Offshore outsourcing – a concept that made IT & India synonmous with each other in the first decade of 21st century is loosing its glamour quotient consistently. It seems that by 2010, hundreds of software companies will run out of steam as they loose their competitiveness in the ever changing industry, since their business model has been worked around cost arbitrage alone.
Some hard facts which makes me feel so:
Increasing wages in India: Salaries are constantly moving skyward. Every year IT companies are forced to raise wages by 20-25% to remain competitive in the job market. Some hot IT destinations in India have become as expensive as Australia and Canada (if not USA and UK) in terms of manpower costs. With advent of offshore facilities of US / Europe based software companies, the trend will continue to move north.
Shortage of skilled manpower: Indian IT industry is facing a major shortage of employable skilled manpower. The education system has not gone through any fundamental improvement to fulfill the ever growing demand of the industry. Large companies are hiring semi-skilled and non-skilled professionals (not really) to fill in the positions that exists in their team. This is continually detoriating the quality and quantity of work that gets done resulting an increase in effective cost of production for the customer. At one point of time or other, this will pinch and will make offshore outsourcing non-competitive.
Appreciating rupee, depreciating dollar: With the economic upswing, the rupee is scaling new heights. On the other hand, due to economic slowdown in sight, US dollar is declining heavily. This is resulting in direct losses of revenue for most offshore outsourcing companies. There has been a 10-14% decline in revenues just because of currency appreciation. This is a net loss to the company since the effort / cost of servicing the client remains the same.
Increasing operational expenses: Cost of doing business is on a rise with zooming real estate prices, increasing fuel prices and towering living expenses. Companies are forced to spend a lot of money in the x-factor to impress prospective employees. All these put together are increasing the operational expenses and overheads for offshore outsourcing companies. In fact inflation is heading towards 10%, which is not making things better.
Companies are adpoting global-sourcing: Large enterprises in USA / Europe which were dependent on offshore outsourcing till date are now aggressively adopting global-sourcing. Many of these companies are directly setting up their software development centers in India (or a competitive location), resulting in a dent in the revenues of offshore outsourcing companies who used to serve them. The trend towards captive offshore development delivery will only increase in years to come.
New destinations: Several new offshore outsourcing destinations are coming up including China, Brazil, Ukrain, Ireland, Poland, South Africa and Russia. Many of them do not rank close to India in terms of the combo-punch of english educated, logically strong, hard working Indian IT worker. But they are making
But as it is said, when the going gets tough, the tough gets going. I am sure many companies will evolve their business models, move up the value chain and give customers more than one way to outsource to them!
Afterall the outsourcing story has just begun!