Will India, China Remain Top Spots for Offshoring?

Ann All

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.



Add Comment      Leave a comment on this blog post
Apr 2, 2010 6:29 AM avar avar  says:

Indian will countinue to be number one destiny  for offshoring back office work and China for manufacturing .Because of it's cheap workforce.Next decade belongs to Asia.That's ground reality.Cant be reversed cause it will be against Business fundamentals.

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Apr 3, 2010 10:31 AM Monte christo Monte christo  says:

Quote

''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.''

Ann,

Comparison made to Singapore, Taiwan, Estonia, SouthKorea, Germany in relation to literacy is not fair with India's 1.5 Billion population. Give me a break what's Singapore's population 4.99 million, Taiwan 23 Million, Estonia 12 million.

As for literacy rates some of the southern states in India have 90 % Literacy levels states like Kerala, Mizoram. check the link for more literacy on each states http://india.gov.in/knowindia/literacy.php

Its quite misleading to readers to think India's literacy rates as of whole country.

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Apr 3, 2010 10:32 AM Howard Sontz Howard Sontz  says:

As long as the #1 factor is cost, India and China will continue to be the first choice of businesses looking to maximize their bottom line by reducing labor costs to a minimum.

Creativity and quality will suffer, but the bonuses for upper management will be significant, and that, after all, is the true bottom line.

"You get what you pay for" - the truest of all business slogans.

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Apr 4, 2010 8:27 AM Theo Priestley Theo Priestley  says:

http://www.bpmredux.com/blog/2009/4/7/tcs-prove-offshoring-likely-to-shake-up-the-industry-again.html

Interesting post, almost to the day last year there was an announcement from TCS after winning a bit UK Govt contract. Offshoring takes many forms, not only back-office functions but IT offshoring as well. India still leads this field and I don't see it waning either when you can combine the both as a service.

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Apr 4, 2010 10:25 AM Lead Generation Philippines Lead Generation Philippines  says:

Monte Christo has a point. It's not fair to do such comparisons when involved factors are not in the same bracket. It is difficult to give focus on the literacy rate of each person when a large number of people are involved. Going back to the topic of outsourcing, experts still see the industry flourishing as more and more developed countries rely on it. 

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Apr 14, 2010 4:50 AM sankar sankar  says: in response to Theo Priestley

I think Ann has amply demonstrated her ignorance of the real issues of the outsourcing market from this article.

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Apr 21, 2010 7:13 AM sam sam  says:

Outsourcing is the largest wealth extractor of our time,

The "global" playing field will only be level when it is no longer cost effective for companies to hire labor in India, China and other popular outsourcing destinations. America needs to enforce a "VIRTUAL FOREIGN EMPLOYEE" tax on all US corporations that hire foreign employees to work on US based projects.

If skilled engineers from foreign countries want to work for US corporations on product versions that will be sold to US consumers then allow these skilled foreign engineers do it from the US headquarters of these corporations not from their home countries such as India.

Until a "virtual foreign employee tax" is enacted no one in America could compete with someone in India or China as a lot of people living in those countries could afford to live on $5,000 USD /yr.

It's not a matter of skill or education those are cop out excuses the real decision about outsourcing is cost and payroll savings. Trust me I know I am a former Senior EVP of a large Fortune500 technology company and I was in charge of locating and managing the company's outsourcing partners

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May 5, 2010 9:58 AM call center philippines call center philippines  says:

Philippines is also improving their offshoring industry. In 2009, the BPO industry  in the country saw an 18% growth in employment. Total hires reached 400,000 with 280,000 of those working as call center agents in the Philippines. Thanks for the post.

Reply
Jan 20, 2011 2:43 AM Thuy Nhien Thuy Nhien  says:

Hi Ann!

I think other SEA countries like Indonesia, Malaysia, Thailand and Vietnam also have a big chance to compete with India and China in offshoring projects.

I am working for swiss IT bridge co. ltd. (an IT offshoring firm with Software Center in Ho Chi Minh City). A recent report revealed that Outsourcing IT companies in Vietnam are riding out tough times and will gain very strong growth this year.

Thanks.

Thuy Nhien

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