India being Bangalored by China

The dragon poses a clear danger to India’s outsourcing industry

A faint rumble may, on occasion, give forewarning of a continental shift of momentous significance. For BeyondCore, Inc. CEO Arijit Sengupta, an expert on eBusiness standards, it’s a surge in the volume of business enquiries in recent weeks from China, where his California-based technology company doesn’t yet have a presence. That alerted him to a shift of the tectonic plates of outsourcing from India to China.

Sengupta told DNA: "In recent weeks, I’ve received cold calls from Chinese BPOs who found BeyondCore over the Internet while looking for new technologies to reduce their operating costs and improve the the quality of their output. Over the past three years, I’ve never received a cold call from an Indian BPO!"

It’s not just about cold calls: hard facts too make the point forcefully that India, today’s undisputed leader in outsourcing services, is gradually being, well, Bangalored by China. The Global Outsourcing Report, which ranks countries based on their opportunities, costs, and risks in relation to IT offshoring, predicts that by 2015, China, currently placed second, will have taken over the No 1 spot from India.

From all accounts, companies looking to outsource critical services have already begun the Long March from India to China. Last year, faced with 15 per cent-a-year escalations in the cost of offshoring IT services to India, British Telecom took a giant stride over the Great Wall of China — and set foot in the outsourcing destination of the future.

And among mid-sized corporations in the US, there is virtually an avalanche of interest in relocating from India to China. Remi Vespa, a California-based veteran of the outsourcing industry, told DNA: "Over 50 per cent of my prospects — mostly mid-sized corporations — currently outsource to an Indian provider, and are considering changing."

In Vespa’s estimation, Indian leaders — like Infosys and TCS — are so far ahead of their Chinese counterparts that even 10 years from now, their standing won’t be seriously threatened.

"If we look at the top 10 companies in the outsourcing market in 10-15 years, I have no doubt that six or seven of them will still be Indian… But China as a whole will have taken over from India as the leading outsourcing destination."

What’s driving this exodus? China, says Vespa, has taken a "very smart road to catch up with India". The way it does it is by offering a whole package of incentives to attract industry leaders: allowing wholly owned foreign entities, creating over 500 science parks, offering tax breaks. In his reckoning, it is this that has led Google, Microsoft and Apple to shift their outsourcing focus from India to China.

China’s outsourcing ambitions are backed by a healthy dose of central planning. Under the 6th Five-Year Plan, China aims to build service outsourcing bases in 10 cities, encourage 100 multinationals to outsource services from China, and foster 1,000 large- and medium-sized service outsourcing enterprises.

Ironically, at about the same time that China is introducing significant tax incentives and other benefits to promote BPO, in India, policy initiatives have gone the other way — towards increasing taxes!

In addition, notes Sengupta, the Chinese BPO industry has a "secret weapon": labour efficiency. "A significant portion of the Chinese BPO industry serves domestic Chinese customers. They do not have labour-cost advantages relative to their customers and have to be very cost-efficient. If Chinese BPOs now start serving US customers and gain the additional advantage of the labour cost difference, they may turn out to be very credible competitors indeed."

On the other hand, notes Sengupta, Indian BPOs have enjoyed such a large labour cost difference relative to their customers that they have not had to be as cost-efficient. "With the exception of some leading BPOs, one theme I’ve noticed with many Indian BPOs is an attitude of ‘Why do I need the latest software or technology? Labour is cheap, so I’ll have 20 people write similar software internally or just allocate 10 people to do the task that I could have automated with the appropriate technology.’ I characterise this as ‘throwing people at the problem’. Is it surprising that most of the key problems that the Indian BPOs face relate directly to labour: churn, salary growth, and training costs?"

Of course, the flip side of this argument, according to Sengupta, is that if Indian BPOs start focussing on efficiency and technology adoption, they may become even more competitive.

Vespa points to a deeper problem that companies outsourcing their work to Indian service providers face today. "Apart from the top Indian players, the thousands of smaller companies have a very bad reputation. They have a high attrition rate: you work with a company, and six months later, it’s gone — or its key staff have left to start their own company and want your contract!" He believes it’s important for India’s outsourcing industry to "introduce some order" in this particular market segment of small-to mid-sized outsourcing providers.

Sengupta too believes that the Indian BPO is at a defining moment. "Clayton Christensen, the author of Innovator’s Dilemma, describes how the integrated steel companies in North America were rapidly disrupted and eventually driven out of business by steel mini-mills.

Likewise, the British used to dominate the motorcycle industry, but the Japanese disrupted them very quickly. In both cases, the incumbents were initially overconfident about their strengths relative to the disruptors until it was too late. I fear that the same is happening today as regards Indian attitudes to Chinese BPOs.

If India wakes up to this threat, I believe it can compete effectively. If it does not, then eventually it will cede its leadership in the global service market and whether that happens in five years or ten, it will be catastrophic for the Indian economy."