The Anywhere-But-India Strategy

Posted by: Steve Hamm on September 13

I wrote a little bit about Softtek, the Mexico-based, IT and BPO outsourcing company, when it bought I.T. United in China last month. Some of the company’s executives dropped by my office yesterday and filled me in on their strategy. Simply put, it’s: Anywhere but India. Softtek started off modestly in Mexico 25 years ago, and didn’t really expand beyond the Mexican borders until 1997, when they came into the US (First client: GE, of course) and began marketing the near shore service delivery approach. They even trademarked “Near Shore.” Their pitch: IT services could be delivered more effectively if the people who were doing the work were in roughly the same time zone as their clients. That results in easier communications and collaboration. “We’ve been preaching the near shore philosophy for 10 years, and it’s been catching on in the past three years,” says Beni Lopez, CEO of Softtek US.

Clearly, in spite of the appeal of near-shoring, the low cost Indian option has been more popular with US and European corporations so far. But Lopez says corporations are increasingly coming to Softtek because they want to diversify so they’re not so dependent on India. Indian salaries are rising fast, attrition is a problem, and they want to mitigate risk. At the same time, Softtek has been expanding its reach geographically so it’s now becoming a truly global company. It has delivery centers in Brazil, Spain, and China, as well as four of them in Mexico. Spain serves the European market; Mexico serves the US; Brazil serves Latin America, and China serves Asian and global markets. Softtek considered opening a delivery center in India to take advantage of the still-relatively-low labor rates, but decided against it. “We want to be seen as the alternative to India,” says Lopez. Instead, the company expanded in to China, where the salaries are almost as low as India’s. “Our advantage is we have no play in India. If people want to diversify, there we are,” says Lopez.

Still, overall, Softtek can't match Indian labor rates and pricing. Its labor costs range from 15% to 30% more expensive. It tells clients that other costs of offshoring work to India makes it more cost-efficient to chose the near-shore option, but, clearly, that's a tough sell. With revenues expected to be about $235 million this year, Softtek is still small potatoes compared to behemoths such as India's TCS, Infosys, and Wipro.

It has some good momentum going, thorugh. Sales were just $50 million in 2003, so demand is soaring for its unusual service offerings. Over time, Lopez expects most of the major and even many of the smaller outsourcing players to be spread around globally. Then labor arbitrage won't be an advantage for any particular companies. "In the future, once everybody is everwhere, it will be all about execution," says Lopez.

If Softtek sticks to its strategy, though, and stays out of India, it will still operate at a bit of a price advantage, and it will still be in the position of picking up India's crumbs--rather than partaking in the main course. My bet: Eventually, whether it likes it or not, Softtek will have to make an Indian play.

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