Wednesday, July 26, 2006

It Doesn’t Get Any Better Than This For India’s Outsourcing Boom

Is offshoring here to stay? Without a doubt. And, ultimately the pie will become significantly larger. That said, I wouldn't be surprised to see a slowing for some time as American and European economies experience wage and worker malaise. This will likely result in backlash manifested via anti-globalization and political pressures. I suspect India's pre-eminence has likely peaked. India has garnered nearly 50% of the global business process outsourcing market. This is a trend which simply is not sustainable. Labor costs are rising 15% annually and clients are starting to demand more than cost benefits and service level agreements. Some companies are actually pulling back on on offshoring for fear their brands may be tarnished. In that same vein some recent studies undertaken in America have shown consumers are as much as 75% less likely to do business with companies who engage in offshoring.

This is not to say I am bearish on India long term, or that their long term economic prospects are dim. To the contrary, longer term, I believe India will surpass China in economic prosperity and opportunity. The BPO market may still grow in raw size but comparatively, 50% share with such low barriers to entry cannot sustain itself. But, long term India is more closely aligned with democratic ideals and in the game of political chess, the US wants a counter weight to China's increasing presence. While I find the political shenanigans total nonsense, the way of the world will not change because of what I think.

Everyone has all heard the stories where India and China are graduating legions of computer programmers and engineers. The numbers quoted are absolutely silly. First, China's numbers for anything are hard to verify because their statistics across the board are a form of manipulation by a closed communist government still engaging in propaganda. A Duke University study sheds a little reality on the situation. First, China includes auto mechanics and a slew of trade school graduates in their numbers so it really draws into question the validity of anything China publishes. ie, An HVAC technician in America is counted as an engineer in China. This is a clear reminder that just as the Soviet Union used to publish manipulative data, so does Communist China. One must remember China still has a Minister of Propaganda whose job it is to spew all powerful gibberish regarding China's superior society. Secondly, China has tried to incent more citizens to attend college thus new universities have been popping up overnight for quite a few years. To say they are graduating engineers with the rigorous curriculum of the US, Japan, Europe, South America or Russia is highly suspect. This same point is also a significant issue in India. McKinsey has stated that somewhere between 10-25% of engineers and science professionals from India and China are able to participate in the global outsourcing business. Much of this is attributed to language barriers and educational quality. So, now all of a sudden, taking all parameters into account, India and China are likely not graduating as many four year degreed engineers as the US in a worst case analysis and a best case analysis the numbers are likely similar but the quality is significantly inferior.

In other words, America and Europe are not becoming back water nations only to be outsmarted by the intellectually superior masses of science graduates in developing nations as so many journalists and fearmongers would have you believe.

My point in all of this is to debunk a journalistic myth not to devalue what India and China are attempting to accomplish. I am a big proponent of global development and opportunity for all people of all nations and I support such efforts financially. I am highly encouraged that many developing nations are pinning their future on education. The world will be a better place with improved educational opportunities in China, India and other developing nations. Where education, free markets and political freedoms develop, wealth and improved opportunity usually isn’t far behind. So, we should celebrate global education and graduates in engineering, the sciences, medicine, the arts, finance and other areas of development.

Back to India's outsourcing miracle. Regardless of how many graduates India produces, they have a limited computer science labor pool of superior quality. Already, there is wage competition and employment competition for some very marginal talent similar to the marginal talent which found tremendous opportunity in the US leading up to year 2000.

Success drives competition and there are many countries which want a piece of the outsourcing business. With the strong English speaking skills- the dominant language of international business- in South America, Russia and Eastern Europe, competition is already heating up. In addition, South America also has the ability to handle the bilingual outsourcing requirements of North America. Hence, the wave of outsourcing growth in Central and South America. Just as importantly, eastern Europe has tremendously talented computer science and engineering talent which has the ability to fill the multi-lingual outsourcing requirements of Europe.

In the end, India's largest services companies which have gained critical mass will likely continue developing into global companies. In other words, the miracle of India's IT industry will likely face tremendous global competition on one hand. Yet, on the other hand, its leading IT businesses will likely become even more successful global players via expansion into Europe and South America, thus supplementing their Indian based businesses with solutions able to meet an even broader customer base.

posted by TimingLogic at 7:33 AM