Monday, May 28, 2007

Wage hikes, quality top offshore outsourcing concerns


While recent press reports have highlighted rising labor costs in India as one of the biggest hindrances to global outsourcing, IT services and business process outsourcing (BPO) provider Syntel Inc. says this issue isn't as big of a roadblock as it seems.

Troy, Mich.-based Syntel recently surveyed 325 Fortune 1000 IT executives of global companies to gauge their views on top threats to outsourcing. In an online poll, participants answered the question, "What is the single greatest threat to the global outsourcing trend in 2007?" by selecting from one of five responses: wage inflation in India; quality concerns; possible outsourcing legislation; perceived security risks; and resistance from middle management. While the questions were not specifically focused on India, Jonathan James, Syntel's vice president of marketing and investor relations, said responses referred mostly to India where the most overseas IT shops are currently set up, and did not take into account other outsourcing destinations such as Mexico, Russia or China.

Wage inflation rates in India -- even at 15 per cent, are "still manageable," according to James. The goals of offshore outsourcing have also evolved. "As the industry matures, people are moving beyond that to speed-to-market because of time zone differences, quality improvements and access to talent."

Organizations outsourcing their IT work are "well aware that (wage inflation) is an industry-wide challenge and something they need to share the burden on," James added. While an IT vendor may not go as far as to expect that the client pick up 100 per cent of the increased costs, pricing may be adjusted in contracts down the road to offset some of those costs. "Clients understand that as a logical discussion -- it's a fact of life," said James, adding that this encourages clients to examine which projects make the most sense to be delivered globally, and which are best left in-house.

Next on the list was a concern over quality: 27 per cent of respondents cited this as a top hindrance to outsourcing. In a poll Syntel conducted in October 2006, 30 per cent of respondents cited quality as a top concern. The lessening concerns over quality are a "natural outgrowth of the maturation of the industry," James said. In the early days, most of the outsourced work was coding, but today it includes complex development projects, back-office processes and delivery of solutions. Most organizations in India are at level five of the Software Engineering Institute's Capability Maturity Model (CMM), James noted. Smart IT firms will continue to enhance their educational training and skills development practices to keep driving quality higher.

In addition, 10 per cent of respondents cited security risks as a major hindrance to outsourcing. Security is are lower on the list because from the beginning, outsourcing companies have had to protect data in multiple locations and have evolved on a par with U.S. companies, and in some cases beyond, James said.

Lowest on the list was middle management resistance, which nine per cent of respondents said was still a roadblock to outsourcing. Internal IT departments are now being called upon to help select what should be outsourced and what should stay in-house, opening up the opportunity for IT staff to use their skills in more strategic ways.