Which Location Has the Best Outsourcing Deal?


Not too long ago, the outsourcing of corporate office jobs was synonymous with India. Big news stories showed example after example of work successfully outsourced to India, yielding enormous savings.  Years ago, when IBM was the biggest and most recognizable name in computers, managers often chose IBM without even looking at the competition. “Nobody ever got fired for recommending IBM,” was once a common saying in corporate America. Once we were all aware that outsourcing existed, India became the dominant “brand”, and it dominated our thinking. Is India still the default choice for outsourcing? What about the rest of the world, including outsourcing to the US?

Over the past few years, outsourcing has become more sophisticated. Outsourcing firms have learned that economies rise and fall, and that different currencies can have very different exchange rates over time. Contracts now include many more clauses and conditions than they used to, so it’s a bit more difficult to compare a flat rate per hour. Still, there are definitely trends. Since India is still the world’s brand for outsourcing,
let’s start there and look just a bit deeper than just the hourly rate:

 

  • India: India still offers positions at a fraction of the hourly US rates. Due to the
    downturn in the world economy, outsourcers have held back raising rates, even
    though inflation in India is two to three times greater than the US. Whether or not they will catch up for these “missing years,” we can expect Indian inflation to outpace the US for the foreseeable future. India also has a higher rate of promotions (on top of cost of living increases), and a very high attrition, leading to a
    higher cost of recruiting, training and employee incentives. While it is not
    unique to India, anytime you deal with another country you need to keep in mind
    that currency rates may change dramatically. If you sign a contract today under a favorable rate of exchange, by the time of your contract renew the exchange
    rate could be dramatically different. This is applies to any offshore location.
    Finally, India does not have a well-established “night shift” culture, and it
    takes dramatic incentives to get people to work at night for any prolonged
    period. Since “normal” work hours in the US are late night in India, your best
    bet is to outsource over-night work, or on work that can be returned a day or
    two later.
  • Other Countries: There are many countries with very specific value propositions:
    specific areas of expertise, better synchronized work hours, different language
    skills, and so on. Let’s use the Philippines as an example. While India’s
    culture is based on British culture, the Philippines follows American culture.
    Britain’s long history with India reduces many cultural barriers, especially
    since India follows British law (the Philippines follows American law). For an
    American, they will find it a bit easier to use the Philippines for tasks
    involving language and will require much less training for legal outsourcing.
    Their inflation rate is on par with the US, and attrition is also lower. There
    are similar (but not a severe) night shift issues, and you have the same
    currency exchange rate issues. However, comparable work in the Philippines
    costs about 20% more, and not all the established forms of outsourcing are
    available in the Philippines.
  • U.S. Outsourcing locations: These are smaller cities and towns with lower wages and operating costs than the big metropolitan cities where many outsourcing
    projects originate. Pricing here is a very mixed bag. It depends on the local
    conditions. If we look at Fargo North Dakota, which has a long tradition in
    outsourcing. In 2010, local unemployment was 5.0% and dropped to 4.2% by August
    of 2011. A busy local economy increases pressure for higher wages and raises
    your hourly rates. With greater cultural similarity, much less soft skill
    training is needed. Inflation is at US levels, there are no currency exchange
    risks and hours of work fit well with the rest of the US. Since Fargo’s greater
    metropolitan population is about 150,000 compared to Mumbai’s 20,000,000, it
    often takes longer to recruit there. And the costs are much higher than India,
    usually 50% more. You can still save money and improve services, but the
    financial impact is much less.
  • US Major Cities: Why outsource to the same location (with the same basic costs) that you work in? You may need a skill that is only available in your local market,
    or the work process may require direct physical interaction. You may even host
    the outsourcer within your facility. However, even in the same location
    outsourcers may provide nuanced cost advantages: a document outsourcer lease a
    fleet of copiers at a better rate; outsourcing e-discovery proves staff that is
    more fully billable than internal resources; outsourcing of programming
    minimizes the number of programming skill you would need to hire and keep
    occupied. A good outsourcer may have slightly lower attrition and costs, but
    otherwise they hire and buy from the same market as you do. This is the highest
    cost market, but there are times when it can still the best deal.

 

There are many other details that will affect the real value
of your outsourcing price. India continues to be one of the lowest per hour
options. Even though costs and risks for India are often left out of the
initial pricing, there are still opportunities to reduce costs and improve
work. There are a lot of other countries that offer equally compelling options,
but you need to know these markets to understand their real value. Outsourcing
to smaller domestic locations is a very viable option, and there are still very
many “undiscovered” locations that offer excellent value. Even local
outsourcing in the big cities still has a place, and offers value, but should
be used more selectively. Invest a little time to understand how to interpret
the cost and value structures of each location, and it will pay a big
dividend!

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4 Responses to Which Location Has the Best Outsourcing Deal?

  1. Unni Vasudevan says:

    Very informative and bang on with outsourcing and its feasibility.

    Regards, Unni

  2. Karl Laird says:

    This is not bang on at all, the quality of work produced suffers when sent offshore.

    Or do you not remember your time at BSC Chris?

  3. Welcome to the Blog Karl! Mr. Laird raises an excellent point. While this article focused on financial risks… especially the higher attrition rates, greater inflation, changes in currency rates, and significant training cost offshore … all outsourcing has equally important risks in work quality.

    McKinsey, the world’s largest consulting company, tells us that 50% of outsourcing fails, for reasons of quality, cost, or client commitment to the program. When the goal is “total outsourcing,” moving an entire function out of the organization, quality issues are greater than in programs that balance outsourced and internally managed work. A study of total outsourcing in IT services, from the Max Planck Institute for Economics, found that the long-term success rate was as low as 10%.

  4. It is a good read. The competition is close among India, china and Philippines. The major advantage India offers is the cost effectiveness and availability of the skilled resources across the nation.

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