Q: What impact does the recent news of inflation in low-cost zones have on companies considering outsourcing and offshore-captive centers?
A: Wage inflation should always be considered, particularly in low-cost locations. Picking a city and building is a careful exercise to avoid needless salary inflation impact. While we have learned to live with three to five percent increases in the US, current rates as high as 15 to 20 percent in India should not be surprising if you make a poor location decision. That said, the cost-savings delta is still dramatic between onshore and offshore. The cost of labor through globalization of labor pressures creates an equalizing effect. The real issue however is currency rates and terms associated with currency risk.
Q: So the real issue could be currency exchange rates?
A: This is a stealth issue that has gone unnoticed for years. The savings were so great. No one focused on this issue. The rupee is at a 10 year high against the dollar with a seven percent increase in the past five months. Offshore providers receive payment in dollars but pay their people in rupees. Captive shared services access the same labor pool and have the same issue. Our research indicates that currency is the real and material cost change over the past 12 months. Q: What should we consider doing in light of this market and financial condition?
A: Location, location, location. And new locations! Clients and providers must expand into new locations, broaden their capabilities and learn to use the global labor force more effectively. You see the Indian firms moving into Mexico (Infosys and Wipro), Eastern Europe (Infosys) and Malaysia (Satyam) to leverage their experience in building competence in low cost locations. The Indian firms are starting to move away from their own capital and university cities they feel most comfortable in and seeking out the Cleveland, Ohios of India. Buyers need to think about this and not get pulled into the broader headlines on labor.
Q: What should companies do to hedge their financial position when making outsourcing decisions today?
A: Again, the impact of accessing a low-cost global labor arbitrage is still a compelling argument for the board room. The business case for outsourcing and offshoring stands to be a winning proposal for the next 20 years. Other than the potential for currency changes, the value of offshore will not disappear. Each company must evaluate what functional areas, what locations and which providers make the most sense. Each one is different and requires an extensive analysis, planning and implementation expertise to succeed. Choose well.
|
