I recently led an Info-Tech Research Group study that reviewed the key low-cost Asian destinations of China, India, and the Philippines for IT Outsourcing services like helpdesk and application/Web development and maintenance. The study included in-depth interviews with clients and vendors, site inspections, and analysis of published data. My intention was to take the guesswork out of choosing the most suitable offshore outsourcing destination. This post pinpoints some the key findings of one report based on the study, entitled The Philippines for Outsourced IT Services . China and the Philippines are covered in other posts.
We put together eight evaluation criteria: (1) affordability, (2) language, (3) cultural affinity, (4) resource availability, (5) government support, (6) geopolitical stability, (7) infrastructure, and (8) data security. Here is how India stacked up:
- Affordability: Rising wages for experienced workers make India no longer the cheapest offshore destination available. However, India still has offers a competitive cost advantage. The average IT/BPO salary in India was about $12,877 US per year in 2010 . Typical fully loaded costs per technical resource is $18 to $32 US per hour.
Recent economic conditions have helped slow rising wages among Indian service providers, with Infosys raising wages by 10% and others freezing wages . Additionally, lower costs can be found in Tier 2 cities. In general, India has often been seen as the top offshore destination for organizations looking to cut costs. While this is no longer the case, India continues to offer relatively competitive pricing. Outsourcers can also leverage accumulated offshoring experience, which continues to make India a top choice as an offshore destination.
- Language: English is the standard language for business across India. The popularity of English in India contributes to its large English speaking workforce, particularly in major cities. Heavy accents are not often an issue in Tier 1 cities such as Delhi and Bangalore, as many vendors give their staff accent neutralization training. English speaking skills might decrease in more remote Tier 2 cities, making it important to evaluate the English proficiency of vendors in these areas. English language proficiency in India is less of a problem than it used to be. However, it is still necessary to check into the English speaking abilities and training provided by Indian vendors, particularly for organizations interested in outsourcing helpdesk services and/or those organizations outsourcing to Tier 2 cities.
- Cultural Affinity: India tends to show good cultural compatibility with the US and the UK. Many established vendors offer cultural training for employees. Understanding of cultural nuances may be less prevalent in remote locations. As Tier 2 cities become more developed, it will be important for Indian vendors to continue to provide cultural training in these areas. Factors like increased adoption of social networking, increased global tourism into India, and a growing interest in Indian culture will contribute to India’s cultural connectedness and improved work results.
Non-English speaking markets, such as Japan and some countries in Western Europe, tend to have cultural compatibility problems with India. However, India has started to reach out to a broader range of locations as Indian vendors look to grow their organizations in other countries. Cultural issues that do arise with Indian vendors can often be mitigated by having face-to-face meetings, either through video conferencing or by having a few key personnel from the offshore team spend time onsite.
- Resource Availability: India has a large technically proficient workforce, and adds over 3.5 million graduates and postgraduates to its talent base every year, with most students preferring technical careers . Indian IT employees display particular strengths in application development and maintenance as well as help desk services. Attrition levels tend to be high in Indian companies, which result in reduced productivity as new staff ramp up on a particular project. Turnover rates have dropped due to the global economic slowdown, but are likely to increase as demand increases during the recovery. Attrition rates also tend to be lower in Tier 2 cities.
India boasts a large workforce with many graduates coming from universities and institutes of technology; however, not all graduates are employable right out of school due to differences in educational quality across institutions. Associations such as National Association of Software and Services Companies (NASSCOM)  and partnerships between IT and academia are currently trying to address this issue. Despite this, India stands out from other countries for its ability to draw on a large labor pool of technically proficient employees. In addition to a deep pool of technical talent, India has developed skilled middle and upper managers capable of managing technical resources.
- Government Support: The Indian government is highly supportive of the outsourcing industry, with competitive tax breaks and designated technology parks for IT vendors.
Software Technology Parks of India (STPI)  also helps to provide infrastructure in technology parks, and has the goal of making India one of the largest software exporters in the world. India also has a government body in charge of communications and information technology, which is involved in setting up policies and standards as well as advocating for the government use of IT. India also receives support from NASSCOM, which promotes the Indian offshoring industry.
- Geopolitical Stability: India is a relatively stable country and represents the largest democracy in the world, with an expected GDP growth of 7.9% for 2011 . Two events have recently called India’s stability into question: the terrorist attacks in Mumbai in December, 2008 and the Satyam scandal of 2009. Satyam founder Ramalinga Raju confessed to falsely reporting $1.02 billion in non-existent cash reserves. These have caused concern for organizations that are currently offshoring to India, with some companies looking for alternative vendors or scrutinizing their current vendors more closely. There is currently no indication that the Satyam scandal represents a systemic problem with India’s corporate governance, or that there are any additional terrorist threats looming on the horizon. However, it is always a good idea to evaluate disaster recovery capabilities, and to contemplate the option of diversifying risk by offshoring to more than one country or with a vendor that has locations in multiple countries.
- Infrastructure: India’s popularity as an offshore destination is a blessing for the country’s economy, but a curse for its infrastructure. India’s infrastructure cannot keep up with high demand, with power supplies and both local and international connectivity straining under the load. Infrastructure reliability varies depending on location. For example, technology parks have redundant telecom and power as a standard; however, power and telecom are not as reliable outside of the technology parks, which can cause service disruptions.
India is working to improve its infrastructure, results still pending. It is important to assess how often vendors experience disruptions due to poor infrastructure, and if things like application availability are a critical factor for the enterprise, then consider going with an Indian vendor located in a technology park. Ask prospective vendors how often they experience power disruptions, and whether or not they have redundant telecom and power.
- Data Security: India does not have breach notification requirements or industry privacy legislation such as the US Health Insurance Portability and Accountability Act or the Gramm-Leach-Bliley Act, and also lacks European Union style privacy legislation. Associations such as NASSCOM are lobbying the government to bring India’s security standards up to par on a national level. Individual IT vendors have also made strong efforts to protect their clients through compliance standards such as ISO 270001, SOX, and PCI. India has not shown a disproportionately large incidence of security violations as compared to global standards; however India’s gaps in data security and privacy legislation do need to be addressed.
There are several factors that make India’s a strong offshoring location:
- Availability of qualified staff. India has a large, technically proficient workforce including strong management ranks.
- Supportive government. The Indian government is extremely supportive of the IT outsourcing industry, and does everything that it can to make the offshoring experience as easy as possible on the customer.
- Reasonable prices. Even though India is no longer the cheapest offshoring option on the market, its costs are still substantially lower than rates in Western countries. These prices, combined with India’s strengths in terms of staffing availability and process maturity, continue to make India the top offshoring choice of many customers.
- Accumulated experience. In a sense, India founded the offshore movement as it began to gain momentum 10 years ago. Many of the established Indian outsourcing vendors have had locations in India throughout this 10 year period and have instituted mature outsourcing processes.
India also has several weaknesses that need to be taken into consideration:
- Overloaded infrastructure. The high demand for IT outsourcing in India has placed pressure on the country’s power supply and connectivity. Designated technology parks have solid infrastructure, however service levels might be disrupted in areas outside the technology parks.
- Staff turnover. Despite the fact that attrition rates have dropped in light of the economic downturn, turnover is still relatively high in India and may return to higher levels as the demand increases.
- Laggard security. Compared to its maturity in most other areas of offshoring, India’s security and privacy laws leave much to be desired. Individual providers often have controls in place to ensure their clients’ privacy, and associations such as NASSCOM are lobbying the government to beef up its security legislation, however these changes will take time.
- Asynchronous time zones. North American customers sometimes find that communicating with Indian providers means meeting very early in the morning or late at night. This can strain resources in both the client and vendor organization when compared to near-shore locations. While some projects leverage the time zone difference with around the clock development – for example, handing off changes at the end of the business day and getting them back first thing in the morning – only a minority of outsourcing clients we spoke to were able to get time zone differences to work in their favor.
Follow these recommendations when considering India as an offshore destination:
- Shortlist vendors. In some respects vendors are more important than locations because a skilled provider can work around the limitations of their location, but a location cannot control all of its vendors. Find prospective vendors through a professional association like NASSCOM or thorough an advisory service.
- Discuss weaknesses with prospective vendors. In addition to evaluating a vendor’s general outsourcing strengths such as technical competency, governance, and project management, question them about how they handle location specific limitations. Be prepared to walk away from a vendor if the answers are unconvincing. For India, include questions like: How can you ensure continued electrical, telecom, and data connectivity? How does your organization respond to infrastructure failures? How do you retain your technical talent? How do you ramp up new hires? How do you deal with cultural differences between onshore and offshore team members? How do you ensure data security and protect intellectual property? How do you deal with time zone differences? How do you manage time zone stress in your staff?
- Consider Tier 2 cities. India’s Tier 2 cities offer lower costs, smaller providers, and are particularly well-suited for less critical and/or short-term outsourcing initiatives. These cities are also receiving increased attention from the Indian government as options to support India’s weakening infrastructure.
- A copy of full report that this post is based on, India for Outsourced IT Services, is available from Info-Tech Research Group.
- Introduction to The Services Shift: Seizing the Ultimate Offshore Opportunity, FT Press, Ajay Sharma and Robert E. Kennedy, January 2009
- Talking Outsourcing, Lulu.com, Mark Kobayashi-Hillary, October 2010
- NASSCOM Strategic Review, 2009
- National Association of Software and Services Companies (NASSCOM)
- Software Technology Parks of India