Offshoring 2.0: The Post-India Market

By Deborah Perelman  |  Posted 07-05-2007

What will be the next big offshoring frontier? While the experts don't all have the same locations in mind, they all agree that it will no longer be in India.

Salary inflation is largely to blame for the change in course. When the outsourcing boom took off in 2004, the salaries of software engineers were one quarter of what San Francisco-area computer engineers made, making very clear the cost savings of offshoring.

But in the years since, Indian salaries have soared—in several cases to 75 percent of U.S. levels—and some in Silicon Valley have begun to sour on sending jobs to India, wrote the Wall Street Journal on July 3.

However, it wasn't only salary inflation that has caused many technology firms to pull their labor out of offshore centers; it was the hidden costs they hadn't anticipated such as geographic and time gaps, the need for more U.S. managers to oversee the outsourced relationships and the significant costs associated with pulling out.

Click here to read why the cost benefits of offshoring have slipped.

Companies that are not pulling out of outsourcing relationships altogether are shifting their offshore office to newer and different regions. A report released by the Aberdeen Group on July 2 found that while India remains the leading offshore destination for most companies—especially if cost savings are the primary driving force—both Russian and Asian providers are maturing quickly and sustaining double-digit growth by competing on both price and quality.

Wage inflation and higher attrition issues, as well as a rising demand for technology professionals in India are causing enterprise customers to shift from tier 1 to midtier providers, finds the report, and argues that companies that want to stay ahead should take advantage of multiple offshoring locations across the globe, or multisourcing.

In comparing potential offshore delivery centers based on labor, cost of rent, language skills and turnover rate, IDC found in a July 3 report that while Indian cities were still highly ranked, Chinese cities were on the rise and closely nipping at India's heels.

Conrad Chang, research manager for IDC's Asia/Pacific BPO Research said that there are different risk factors to consider when evaluating outsourcing, offshoring, onshoring and nearshoring.

"Often times, what differentiates leading cities from the rest is their focus on deal-clinching factors, and the GDI [Global Delivery Index] weighs that more heavily than other factors," Chang said.

Agent skills, political risk, cost of labor and language skills were all factors considered in the IDC report's ranking of three Chinese cities—Dalian, Shanghai and Beijing. These three cities were ranked by IDC as numbers five, six and seven of the top ten locations for global delivery. IDC predicted that Chinese cities could take over Indian ones as early as 2011.

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