Is Indian Outsourcing on its Deathbed?

A question like this will make people upset, especially those who are directly or indirectly dependent on the outsourcing sector in India. But the fact remains that there are indications that the bubble may burst, soon if not later, if required measures are not taken now. If you are an employee of an outsourcing firm, you would be hearing some gossip doing the rounds in your cubicles. So are there any solutions to this predicament? A big YES would be my answer. So there is some reason to smile now!

Some years ago, a new job opportunity had opened for many youths in India, with the dawn of outsourcing. This was the boom time as many fresh graduates were able to earn handsome salaries. So what has currently gone wrong in this promising path? I have some answers to this question like, India becoming an expensive outsourcing destination because of inflation and high attrition rate, the competition from latest entrants is fierce, and finally, Barack Obama, the Democratic presidential candidate.

Indian job market has truly become expensive and some studies prove it. According to a recent report from London based human resources firm ECA International, average wages at multinationals in India are likely to jump 14% this year up from 12.6%, putting India at the top of a ranking of 47 countries worldwide for the second year in a row. "Salaries in India are catching up to developed nations at a faster rate (than in many other Asian countries)", says Lee Quane, Hong Kong-based Asia general manager for ECA. He feels that the culprits for this salary rise are inflation and attrition.

Now let’s look at the other roadblock, which is the tough competition, India has to face in the global outsourcing market. I will give some statistics to this statement of mine. Focused on UK's top IT service providers, a study by Pierre Audoin Consultants (PAC) a market research firm showed that China, Morocco and Hungary are the new locations of choice to set up offshore sourcing centers.

"India's position as the premier low-cost IT sourcing centre is not under serious threat in the near term. But what we are seeing is vendors are looking to reduce their reliability on India's heated labour market," Nick Mayes, a senior consultant at PAC, said in a statement. SAP AG has announced their plans to expand their BPO operations in countries like Eastern Europe and China. The reason behind this switch is that the company has claimed that outsourcing work to India is proving to be pretty expensive. So it seems that the stiff competition is mainly because of the ‘heated labour market.’

So finally, we have some politics in this story, with Obama’s views on outsourcing. Though it needs to be seen if he emerges as the most powerful man in the world, let’s currently focus our thoughts on his views. We know that Obama has been regularly playing the anti-outsourcing card since he entered the presidential race. Recently in his speech, he added fuel to the fire by saying, "....Unlike John McCain, I will stop giving tax breaks to companies that ship jobs overseas, and I will start giving them to companies that create good jobs right here in America."

Yes, that is an offensive comment by Mr. Obama. Now let’s see what the Indian reply, towards this comment was. NASSCOM President Som Mittal said Indian software exports are unlikely to be affected by this as offshoring is a key economic decision for US companies. Mittal feels American companies will themselves favour outsourcing. "US companies are facing shortage of talent to drive the growth. It is in their interests," Mittal said. Now, don’t you think that it is really nice to hear these words from him? Well, I think that should keep Obama at bay, at least for sometime though.

You may think that is a lot of problem? I feel the problems faced by Indian Outsourcing are mainly because of the soaring salaries and attrition rate, as I have pointed out earlier. This has led to many questions about the future prospect of the outsourcing industry in India including, “Is Indian Outsourcing on its Deathbed?”

I feel the companies should start setting up their facilities in smaller towns and villages rather than the big cities. It is a strategy that has been obvious to most industry leaders for a long time but has not yet been adopted widely. This will create more workforces, because a majority of our compatriots are in the villages. When the companies take the jobs to the rural masses it will create a world of opportunities to them. This will bridge the gap between supply and demand of labour. It will invariably help in controlling the rising salaries and attrition.

An interesting experiment is being conducted by Satyam Computer Services’ founder, Ramalinga Raju. His philanthropic endeavor GramIT aims to ship business-process outsourcing projects to some of the 600,000 odd villages in India, dropping the cost-structure further while creating jobs in India's poverty-stricken heartland. GramIT employees earn $1,000 a year versus the $10,000 to $15,000 that urban employees at outsourcing companies make.

GramIT's attrition rate is close to zero. Employees successfully take jobs such as data entry and transaction processing. Seven such centers are operating in Andhra Pradesh and 10 more are slated to start up. Each center averages 70 to 100 employees and is often the pride of the village. Even the likes of HDFC Bank and Tata Group have taken up initiatives to set up rural BPO.

I think GramIT's model can become the survival formula for the low end of the Indian outsourcing industry. If the cost structure is pegged at the right level, India can also do work for other emerging markets. And, more important, India can do work for itself.