Indian IT Outsourcing Faces Cost Crunch, Rivalry in 2008

02 January 2008

MUMBAI: Even as India's booming IT outsourcing sector continues to siphon substantial business from US and European rivals, there is mounting concern within the subcontinent that escalating staff and real estate costs linked to the fast-rising value of the rupee will bring the bonanza to a juddering halt in 2008.

Multinationals - ever eager to shave an extra percentage point or several from their costs - are starting to eye new and cheaper outsourcing cherries such as Brazil, China, Vietnam and the Philippines.

One of India's largest outsourcing facilities Tech Mahindra, majority owned by Indian industrial giant Mahindra & Mahindra in partnership with British Telecommunications, has already started to develop a nervous tic.

Its triple-hatted vice-chairman/managing director/ceo Vineet Nayyar describes the effect on TM's margins of the rupee's 12% rise against the dollar in 2007 with just one word.


India's IT outsourcing companies, hitherto seen by global investors as brave bulls, have descended to the status of baited bears in 2007 - underperforming the nation's stock index by 47%.

Groans Nayar: "All your emerging sectors are going to have major problems because of the currency adjustment."

But as the western world has already learned the hard way, the good times have ceased to roll - and it may be that the Occident is set to outsource its economic pain to the subcontinent.

According to global IT research and advisory consultancy Gartner Group, India currently accounts for 28% of the estimated workforce available worldwide for offshore work - the largest such labour pool on the planet.

But soaring costs are the maggot in India's apple. Salaries are averaging an annual increase of 14.5%, nearly double that of China and the Philippines, and the rate of staff attrition is somewhere between 20%-25%.

Opines Garner research-vp Ian Marriott: "The attrition [rate] leads to the challenge of consistency and therefore of quality for buyers of these services. And so the whole appeal of India is starting to just lose a little bit of the gloss.

"It's still very appealing for a whole variety of reasons but it's starting to get people thinking: should we investigate other locations as well, probably not as an alternative necessarily but in addition to India."

And although it is rare for a consultant of whatever ilk to offer advice without a fee, Marriott was in magnanimous mood.

"Indian companies," he counselled, "need to move away from thinking that more demand means more hiring and [instead] extract greater productivity out of existing workforces."

Data sourced from Financial Times; additional content by WARC staff