Can India hold on to offshoring throne?

Experts believe so, despite increasing competition from countries such as the Philippines and Malaysia, that have emerged as alternative offshoring locations.

news analysis While market observers believe that India is facing increasing competitive pressure, there appears to be no serious threat to India's outsourcing dominance in the short term.

"Over the last three years, the Philippines and Malaysia have emerged as very strong contenders in the IT-related services," Milan Sheth, partner of business advisory services and leader in technology and telecom Verticals, Ernst & Young India, told ZDNetAsia in a phone interview.

"It will be naïve not to take the threat from these countries seriously," Sheth said. The Philippines, he said, has emerged as a very strong threat to India in the provision of voice-related services.

Hari Rajagopalachari, executive director at PricewaterhouseCoopers India, said in an e-mail interview: "Poor urban facilities [impacting quality of life] and increasing crime rates are making India a less attractive destination for expatriates--a critical factor in establishing captive centers."

There are several factors why India may be losing business to other countries, including the strengthening of the rupee, high attrition rate and poor infrastructure.

"Over the last decade, the depreciating rupee [vis-à-vis the U.S. dollar] has contributed about 12 percent to the bottom line of IT-ITES (IT and IT-enabled services) companies. This had helped them maintain very healthy gross and net margins in Rupee terms," Rajagopalachari said.

The current trend in the depreciating dollar has not only wiped out this advantage, it is also eroding the margins and will continue to do so since the U.S. current account deficit and inflation are showing no signs of reversing.

India's other problem has been high attrition rate, rising salaries and escalating real-estate costs. These factors have resulted in higher costs, even though India continues to enjoy considerable cost advantages over other nations.

Rajagopalachari said: "While India has an edge in terms of cost arbitrage and lower explicit costs, outsourcing and offshoring companies are paying increasingly greater attention to implicit or hidden costs, like the cost of quality.

"While the Indian IT industry has come a long way in adherence to process parameters [process quality], there is still a huge scope for improvement in the area of customer experience," he added.

Sheth noted: "In BPO (business process outsourcing), transformational outsourcing is becoming increasingly popular."

Demand for domain expertise
Outsourcing is no longer seen purely in terms of its abilities to deliver cost improvements. Leading companies now think of outsourcing more strategically, and look to external service providers to help with their own continuous improvement and growth.

Because of these requirements, the service provider's domain know-how is gaining importance.

Offshoring outfits in countries such as the Philippines, China and Malaysia have been developing expertise in various domains including automotives, telecom, consumer products, retail, IT equipment and healthcare. This has helped attract more customers to their respective country.

According to a recent survey by French consulting firm Pierre Audoin Consultants (PAC), fewer global delivery centers were opened in India by the U.K.'s 20 largest IT services suppliers.

"Of the 21 centers opened since January 2007 by the big 20 U.K. companies, only two were in India, while four were in China and three each [were established] in Eastern Europe and Morocco," the PAC report said. The 20 largest U.K. companies featured in the report included Accenture, BT Global Services, Capgemini, Capita, CSC, EDS, Fujitsu, Hewlett-Packard, IBM and Logica.

In addition, India's multi-sectoral growth is exacerbating manpower deficiencies across sectors. There is scarcity of skilled manpower across every industry, and the IT-ITES sector is no exception.

According to industry estimates, the IT and ITES industry will need some 850,000 additional skilled manpower by 2010. India's education system needs to keep pace with these growing scarcities.

According to Sheth, skill scarcities are a genuine impediment. "But, it's not that we aren't aware of these challenges. The private sector is doing enough to meet the skill shortages," he added.

Sheth noted, however, that the Indian education system leaves a lot to be desired.

"There is a complete disconnect between education boards and the industry. For instance, in China, there are specialized courses for mobile application devices, which have proven very useful for companies like Nokia," he explained. "In India, there are no such courses. It is the corporates that are becoming semi-universities in their own right."

Does India's advantage lie in its familiarity of the English language? PricewaterhouseCoopers' Rajagopalachari believes so.

He said it is unlikely that China can overcome language, accent and cultural issues in one or two decades.

"The cultural attunement of the young Indian urban population toward Western styles, literature and social mores is a lot more than the Chinese society, which is much more insular," he added.

Will India lose its offshoring throne to countries such as the Philippines and Malaysia in the long-run? Not really. "The sheer supply elasticity of the skilled Indian labor market remains unmatched. India will remain the leader in outsourcing," Rajagopalachari said.

The Nasscom Everest Report 2008 confirms his contention. According to the report, India emerged as the "destination of choice" for offshore delivery of business processes, when compared with countries such as the Philippines, China, Canada, Ireland, Mexico and Central and Eastern Europe (CEE).

"India has emerged as a leading destination, in terms of market share as well as the length and depth of work," the report said. India has a market share of 37 percent in the BPO market, as opposed to Canada's share of 27 percent and the Philippines' share of 15 percent. Ireland and Mexico had a share of 5 percent each, while China's footprint stood at 2 percent.

Swati Prasad is a freelance IT writer based in India.