Saturday, July 21, 2007

Outsourcing at a crossroads


High talent turnover can wipe out cost advantage, as India is discovering

Companies looking to be a part of the information technology outsourcing trend in the region should consider other aspects of competitiveness apart from mere cost effectiveness, says an industry expert.

"The paradigm is shifting away from just being a cost-competitive player in the market. Instead it is more toward value creation, and this is going to change the landscape of the outsourcing service industry in the near future," said Aroop Zutshi, president and senior partner at Frost & Sullivan, a multinational consulting group.

Outsourcing, which currently is associated with hiving off various business processes to companies in countries such as India, was a $930-billion industry in 2006 and is poised for 15% annual compounded average growth rate over the next three years to $1.43 trillion, a Frost & Sullivan study shows.

The study, which was conducted from February to June this year across the company's vast network of clients and offices across the globe, showed that the major was coming come from a shift of outsourcing hubs to other parts of the world, and away from traditional centres such as India.

"The biggest problem that India is facing today is the attrition rate, which in some instances is running as high as 70% annually," Mr Zutshi said.

"Creating more problems for the industry is the fact that costs in India are rising by as much as 25-35% annually, and this is one of the key reasons why some global outsourcing giants are shifting their bases away from India to other parts of the world."

Mr Zutshi said that even with more than three million engineering graduates entering the market each year, India's reputation has been tarnished due to the higher cost and attrition rate.

"The biggest challenge that companies are facing in India is the retention of talent, as it costs more than two or three times the salary to train and bring the employee to a highly productive level - and then companies are seeing this talent flow out to other companies," he said.

He added that such factors have helped to push even Indian companies away from home turf, with outsourcing giants such as Satyam and Infosys gradually shifting part of their operations to other countries such as China, Ireland, Malaysia, Mexico, the Czech Republic, Poland, Philippines and Canada.

"These countries have the cost advantage, the quality and availability of human capital and the infrastructure to support it, and as there is higher demand from the technological, health-care, fast-moving consumer goods and retail areas that is set to rise, these countries are likely to benefit," Mr Zutshi said.

He added that countries looking to be emerging SSO centres should also look at their immigration regulations to ensure they can attract talent to settle on a long-term basis.

Frost & Sullivan said that during 2006 the top three spenders on SSO were the banking, financial and insurance sector with $273 billion, technology and ICT at $233 billion, and health care at $130 billion, accounting in all for more than 50% of SSO spending.

Other areas that are heavily involved in outsourcing included transport and logistics ($113 billion), energy ($84 billion) and fast-moving consumer goods (FMCG) at $59 billion.

"We have seen what has happened in India. It took the country just three years to reach this stage and we want to avoid such mistakes, and therefore would look at all means not to overheat the SSO market," said Zulfiqar Zainuddin, head of marketing and partners for SSO at the state agency Multimedia Development Corporation Sdn Bhd, which is in charge of promoting the IT industry in Malaysia.

"We are not there to take away the industry from these two countries but instead to complement them and this can only be done by cross-pollination - that is, to bring in outside talent and mix it with local talent," he said.