India, Still Cheapest Outsourcing Destination - Everest Group

"According to Everest Group, an outsourcing consultant group, India is expected to forge ahead in the offshoring landscape among top outsourcing countries. This is despite some stiff competition making waves in Brazil, China and the Philippines.

What would be the advantage that is unique to India, one might ask, apart from having six billion or more of the world’s population, unbridled poverty and a rising middle class? And the answer is: India scores high on the IT outsourcing checklist in three important categories – the massive talent pool (India is commonly dubbed the ‘world’s largest democracy’), very low cost structures, and most importantly a higher degree of cultural alignment to Western markets than outsourcing in China, for example.

In that regard, it is fair to say that the world buys Chinese goods because it’s cheap, but buys Indian services because they’re ‘West-aligned.’

Everest Group’s Managing Principal for Research, Eric Simonson told The Hindu’s Business Line, “We are in the process of wrapping up a survey we did, for which we have preliminary results from 400 responses. We asked people about their perception of different countries. On a scale of 1-5, India is the only country that scores five…If you look at other offshore locations, the volume is more ‘complimentary'. India is the hub, will be the hub.

Everest also noted that other countries are well poised and are aggressively pursuing the offshore market with some degree of success. However, when companies consider adding units, they tend to add units in India.

Research from the group suggest that of 116 new offshore delivery sites set up in 2009, a whopping 35 centers were cornered by India. Apparently, this was the largest number of new offshore delivery sites in any geography in 2009 with the Philippines trailing with 15 delivery centers – just 13% of the total offshore market.

The recent debate about India losing dominance as an offshoring site and the prominence of new outsourcing hotspots, i.e. Brazil, China, Pilippines, Poland and Vietnam has been offset by the results from the Everest Group.

Perhaps one of the biggest attributes of India is that it is one of the most inexpensive destinations for offshore operations in comparison with the aforementioned countries. For instance, BPO operations is about 85 percent cheaper in India in comparison with Tier 1 locations like Atlanta in the U.S. Similarly, operating cost in Brazil is about 50% less when compared to the U.S." Jacob Cherian

However, Everest Group is not focusing on Total Cost of Engagement (TCE), just the hourly rates.

The Total Cost of Engagement (TCE) evaluates the total expenditures of outsourcing projects. In addition to the hourly rates of engineering talent you must consider the cost of additional management overhead, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. Most of these costs are directly related to the separation in time between teams.

In the end, outsourcing to India could be more expensive because of the TCE.

Total Cost of Engagement (TCE)

Undoubtedly, offshore outsourcing has reached a mature level. Countries as India and China have built huge IT hubs, and invested in education for young people to facilitate the acquisition of human resources to meet the growing demand.

The boom of offshoring has been primarily driven by the belief that lower wages decreases the expenditures of the companies. What have frequently been misunderstood have been the hidden costs.

Recent studies have found that despite the low rates per hour that countries like India or China are able to provide, the Total Cost of Engagement (TCE) is higher than outsourcing the same service to a nearshore location. If you compare the cost of labor in India vs. Mexico for example, you will find India is about 10-15% cheaper.

The total cost of engagement (TCE) evaluates the total expenditures of outsourcing projects. In addition to the hourly rates of engineering talent you must consider the cost of additional management overhead, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. Most of these costs are directly related to the separation in time and distance between teams. Below is a detailed explanation of why in the end offshoring typically is more expensive than nearshoring.

1. There is still an important amount of work that needs to be done at the client´s site. No amount of technology can make up for the productivity achieved face to face. Typical offsite leverage for Asian vendors range between 60 -65%, which means 40-35% of the work remains at the client´s site. The percentage of work that can be done offsite when working with a nearshore provider fluctuates around 80%.

2. Overhead. Due to the addition of inexperienced resources halfway around the world and the poor communication that typically occurs, additional resources from the client side are needed to manage the relationship and the work. This creates additional overhead for the client.

3. Proximity. The long distance between the client and the offshore team, make more expensive and difficult the travels between the 2 destinations. Nowadays, close proximity is a key success factor in IT engagements. Close proximity offers an improved cost management, particularly when travel is required, and allows for better supervision and control.

4. Time zone difference. This can be a huge barrier because offshore and onsite teams need to accommodate schedules for call meetings, releases, etc. causing an overtime payment. Sharing requirements documents and communicating entirely by email greatly reduces the likelihood of getting the desired results.

5. Offshore training. Offshore resources need to be trained by onshore teams, so flight tickets, visas, accommodation, etc. become more expensive the offshore model.

6. High attrition. After all the training and learning curve is overcome a the expense of the client, developers return to the development center in India or China and, recognizing their new found skills and value in the marketplace, they seek higher paying jobs, causing a disruption in the project as new, inexperienced resources are added to the team.

As the result of the total sum of these costs plus the man/hour rates is the Total Cost of Engagement (TCE), which certainly is pretty much higher in India or China than Mexico or other LA Countries.

A good calculator for comparing the cost of development between in-house, and nearshore and offshore teams can be found here.

Engagement model calculator

More information supporting nearshore outsourcing can be found here.

Mexico nearshore

Nearshore vs. Offshore Total Cost of Engagement

GSC LOCATION SELECTION APPROACH

As Offshoring Gets Tougher, Nearshoring Alternatives Shine

U.S. Secretary of State, Hillary Clinton visited India this week. Among the topics addressed with the Indian Prime Minister, Manmohan Singh, was a promise to improve cooperation on high-tech trade between the two countries, even though, Clinton didn´t give specifics about how it will be accomplished.

Why weren’t greater details offered? Perhaps because last May, President Obama announced a series of steps aimed at overhauling the U.S. tax code to detect and pursue U.S. tax evaders and go after their offshore tax shelters.

It is clearly known that many companies in U.S. are offshoring information technology services to India, not only to seek out cheaper labor, but also to avoid the taxes that they are bound to pay in their Country.

In the other hand, the U.S. wants to implement a new law that would set a number of restrictions on overseas firms that need H-1B visas to deliver their services. India´s IT Industry is anxious of the solution that U.S. Congress will give.

Less well known are the benefits that a nearshore location, such as Canada or Mexico has to application development. The India-based providers, such as Tata and Infosys recognize the benefits of working in the same time zone. That´s the reason, that Indian companies are moving operations near to U.S. or even in the U.S.

Now, with new tax policies and visa restrictions it looks that India-based firms may have greater difficulty to deliver their IT services. Companies like Infosys Technologies Ltd. (which on March 31 employed 8,900 people in the U.S. with H-1B visas, and 1,400 with L-1 visas, according to U.S. Securities and Exchange Commission filings) has to face this complicated problem. It is estimated that other Indian companies will suffer a huge negative impact as well. It is recognized that some companies are paying less to people with H-B1 visas than what they would have paid to locally hired US employees. Now with the decrease of visas they would need to hire U.S. workers who earn more and require more benefits. The benefits of offshoring could disappear with this new model.

Companies will continue move services offshore, but with the new tax code announcement of U.S. President, it won´t be so easy. Even while the cost of manpower in India rises (find stats and link), the total cost of engagement including taxes will increase the cost of an application software or IT service.

In light of these new restrictions, outsourcing to Latin America, specifically Mexico, looks even more appealing. NAFTA (North American Free Trade Agreement) protect and ensures the safe treaties and relationships between U.S. and Mexico including protection to Intellectual Property and simplifies trade.