India was smart enough to recognize an opportunity to expand its IT outsourcing business during the late 1990s by selling its services to North American companies scrambling to prepare their systems for the Y2K crisis -- which ended up being not much of a crisis after all, though that's another story. Since then, it's become the dominant destination for offshoring by offering a large labor pool that will work for wages far lower than salaries commanded in Western countries.
Lots of other companies have tried to position themselves as "the next India" by promoting their own lower-cost labor pools. One country that has made serious headway is China, the only country with a population larger than India's. (China has about 1.3 billion residents, compared to India's 1.1 billion. The U.S. population is about 309 million.)
Yet these large populations are beginning to look less appealing since only a small subset of them are skilled enough to perform the kinds of sophisticated tasks Western companies are interested in offshoring, contends a strategy+business article (registration required) written by Kevin Stringer, a visiting professor at Thunderbird School of Global Management and a lecturer at the Swiss Finance Institute. Stringer knows a little something about offshoring, as he previously helped UBS develop an offshoring strategy.
I don't want to jump to conclusions, but one of the examples in the article involves "a global bank" that set up a wealth management analytics team in India to provide equity research for private banking clients. Though labor costs were far lower, bank executives found productivity wasn't up to snuff: Although the Indian analysts were equal to or slightly better than their global colleagues in mathematical modeling, they were well below average in synthesizing the data, and in writing and producing the actual research and recommendations, which reduced the labor-cost savings.
According to the article, productivity of Indian and Chinese workers lags behind that not only of U.S. workers but of workers in offshore alternatives. According to the Organization for Economic Cooperation and Development, China's GDP per hour worked is only about 8 percent of that of the United States, and India's is 7 percent. By contrast, Estonia's is 40.8 percent and Slovakia's is 53.4 percent.
One of the sources the article cites is Diana Farrell, deputy director of the U.S. National Economic Council, who in the 2006 book "Offshoring: Understanding the Emerging Global Labor Market," said just 10 percent of engineers in China and 25 percent of those in India possess the language skills, practical knowledge and/or appropriate cultural attitudes to work for multinational companies. For comparison's sake, 50 percent of engineers in Poland or Hungary have the required skills.
Not only that, but large chunks of India's and China's population lack basic literacy. According to the article, India has the highest absolute number of people receiving very little education. Its literacy rate of 61 percent stacks up poorly with that of Singapore (92.5 percent), Taiwan (96.1 percent) and Estonia (99.8 percent), three countries mentioned as offshore alternatives for companies looking for skilled work forces that make more than their counterparts in India and China, but less than U.S. workers. The article also cites Indian government figures that put the percentage of India's existing work force with basic vocational skills at 2 percent to 5 percent, compared with 96 percent in South Korea, 75 percent in Germany and 68 percent in the United States.
India is certainly aware of this, as I wrote last summer, citing the country's efforts to beef up skills of residents living outside large metropolitan areas.
The article is well worth a read. It cites a long list of economic and environmental statistics to make the point that far more than in the U.S. and other Western countries, populations in India and China are starkly divided into haves and have-nots. Though it may sound crass to point it out, considering the larger societal ramifications, it'll be hard to increase the number of knowledge workers in populations struggling to improve basic living conditions for so many of their people.
Gartner analyst Frances Karamouzis said last spring that other countries were beginning to take outsourcing market share away from India and China. Because of the maturity of its market, India is still best positioned to get large work forces up and running more quickly than other countries. Yet fewer outsourcing customers are seeking that kind of staffing power. But in a SearchCIO.com piece from August, Gartner portrayed India and China as strong candidates for offshoring.
It's not my intent to be pro- or anti-India, but I do agree with Stringer's conclusion that companies need to look beyond labor costs and seemingly ample pools of workers to conduct more sophisticated risk-reward assessments of offshoring opportunities. One alternative I hope more Western companies are at least considering is moving their outsourcing inititatives to a location in the rural U.S. instead of offshore, a trend IT Business Edge contributor Don Tennant wrote about last month.