involves a committed relationship and understanding between both parties involved. A recent article on IBM and outsourcing illustrates this.

"Outsourcing services companies frequently have to make substantial investments in IT equipment, facilities and personnel. Yet IBM, HP and others prize these multiyear contracts because they can help bolster higher-margin sales of hardware and software by creating a long-term, interdependent relationship with clients". ("IBM cements outsourcing dominance", CNET News.com, October 02, 2003)

So the aspect of saving money does exist, but one has to realize that initial investment may make the promise of cost reduction seem false.

There will be savings and along with these savings there is great value addition. Most who outsource only realize the quality and value addition after the offshore outsourcing relationship begins. This is not usually the primary goal when deciding to outsource, and the creativity and talent in India comes as a surprise to many.

"Certainly cost reduction, but it's not as simple as that! Cost reduction was only part of the reason that companies were considering offshore outsourcing, there were benefits to be had in time-to-market and quality, leading to an adage that companies initially chose India to save costs but stayed for the speed and quality!" (National Outsourcing Association (NOA), 1st Annual Offshore Outsourcing Conference - 23rd July 2003)

Offshore Outsourcing to India is about quality and value addition at a reduced cost.

The shift in motivation is already apparent. The fact that so many companies continue to outsource is proof of this. Along with the sheer volume of work that is pouring into the country comes recognition of the talent and expertise possessed by Indian Service Providers.

In an article featured in COMPUTERWORLD on India's prowess in the outsourcing domain, several analysts and outsourcing parties believed that cost was no longer the only reason why outsourcing to India is an attractive option. Companies in countries such as Russia and China have begun offering better rates than Indian companies.

"The difference lies in the scalability of major Indian vendors, their strong focus on quality and their experience delivering a wide range of services", says John Blanco, senior vice president at Cablevision Systems Corp. in Bethpage, N.Y.

The article continues to explain how major Indian software vendors have developed more of a global services delivery capability than their counterparts in other countries. India's workforce also offers the largest pool of technical skills in the world, and the country's universities add 180,000 engineering graduates to its ranks annually.

"The goal is to eventually use Indian vendors as strategic IT partners, both to augment internal IT development capabilities and to help Cablevision plan, design and implement new projects. We're not looking for just the lowest dollar [cost]. We are looking for vendors that will help us mature technically and from a process standpoint as well", says Blanco. ( "India Inc., Still Going Strong", by Jaikumar Vijayan, September 15, 2003,COMPUTERWORLD )

Indian companies also realize that cost cannot sustain the country's current dominant position in the offshore outsourcing industry. Nandan Nilekani, CEO Infosys, points out that the way business is conducted is changing. The perfect formula two years ago is no longer the way to do business today. Now the mindset is changing from a company that simply provides services to one that provides solutions.

"Our selling pitch so far was, 'We have 100 Java engineers, and we can deliver for you from offshore, now tell us what you want us to do.' Today that is being replaced with "we can give you a technical solution which can cut your inventory expenses by $100 million", says Nilekani.

The Outsourcing History of India

The idea of outsourcing has its roots in the 'competitive advantage' theory propagated by Adam Smith in his book 'The Wealth of Nations' which was published in 1776. Over the years, the meaning of the term 'outsourcing' has undergone a sea-change. What started off as the shifting of manufacturing to countries providing cheap labour during the Industrial Revolution, has taken on a new connotation in today's scenario. In a world where IT has become the backbone of businesses worldwide, 'outsourcing' is the process through which one company hands over part of its work to another company, making it responsible for the design and implementation of the business process under strict guidelines regarding requirements and specifications from the outsourcing company. This process is beneficial to both the outsourcing company and the service provider, as enables the outsourcer to reduce costs and increase quality in non core areas of business and utilize his expertise and competencies to the maximum. And now we can see the benefit to the service companies in India as they mature, prosper and build core capabilities beyond what would generally be possible by the outsourcing company.

Since the onset of globalization in India during the early 1990s, successive Indian governments have pursued programs of economic reform committed to liberalization and privatization. Till 1994, the Indian telecom sector was under direct governmental control and the state owned units enjoyed a monopoly in the market. In 1994, the government announced a policy under which the sector was liberalized and private participation was encouraged. The New Telecom Policy of 1999 brought in further changes with the introduction of IP telephony and ended the state monopoly on international calling facilities. This brought about a drastic reduction and this heralded the golden era for the ITES/BPO industry and ushered in a slew of inbound/outbound call centres and data processing centres. Although the IT industry in India has existed since the early 1980s, it was the early and mid 1990s that saw the emergence of outsourcing. One of the first outsourced services was medical transcription, but outsourcing of business processes like data processing, billing, and customer support began towards the end of the 1990s when MNCs established wholly owned subsidiaries which catered to the process off-shoring requirements of their parent companies. Some of the earliest players in the Indian market were American Express, GE Capital and British Airways.

The ITES or BPO industry is a young and nascent sector in India and has been in existence for a little more than five years. Despite its recent arrival on the Indian scene, the industry has grown phenomenally and has now become a very important part of the export-oriented IT software and services environment. It initially began as an activity confined to multinational companies, but today it has developed into a broad based business platform backed by leading Indian IT software and services organizations and other third party service providers. The ITES/BPO market expanded its base with the entry of Indian IT companies and the ITES market of the present day is characterized by the existence of these IT giants who are able to leverage their broad skill-sets and global clientele to offer a wide spectrum of services. The spectrum of services offered by Indian companies has evolved substantially from its humble beginnings. Today, Indian companies are offering a variety of outsourced services ranging from customer care, transcription, billing services and database marketing, to Web sales/marketing, accounting, tax processing, transaction document management, telesales/telemarketing, HR hiring and biotech research.

Looking at the success of India's IT/software industry, the central government identified ITES/BPO as a key contributor to economic growth prioritized the attraction of FDI in this segment by establishing 'Software Technology Parks' and 'Export Enterprise Zones'. Benefits like tax-holidays generally enjoyed by the software industry were also made available to the ITES/BPO sector. The National Telecom Policy (NTP) introduced in 1999 and the deregulation of the telecom industry opened up national, long distance, and international connectivity to competition. The governments of various states also provide assistance to companies to overcome the recruitment, retention, and training challenges in order to attract investments to their region. The National Association of Software and Service Companies (NASSCOM) has created platforms for the dissemination of knowledge and research in the industry through its survey and conferences. NASSCOM acts as an 'advisor, consultant and coordinating body' for the ITES/BPO industry and liaisons between the central and state government committees and the industry. The ardent advocacy of the ITES/BPO industry has led to the inclusion of call centers in the 'Business Auxiliary Services' segment, thereby ensuring exemption from service tax under the Finance Bill of 2003.

These measures have led to a steady inflow of investments by large foreign companies such as Reuters, for establishing large captive ITES/BPO facilities across India. Moreover, the existing ITES/BPO operations of major multi-nationals are also being ramped up to cater to the ever increasing demand for better and speedier service. Almost all of India's top ITES/BPO giants have announced some form of expansion and are in the process of hiring manpower to fill the additional seats. India's competitive advantage lies in its ability to provide huge cost savings thereby enabling productivity gains and this has given India an edge in the global ITES/BPO marketplace. NASSCOM studies pinpoint the following factors as the major reasons behind India's success in this industry.