The New Economics of Outsourcing

Efforts to send IT work anywhere but Bangalore are taking on added urgency as costs of doing work in India rise and the dollar sinks

By Rachael King

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Softtek, a Monterrey (Mexico) provider of IT services, added 30 new clients last year. Most of them had been using Indian firms for at least part of their outsourced IT. But they came to Softtek because they "were looking for something else," says Beni Lopez, CEO of nearshore services for the company, which has operations around the world.

Companies that traditionally rely on India for
offshore IT services have been looking for that something beyond India for years, citing such reasons as high employee turnover and unreliable communications. But the search has taken on added urgency recently, especially for U.S. companies, as a weakening dollar has boosted the cost of IT services priced in India's rupee. Over the past five years the dollar has declined about 16% against the rupee. High real estate costs and expectations for tax increases also have diminished India's allure.

As outsourcing to India becomes more expensive, North American companies are more inclined to "nearsource," keeping work in the Western Hemisphere, where they can operate in a closer time zone. In years past a company could save 40% to 50% by hiring Indian firms to handle IT and other services, says Atul Vashistha, chairman at neoIT, a management consulting firm. Should the U.S. dollar continue its descent, that differential would shrink to 10% to 20%, he estimates. "If you're only going to have a 20% savings, clients start to think about time zone," Vashistha says.

Argentina's Time Zone Advantage

Kimberly-Clark (KMB) had time zone in mind when it hired Cognizant Technology Solutions in Buenos Aires to handle tech support for its SAP (SAP) software applications.

Kimberly-Clark was drawn by the available talent and the fact that the company has Argentine operations but also because geographical proximity and similar time zones make collaboration easier. "We picked Buenos Aires for a number of reasons, but we really felt from supporting SAP, it was the right place to be," says Kimberly-Clark Chief Information Officer Ramon Baez. The company also outsources application development and maintenance to Cognizant in Chennai, India.

How much longer the world's companies will have financial incentive to outsource to India is a matter of lively debate. India's "advantage as an offshore location is fast eroding—its attractiveness takes a hit with each passing day," analysts at Forrester Research (FORR) wrote in a January, 2008, report. Forrester catalogued some of the well-known challenges, such as increasing staffing costs, turnover and strained infrastructure (BusinessWeek.com, 12/11/06). Yet, there are newer challenges as well, including the falling dollar and expected tax revisions that may increase the cost of relying on outsourcing providers.