Offshoring: Today and Tomorrow
Plenty has changed in the field of offshore outsourcing, and plenty of change lies ahead. The following are some of the more noticeable developments fueling the global practice's new phase.
Mar 04, 2008
During the 2004 U.S. presidential elections, offshore outsourcing was a hotly contested issue. The 2008 election? Not so much. Offshoring doesn't seem to have made the shortlist of points being debated by would-be leaders this year.
What happened?
For one thing, even conservative companies now are willing to experiment with going offshore to gain a competitive edge. It may simply be a sign of how deeply ingrained the concept of globalization has become in the fabric of today’s business.
Plenty has changed in the field of offshore outsourcing, which has evolved from a little-used practice to a mature industry in less than a decade. And plenty of change lies ahead.
Here are some noticeable key developments in the global practice of offshoring.
Use of Collaborative Tools
Greater communication capability via the Internet was the initial driver of the offshoring trend, according to the Forrester report. As the use of collaborative tools is burgeoning, Web chatting, Lotus Notes, virtual-whiteboard interaction between client organizations and suppliers all are aiding new collaboration in automation and technology. With such remote networking techniques now coming into play, according to CFO.com, "there is a movement away from manual and travel-intensive processes."
Risky Business
More companies are relying on offshore entities for core business processes. Regulatory developments have increased exposure to liability for malfeasance or misfeasance. Piracy, security breaches and theft of information can erode brand value, intellectual property and other intangible assets. A volatile political environment or infrastructure limitations in some popular offshore locations can preclude effective and efficient operations. Outsourcing relationships often morph into de facto partnerships, albeit without the analysis, reporting, visibility and control that typically characterize true partnerships. All of these, according to Deloitte, have increased outsourcing and offshoring risks.
India Remains No. 1
India continues to lead the way as an offshore destination, ranking at the top of A.T. Kearney’s 2007 Global Services Location Index and claiming an estimated 11.5 percent share of the global market, according to estimates from research firm XMG. India’s advantages remain its talent pool, English-speaking population and government support.
However, its usually low cost of doing business is getting unusually high, which is leading India to lose its lure for many...
India’s Appeal Fading
The reason U.S. companies went to India in the first place was to save money. Over the past year, though, the value of the dollar dropped notably in relation to the Indian rupee. As that has happened, some offshore providers have felt compelled to raise prices, which negates the cost savings U.S. companies expect when offshoring work to India. Significant wage increases in India have further shaved the cost advantage.
Not long ago, Apple Inc. withdrew its plans to build a captive center in India that was expected to employ 3,000 workers. While Apple did not publicly discuss its reasons for the decision, BusinessWeek reported it was likely cost-driven, with wages for software engineers and IT managers soaring. Other factors may have included India’s high rate of turnover and competition for quality employees, according to Business Facilities. Whereas India used to be seen as the perfect offshore research and development hub, engineers trained in basic research are harder to find, says R&D consulting firm Zinnov (via IndustryWeek).
Onshore and Nearshore: U.S.
In 2007, Wipro Technologies, India’s third-largest outsourcer, set up its first U.S. — or onshore — development center in Atlanta, Ga., where it will work with the University System of Georgia to educate and train nearly 500 employees. The Banglalore-based firm also established a near-shore location in Monterrey, Mexico. Mumbai-based Hexaware has also selected Mexico for a nearshore location. Among the drivers for locating facilities closer to U.S. borders is a more mature client base looking for alternatives to India and hoping to invest in outsourcing contracts in locations with a greater cultural affinity with the U.S., according to CIO Today.
The nearshoring trend is not unique to the U.S. Indian service providers are also looking to establish centers in Eastern Europe, which could provide the cost benefits, as well as overcome language barriers, for customers in the United Kingdom, France, Germany and other European countries because of cultural and geographical proximity.
Blended Contracts
The creation of outsourcing facilities closer to home does not mean U.S. companies will stop sending work overseas to India. "More likely," says CIO Today, "U.S. clients will engage in blended contracts in which the customer-facing processes or services are outsourced to a nearshore location while back-office functions continue to be sent to India."
Atlanta-based Xpanxion, a global software engineering company and an early adopter of combining U.S. and Indian centers for outsourcing operations, moved its software testing and quality assurance operations from India to Nebraska in 2006. "The company, which still maintains some operations in Pune [India], refers to its business model as ‘cross-sourcing,’ a combination of offshore, onshore and local outsourcing," reports Business Facilities. The company believes that having multiple geographic locations reduces risks and gives clients more cost-efficient services and better support.
Nipping at India’s Heals
Indeed, geographies are changing as the space matures. Behind India in the offshoring race is China, with an estimated $13.1 billion in offshoring revenue at year-end 2007, according to XMG. There’s also new interest in Latin America, specifically Mexico, Brazil and Argentina, which are seeing an inflow of invoice processing, travel-and-entertainment expense processing and accounts-receivable work, notes CFO.com. Russia and eastern European countries are increasingly providing credible alternatives, too, according to recent research from Gartner Inc. (via Business Line).
More offshore work will likely go to Latin America, China, Eastern Europe and other low-cost locations as India struggles to deal with its rising costs and tightening talent pool. Offshoring experts have also recently cited Africa and the Middle East as up-and-coming hot spots, although those regions — like Latin America — still have outsourcing-related issues to work out before they trump the juggernaut that is India.
For A.T. Kearney’s list of the top 50 locations, see its 2007 Global Services Location Index.
What happened?
For one thing, even conservative companies now are willing to experiment with going offshore to gain a competitive edge. It may simply be a sign of how deeply ingrained the concept of globalization has become in the fabric of today’s business.
Plenty has changed in the field of offshore outsourcing, which has evolved from a little-used practice to a mature industry in less than a decade. And plenty of change lies ahead.
Here are some noticeable key developments in the global practice of offshoring.
Use of Collaborative Tools
Greater communication capability via the Internet was the initial driver of the offshoring trend, according to the Forrester report. As the use of collaborative tools is burgeoning, Web chatting, Lotus Notes, virtual-whiteboard interaction between client organizations and suppliers all are aiding new collaboration in automation and technology. With such remote networking techniques now coming into play, according to CFO.com, "there is a movement away from manual and travel-intensive processes."
Risky Business
More companies are relying on offshore entities for core business processes. Regulatory developments have increased exposure to liability for malfeasance or misfeasance. Piracy, security breaches and theft of information can erode brand value, intellectual property and other intangible assets. A volatile political environment or infrastructure limitations in some popular offshore locations can preclude effective and efficient operations. Outsourcing relationships often morph into de facto partnerships, albeit without the analysis, reporting, visibility and control that typically characterize true partnerships. All of these, according to Deloitte, have increased outsourcing and offshoring risks.
India Remains No. 1
India continues to lead the way as an offshore destination, ranking at the top of A.T. Kearney’s 2007 Global Services Location Index and claiming an estimated 11.5 percent share of the global market, according to estimates from research firm XMG. India’s advantages remain its talent pool, English-speaking population and government support.
However, its usually low cost of doing business is getting unusually high, which is leading India to lose its lure for many...
India’s Appeal Fading
The reason U.S. companies went to India in the first place was to save money. Over the past year, though, the value of the dollar dropped notably in relation to the Indian rupee. As that has happened, some offshore providers have felt compelled to raise prices, which negates the cost savings U.S. companies expect when offshoring work to India. Significant wage increases in India have further shaved the cost advantage.
Not long ago, Apple Inc. withdrew its plans to build a captive center in India that was expected to employ 3,000 workers. While Apple did not publicly discuss its reasons for the decision, BusinessWeek reported it was likely cost-driven, with wages for software engineers and IT managers soaring. Other factors may have included India’s high rate of turnover and competition for quality employees, according to Business Facilities. Whereas India used to be seen as the perfect offshore research and development hub, engineers trained in basic research are harder to find, says R&D consulting firm Zinnov (via IndustryWeek).
Onshore and Nearshore: U.S.
In 2007, Wipro Technologies, India’s third-largest outsourcer, set up its first U.S. — or onshore — development center in Atlanta, Ga., where it will work with the University System of Georgia to educate and train nearly 500 employees. The Banglalore-based firm also established a near-shore location in Monterrey, Mexico. Mumbai-based Hexaware has also selected Mexico for a nearshore location. Among the drivers for locating facilities closer to U.S. borders is a more mature client base looking for alternatives to India and hoping to invest in outsourcing contracts in locations with a greater cultural affinity with the U.S., according to CIO Today.
The nearshoring trend is not unique to the U.S. Indian service providers are also looking to establish centers in Eastern Europe, which could provide the cost benefits, as well as overcome language barriers, for customers in the United Kingdom, France, Germany and other European countries because of cultural and geographical proximity.
Blended Contracts
The creation of outsourcing facilities closer to home does not mean U.S. companies will stop sending work overseas to India. "More likely," says CIO Today, "U.S. clients will engage in blended contracts in which the customer-facing processes or services are outsourced to a nearshore location while back-office functions continue to be sent to India."
Atlanta-based Xpanxion, a global software engineering company and an early adopter of combining U.S. and Indian centers for outsourcing operations, moved its software testing and quality assurance operations from India to Nebraska in 2006. "The company, which still maintains some operations in Pune [India], refers to its business model as ‘cross-sourcing,’ a combination of offshore, onshore and local outsourcing," reports Business Facilities. The company believes that having multiple geographic locations reduces risks and gives clients more cost-efficient services and better support.
Nipping at India’s Heals
Indeed, geographies are changing as the space matures. Behind India in the offshoring race is China, with an estimated $13.1 billion in offshoring revenue at year-end 2007, according to XMG. There’s also new interest in Latin America, specifically Mexico, Brazil and Argentina, which are seeing an inflow of invoice processing, travel-and-entertainment expense processing and accounts-receivable work, notes CFO.com. Russia and eastern European countries are increasingly providing credible alternatives, too, according to recent research from Gartner Inc. (via Business Line).
More offshore work will likely go to Latin America, China, Eastern Europe and other low-cost locations as India struggles to deal with its rising costs and tightening talent pool. Offshoring experts have also recently cited Africa and the Middle East as up-and-coming hot spots, although those regions — like Latin America — still have outsourcing-related issues to work out before they trump the juggernaut that is India.
For A.T. Kearney’s list of the top 50 locations, see its 2007 Global Services Location Index.