Should you still consider India as an offshoring destination?

In the last few weeks, I have witnessed many companies, particularly in Europe, have been discounting India as an offshoring destination. Quite often these decisions have not be made on the basis of fact but more on emotion and rumor. The following article attempts to put a structured argument forward in favor of India as a destination.

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India leads the services related offshoring phenomenon. In FY 07, the Indian IT industry was worth $47.8bn representing 5.4% of India’s GDP. Total direct employees in the IT sector reached 1.63m. The software and services sector grew by 33% over FY 06 and the industry as a whole is expected to grow by a further 27% in FY 08. In FY 07, multinationals such as IBM and Cisco announced further investments totalling $10bn, focused on growing their Indian operations.

At the same time, the Indian IT Enabled Services and Business Process Outsourcing (ITES-BPO) sector also grew. In addition to the IT sector above, the ITES-BPO sector, comprising broadly of finance and accounting, customer interaction services or call centers, human resource administration and other niche business services, employed 553,000 direct employees. The sector contributed a further $8.4bn in revenues and grew 33.5% over FY 06.

It would seem the case for India is clear. However annecdotal stories continue to emerge of difficult engagements fraught with impenetrable cultural barriers, stories of call centers returning from India and countless other negative press articles.

In reality, we believe these stories are significantly exaggerated. With $56.2bn in revenues and these services representing in excess of 5% of India’s GDP, every other would-be offshoring destination’s favorite whipping boy is India. It’s easy for outsourcing suppliers from Vietnam, Philippines, Ukraine or any other country to try and knock India in order to try and take a piece of the action. Spreading unsubstantiated rumors and gossip about Indian offshoring horror stories and pandering to potential customers’ fears is their best sales tool. Meanwhile, it’s hardly fashionable for the western press to talk about a successful Indian offshore engagement even though thousands of great case studies exist.

Sure there are the occassional problems but with the macro level growth numbers, it is obvious that India delivers. The growth numbers above are not just a blip in a single year, such growth rates have been consistently achieved for 10 consecutive years. If it was not fundamentally working, such growth would not have been achieved.

We see four main reasons why India continues to make the grade and why it should not be easily discounted as an offshoring destination.

1. Scalability

No other country in the world offers the same level of skills in terms of raw numbers. The vast majority of the educated population have at least some English skills with an estimated 300+million being fluent. That makes India the largest English speaking country in the world. In addition to the much fluanted 500,000 engineering and technology graduates every year, there are countless other accounting, architecture, legal, creative, business administration and other graduates coming out of the system. If you are looking to scale up even moderately quickly, there would seem to be hardly anywhere else in the world that can compete with such numbers. China seems to be the only other natural competitor from a population perspective but much work needs to be done to improve the overall language skills before China becomes a real competitor to India in terms of scalability.

2. Cost

If cost is a reason to consider offshoring, then India cannot be ignored. Despite the growth, it remains one of the lowest cost and most productive destinations. Even in the burgeoning IT sector, typical salaries for an individual with 5 years good and relevant experience is no more than $20k per year. Even if wage inflation runs at 20% a year, this cost will reach $50k in 2012 compared to probably $80k in the US today.

Beyond IT, costs for experienced design engineers, accountants, administrators and many other roles remain less than $10k a year.

On the cost question, it is worth remembering that in almost all sectors, IT, engineering, pharmaceuticals, telecoms, financial services, construction etc, the new global leaders are likely to be Indian based companies with their largest cost base in India. For examples of these emerging leaders, consider that Mahindra & Mahindra is now one of the largest tractor manufacturer in the world, that Tata is looking like the most likely company to acquire Jaguar and Land Rover from Ford and that Reliance Group (which includes Reliance Communications, the Indian telecoms company) has a market capitalization of more than $22bn with more than $7bn of assets. These players are not content with the Indian domestic market, they see themselves as the global leaders of the future. Realistically, the only way to compete with these organizations will be if your cost base is also in India. How else will John Deere, Ford or AT&T compete in the long term?

3. Market Access

One of the advantages of establishing an operation in India is that it places you in a position to think about being in one of the fastest growing markets for almost all products and services. For example, India is:

· The fastest growing mobile phone market in the world with 7m new handsets every month

· One of the fastest growing retail sectors with only 3% of retail sales today coming from the organised sector

· One of fastest growing automotive markets, particularly with the launch of the new $2,500 car from Tata making the car accessible for the first time to hundreds of millions of new customers that could only previously attain a motorcycle

In almost any sector, the superlatives speak for themselves fuelling GDP growth of at least 9% a year for the next five years. The question is whether this is a market you can afford to ignore. By being in the market, you can begin to explore the possibilities, if you’re not in the market, you have no chance of participating.

4. Track record

India has one of the longest track records in offshoring, it’s been doing it almost longer than any other country. Today it is more than possible to find large volumes of employees with 5-10 years experience of dealing with international companies. These market ready individuals bring with them knowledge of the best processes and systems to ensure productivity, they will not be learning on the job. Contrast that to other countries where the availability of such skills is much more limited and the resultant risks are much higher. With all their resources,why else would IBM, Accenture, Cisco, GE and countless other multinationals choose India as the destination of their largest headcounts?

We’re not saying you shouldn’t look at our other delivery centers, after all, we are location agnostic. For some offshored functions, distance and timezones are a consideration, for others there are specific language requirements. But we feel that location decisions should be based on hard facts rather than emotion and rumor.

The key question you should ask yourself is not whether you should establish in India or not? But why you should not establish in India?