Troubled by high staff attrition in India, which often disrupts work on projects, customers in the U.S. are increasingly looking for alternative countries for their outsourcing projects, industry analysts say.

The move by customers comes as Indian outsourcers are aggressively cutting costs. Some of the cost-cutting could impact quality of service, giving customers another incentive to take outsourcing projects elsewhere.

The frequent staffing changes caused by attrition, combined with increased staff costs, have lowered customer satisfaction with outsourcing to India, said Sudin Apte, senior analyst and country head for India with Forrester Research. For the first time, some customers are making a concerted effort to find alternative locations, he said.

The pressure to reduce costs comes from several fronts, notably the strengthening rupee against the U.S. dollar, rising salary costs in India, and the need to spend on new service centers around the world to serve customers locally and compete with multinationals.

The rupee has appreciated by about 12 percent against the dollar since the beginning of the year. The appreciation pushes down the revenue in rupees earned in the U.S. by Indian companies, even as staff costs in India rise. The U.S. is the largest market for Indian outsourcers, accounting for about two-thirds of revenue earned abroad.

As Indian outsourcers trim costs, there are concerns that it will impact quality of service, particularly if they start to employ less experienced staff to reduce salary costs, said Siddharth Pai, a partner at the outsourcing consultancy Technology Partners International (TPI), in Houston.

Demand for higher prices to offset the weakening dollar is also putting customers off, Apte said. And maintaining quality while cutting costs is a tough balancing act, he noted.

The impact is likely to be greatest on smaller outsourcers, since the larger ones have more alternatives for cutting costs. Smaller providers will likely be acquired eventually, or will have to differentiate themselves and move away from commodity-type services, Apte said.

That's the strategy of KPIT Cummins Infosystems, a small outsourcer that serves the manufacturing and financial services sectors. Offering a broad range of services, including IT, product design and business process outsourcing, to a few vertical markets, will help it compete better with larger players like Wipro and Infosys Technologies, said Sachin Tikekar, the company’s chief operating officer.

KPIT Cummins is trying to counter the impact of the weak dollar on its margins by getting into higher value businesses like product design and reusable components, he added.

For sure, the news from India is not all bad. Top outsourcers like Wipro, Infosys, and Tata Consultancy Services managed to report higher margins in the last quarter, mainly through currency hedging, improved productivity, and cost cutting.

India’s advantage is that there is not yet a clear alternative to the country for off-shoring. While places like China, the Philippines, and Latin America are emerging as alternatives, many analysts say India still has superiority in processes and quality, and it allows customers to quickly scale the number of staff working on their projects.

“Where else in the world can one company go out and hire 17,000 new graduates, and make them deliver with minimal training?” asked Pai. Salary increases are high mainly among senior and middle-level staff. Entry-level salaries have gone up by 6 percent per year over the last five years, is in tune with the rate of inflation in India and not too worrisome, he said.