"The Coming Death of Indian Outsourcing"

Sramana Mitra at Forbes has a provocative title and cites examples of firms that have stayed away from recruiting in India or moved away from India. No question, India has challenges as I have written here, here and more.

But she misses a fundamental economic reality. In spite of large acquisitions (EDS with MphasiS, Cap Gemini with Kanbay) and recruiting campaigns (IBM and Accenture now claim their largest labor pools are in India), the Western firms are still not delivering India savings to their customers. Their rates on incumbent contracts are still 30, 50, 100% more than even the inflating Indian rates. 

Indian firms cannot often compete with Western internal IT employee or contract/staff augmentation rates. But they are still very competitive with Western outsourcing rates.  There is plenty of room for them to chisel out chunks from IBM's $ 50 bn, EDS's 20bn a year in revenues. Let's not forget, the total India outsourcing industry is still smaller than just IBM's outsourcing revenue.

They do not do as well in IT infrastructure areas, but when it comes to application management, systems integration and BPO, many Indian firms will continue to do just fine.

Update: Phil Fersht now at AMR responds

Comments

[Aditya A]

Vinnie I agree with you. India outsourcing firms will continue to do well at things which are not "cutting edge". India is hard to beat when you have to build a large team from scratch. Where else in the world can you recruit so many engineers or other skilled people? The labor arbitrage for low-entry level engineers is still fairly competitive (CTC of $20,000 in India vs $100,000 in US).

Though I agree with Sramana's point about lack of innovation in India. This is not because Indians are risk averse. Far from it. Its more because the domestic market in India is small and the overall eco-system in India is not mature yet (poor infrastructure, costly broadband, credit cards penetration etc etc). This will change going forward.

Its interesting to note that Sramana Mitra now has a different view point. Just an year ago she was promoting the concept of "Team of 21" to facilitate outsourcing to India and predicting death of Bay Area real estate due to outsourcing. This what she says in March 07 on her blog:

"But, almost inevitably, over the next 5-10 years, there is going to be a tremendous slimming down at all these companies, especially Cisco, where the emerging market opportunity is already well upon them.

The good news is, many of these people are from those very low-cost destinations which would absorb the impact of the downsizing. Perhaps, some of these employees would be happy to go back home. To make this transition smooth and effective, I invite you to read an earlier article: Team Of Twenty One.

The news for Silicon Valley is likely to not be that good, though. Most likely, real estate in San Jose, Cupertino, Fremont and other areas where these employees live today, would crash. An exodus of tens of thousands of people away from the valley would be a shock quite difficult to absorb, I presume."

[Krishna Mony]

Some go overboard in their desperate efforts to have themselves heard. In this case, I think she's just going about in her job. She's been beaten to death in several Indian blogs where she tried to promote her Forbes articles.

[Phil Fersht]

Check out my response to Sramana's post. This factless attempt to gain headlines needs to be discredited, and Forbes will be publishing this as a "counterpoint" tomorrow morning:

http://fersht.typepad.com/the_outsourcing_bloghorse/2008/03/more-panic-jour.html

PF.