India, China & Outsourcing!

AT Kearney has compiled a list of the most profitable Outsourcing destinations. Excerpts:

COUNTRY       Overall Score  Financial Score  People Score       Environment Score
INDIA                            6.9                    3.2                    2.3                     1.4
CHINA                           6.6                    2.9                    2.3                     1.4
MALAYSIA                    6.1                    2.8                   1.3                       2
THAILAND                    6                        3.2                  1.2                      1.6
BRAZIL                        5.9                       2.6                 1.8                      1.5
PHILIPPINES             5.8                     3.3                   1.2                      1.3
MEXICO                       5.7                    2.6                    1.5                      1.6
SINGAPORE                5.7                     1.7                    1.5                      2.5
USA(TIER II)             5.5                     0.5                     2.7                      2.3
Environment Score measures a country’s business environment based on the economic/political environment, infrastructure quality, cultural exposure, and IP security.

The interesting point to not here is that China, which has the second-highest overall score (just behind India) has the same Environment score as India. This basically means that although China’s Physical infrastructure is of course better than India’s, their IT Infrastructure is apparently at the same level as that of India. I didn’t quite understand “how!”

Also, Argentine, Philippines, Sri Lanka and Pakistan are the only countries behind India (& China) on the Environment Score.

People Score measures a country’s people skills and availability based on the IT/BPO industry size and quality, labor force availability, educational skills, language skills, and attrition risk.

India undoubtedly leads on the People Score. Interestingly, India and China again have exactly the same score. Although India I think has a slight edge here as far as the language skills of the workers go. China, however, is making all efforts to catch up fast and is taking initiatives to introduce English as a compulsory language at the Primary School level.

Financial Score measures a country’s financial attractiveness based on the costs of compensation, infrastructure, and taxes and regulations.

China’s lower Financial Score is probably the only drawback but that again would be a result of a booming economy with a higher wage-rate. With the rising wage rates in India, this gap would be narrowing as well.

Bottomline: With India’s rising Wage Rate, the cost of setting up shop in India is increasing. If we go strictly by the results of the report, India needs to better its IT Infrastructure (Connectivity, Broadband et al) if it is to prevent China from becoming the hottest Outsourcing destination. As far as the People Score is concerned, with the introduction of English at the primary level, China would probably better India unless we improve the quality of skilled man-power.

Note: The above list is not complete. I have removed certain countries form the list. To view the complete list, read the BusinessWeek write-up on Global Outsourcing.

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11 thoughts on “India, China & Outsourcing!

  1. Ruhi – Yes, we can almost feel the pinch. Which is why Indian IT Companies are beginning to diversify their customer base. So far, purely for profitability issues, a company would not be too enthusiastic about its sub-continental or even African clients. The depreciation of the Dollar (and subsequent strengthening of the Rupee) will have a 2-fold effect:

    1. It will make India’s services costlier to the American Clients (and subsequently less attractive)

    2. To overcome this, our billing rates would reduce and profits margins would be affected because we must remember that simultaneously the Indian Economy would be blooming and the companies would have to pay their employees higher to retain talent – which would further hurt their bottomlines.

    I am not an expert at observing industry trends and fluctuations (ok.. not yet!). But it doesn’t take one to guess that Indian IT Providers will have to think out of their skins to come up with a solution and maintain (in Michael E. Porter’s words!) “sustainable Competitive Advantage” in the Software Services Outsourcing space!

    The focus clearly has to be on sustaining growth over the long-term rather than maintaining a top-line of XYZ % over the Next Quarter!

  2. As long as we can move up the value chain and provide better services, nothing (incl. rupee) can be a barrier to growth. You can definitely not keep charging the same amount for basic outsourcing deals, and it is not just the Chinese or the Phillipinos who would undercut, it would be the second tier IT companies as well. If the Indian IT industry is to grow, the companies have to take on bigger roles in larger contracts.

    And India is uniquely positioned. Language (China is still far away, it is not easy to suddenly teach a whole country a new language), Talent, Time Zone, the largest growing working population are in its favour. We already have a foot in the door in the largest outsourcing contracts, and we can now shoot for larger pieces. If we let his advantage go, we would be fools 🙂

  3. I agree with Kpower. Even if the rupee appreciates and our manpower n skills are in place, we will keep getting projects. We do have the language advantage and should keep at it. But i seriously wonder about the environment score! How come we’re on a par with the Chinese! Hmmmm….

  4. @Amit, I agree with you a lot. Maintaining a sustainable growth rate will be very important. But can India’s infrastructure support it? Not at present. Every single week there are articles on something about India in the Business Week. There was one a couple of weeks back that discussed the problem with Indian Economy. The only growth in the country is coming from the IT industry and I wonder how long this can continue without help from other parts of the economy.

    @kpower, India indeed is at an advantage when we talk about language. But apart from that, China is at an advantage in every other way. They have talent too. Their Govt. started regulating their population in the late 70s, whereas ours hasn’t done anything till now. So I don’t see how our growing population is an advantage. I would prefer having 500 million people who are educated instead of having 1 bn+ people, majority of whom are below the poverty line and as illiterate.

  5. @ PureSunshine

    Yes! I was a little surprised as well. IN fact I was reading in BusinessWorld only this week that India’s IT Infrastructure Growth rate is abysmally low.. especially when compared to the spike in the number of Internet Users in China .. and I don’t mean ONLY internet “users”.. this also has a direct bearing upon the average speeds at which the users surf which of course, has a bearing on their productivity and output!

    I agree! The IT Companies would have a high-speed internet access and everything – no doubt! .. But if we are supposed to take work to Tier-2 cities, then the Government needs to first develop basic as well as IT infrastructure!

    @ Ruhi, Kpower..

    Found this related article:
    9 Reasons why China will overtake India in Outsourcing

  6. Well, no doubt we lag behind in infrastructure. However, we have the leader’s advantage — a huge supply of talent, better managers, and a better developed financial system.

    When you talk of tier-2 cities, China is actually worse off. Outside of Beijing, Shanghai, it is a completely different landscape. As for the population growth, China would have an ageing population very soon and India a far younger demographics — that is what I was trying to point out. Anyway, I do not agree with many of the points in the article you sent because it assumes the best case scenario in China and the worst case in India, which I don’t think is fair comparison.

    Anyway, the trouble with such discussions is that every point can be argued both ways…. and that is why they never end! I would rather people figure out how to make themselves more competitive, rather than either sit in awe or in complacence of China.

    We do have an advantage, and it is upto us not to fritter it away. Nobody else can be blamed or applauded — whatever they might do.

    If I were so good in predicting everything, I would be sitting in the Stock Market 🙂

  7. Dear Amit

    Firstly, its not the rupee which is getting stronger but its the dollar which is getting weak. One of the major reasons for this is the US-Iraq war which has consumed lots of US resources and to much an extent that China is now manipulating the US economy(The reason for the dollar to fall majorly).
    Secondly, our I.T. industry need not worry about the rupee appreciation or dollar depreciation :B, because the problem arised for the projects which were quoted using the price of dollar earlier. If the dollar is getting weak, obviously US govt. will get more dollars in the market thereby balancing the EQUATIONS.
    Thirdly, Chinese are hardworking but unlike Indians their analytical skills are weak. Indians are preferred by software companies around the world for their analytical skills. It will take a generation of chinese people to come up as an english speaking population. So we need not worry about china overtaking us. And besides Anti US-China feelings will always keep India as the first option for the people of USA(the largest economy).

    three resons to smile nd justify ourselves that our jobs are not in danger… 😀

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