Indians face offshoring competition from multinationals

U.S. services companies are setting up operations in India to take advantage of low costs

Offshore outsourcing companies in India are up against competition from multinational services companies who have an edge both on price and the ability to offer services from multiple offshore locations, according to sourcing consultancy Technology Partners International (TPI) of Houston, Texas.

A number of multinational services companies such as IBM in Armonk, New York, Accenture in Bermuda, Perot Systems in Plano, Texas, and Unisys in Blue Bell, Pennsylvania, have set up services operations in India to take advantage of the low cost of Indian manpower.

Although multinational services companies previously avoided purely offshore outsourcing contracts, they are now bidding for contracts that require the entire delivery of the services to be done from offshore locations, according to Siddharth Pai, a partner at TPI. Their bids have often been at lower rates than those of their Indian competitors, he said on Saturday.

The multinational offshore operations appear to have taken a decision to accept lower profit margins to gain market share, despite their high cost structure resulting from the higher salaries with which they attracted staff from Indian outsourcing companies, Pai said.

Multinationals are able to offer lower prices than Indian companies, because the expectations of the financial markets about their profit margins are far lower than for Indian outsourcing companies, according to Paul Schmidt, a partner at TPI. The margins expected for multinational service companies is less than 15 percent, while it is close to 30 percent for Indian outsourcing companies, he said.

As the scale of the offshore operations of multinational companies has increased, their costs have also dropped as they are amortized over a larger number of clients, Pai said.

In the bidding for the €1.8 billion outsourcing contract from ABN AMRO Bank of Amsterdam, some multinational providers had bid lower than Indian service providers, according to Pai. TPI was an advisor to the bank on this deal. The Indian companies selected won not on price but because of their competence in the specific area, he added. ABN AMRO announced last week that it had selected five vendors, including IBM and two Indian companies, Tata Consultancy Services of Mumbai and Infosys Technologies of Bangalore.

TPI announced last week the initial findings of its report on the "State of Global Service Delivery." The study is based on a survey of 212 respondent companies from the U.S., Europe, and Asia, according to Schmidt, who is a co-author of the report. The study covers offshoring to both wholly owned subsidiaries and to third-party contractors, he added.

As clients gain experience and maturity in offshoring over a period of five years or more, they start exploring the option of offshoring to multiple locations, both with an eye to lowering costs further, and also to mitigate the risk involved in offshoring to only one location, Schmidt said. Multinational service providers are more likely to bag the business, as most of them already have operations in a number of offshore locations including India, China, Latin America, and Eastern Europe, Schmidt added.

Although Indian outsourcing companies have been expanding outside India, customers looking for a single vendor to service their requirements from multiple locations are likely to prefer a multinational service provider, according to Schmidt. Indian vendors claim that they have a global footprint, but the reality on the ground is that they don't have large enough operations at all these locations, he added. Clients are also in general more comfortable dealing with multinational service providers, Schmidt said.

One of the findings of the report is that many companies offshoring to locations like India had to lower their expectations about productivity improvements and cost savings. Many companies came in with high expectations that an offshore worker could be more productive than a domestic worker, Schmidt said. In the survey, TPI found that some of the more experienced companies, that had been offshoring for more than four years, had lowered their expectations, so that they now required two offshore workers to do the work of one, he said.

A key implication of the lower productivity offshore is that if staff costs go up without increase in productivity, then the cost advantage of offshoring could be lost, Pai said. "You only have to come to half the level of the cost in the U.S. for the cost arbitrage to disappear," he said. As staff costs spiral in offshore locations like India, the ceiling may be reached much faster if there are no corresponding improvements in productivity, according to Pai.

Copyright © 2005 IDG Communications, Inc.

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