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Last Updated: Friday, 17 August 2007, 02:43 GMT 03:43 UK
India faces battle for outsourcing
By Mark Kobayashi-Hillary
Director of the UK National Outsourcing Association

Workers in an Indian call centre
Indian firms have been quick to cash in on their skilled workforce

As US and European companies look to cut costs by moving many of their operations abroad, India has stepped in to become a world leader in IT outsourcing.

However, success has attracted imitators and India is facing a fight to keep its position at the top.

India now leads the world in offshore outsourcing - the remote servicing of information technology (IT) or other business processes by staff based in India.

The value of outsourcing to India in 2007 is estimated at $47.8bn (24bn), ten times what it was worth back in 1998.

Outsourcing: Moving company functions from internal departments to external firms
Offshoring: Relocating corporate activities overseas.
Nearshoring: Relocating offshore activities nearer the client's home country
BPO: Business processing outsourcing - moving white collar tasks like accounting or invoicing. to an external firm
Captive firms: Companies owned by foreign multinationals who perform outsourcing services for the parent firm
UK call centres/US contact centers: Offices where workers provide telephone customer services like sales

Expansion is happening fast, and the IT outsourcing industry is predicted to continue growing at about 28% a year.

The sector has become a very important part of the overall economy of India, creating growth and new wealth in a country that has only enjoyed economic liberalisation since the early 1990s.

IT and business process outsourcing (BPO) services now account for 5.4% of India's gross domestic product (GDP), and have had a huge impact on cities such as Bangalore, the centre of the industry.

Chasing pack

But India's success in hi-tech services has not gone unnoticed.

From Mexico to Vietnam, local governments are busy creating investor-friendly tax policies, such as special 'export-zone' offices on the model of India, where offshore work is free of domestic taxes.

Russia has a good talent pool and competitive costs, but lack of government support and infrastructure are still severe holdbacks
Thiago Turchetti Maia, Vetta Technologies

They are also encouraging the creation of new trade bodies to represent and promote their industry in the same way that India's National Association of Software and Services Companies (Nasscom) has been doing since the 1980s.

One of main threats to India has been the expansion of the European Union (EU).

Malta's harbour walls
Malta is one of the new EU centres for IT outsourcing

In 2004, the EU expanded east to accept ten new member states, and then went on to welcome Romania and Bulgaria into the union earlier this year.

These twelve nations in Eastern Europe can now offer lower costs, combined with the protection of the EU legal safety net.

This legal back-up is particularly important for companies in relation to issues such as the protection of customer data as it travels across borders.

Strength in numbers

Of course none of these countries can match the sheer scale of India, which has more than a billion people - with more than two million graduating from university each year.

But countries such as Poland, Hungary and the Czech Republic are becoming very attractive low-cost European choices for executives who want to hire skilled people without the travel headache of regularly visiting Asia.

In the long run, it may also mean that a passage to India is no longer the automatic choice
Mark Kobayashi-Hillary

Among the other nations eyeing outsourcing riches, only China, with a population above 1 billion and a similar number of graduates entering industry each year, can come close to matching India.

China and India are both highly dynamic, large developing economies, and along with Russia and Brazil, some observers expect them to dominate the world economy by the middle of this century.

And all of these nations are looking at their potential to match India's strength in global services.

'Talent pool'

Remi Vespa, vice president of market development at Venus Software Corporation in China, is bullish about China's future as an outsourcing destination.

Garuda shopping mall, Bangalore
Shopping mallls have proliferated in Bangalore, India's IT capital
"The major strength of China in this race to leadership is that the focus of China is not on becoming the world leader, but in creating the conditions that make the country the privileged destination for IT outsourcing," he explains.

Thiago Turchetti Maia, chief executive of Vetta Technologies in Brazil also sees China catching up thanks to its "enormous potential for talent together with competitive rates".

However, he points out that structural problems in some of these nations could lead to patchy development.

"Russia and Brazil are still to catch up," Mr Turchetti Maia explains.

"Russia has a good talent pool and competitive costs, but lack of government support and infrastructure are still severe holdbacks."

New continents

At the same time, Africa is also trying to take a piece of the outsourcing action.

This should come as no surprise because many African nations have the infrastructure, the talent pool, and the entrepreneurs ready to seek out new opportunities.

South Africa - with English widely spoken - now has hundreds of contact centres serving clients in Europe and the US.

China has rapidly emerged as an industrial powerhouse

Ghana is growing in stature as Nigerian entrepreneurs fund start-ups there to avoid the scam email stigma that is proving difficult to shake back home.

Uganda is about to unveil an entirely new town built around a technology park and designed to stimulate the local outsourcing industry.

Egypt will go on a charm offensive, spending on a new marketing and PR programme to ensure that the decision-makers of Europe know that it has more to offer than just the pyramids.

Passage to India

In some ways India is becoming a victim of its own success.

Infosys facilities in Bangalore
Indian computer firms like Infosys are finding it harder to retain staff

Staff attrition is high, and it is quite normal for a company to have to replace its entire workforce each year in a contact, or call, centre.

And though there are a huge number of graduates coming through to the industry, not all have the skills needed for intensive IT work..

Companies are finding it harder and harder to recruit the cream from the best universities, leading to inflated salary demands and more job-hopping.

There have been security scares with customers' personal financial details apparently being sold by unscrupulous employees, and in the UK for example, there is a growing consumer dissatisfaction with telephone calls being answered offshore.

All of these issues coupled with the emergence of hungry and determined rivals now means that India has to work harder to sell itself.

In the long run, it may also mean that a passage to India is no longer the automatic choice for the many executives interested in outsourcing.

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