Is it time to stop outsourcing to India?

I would like to get some feedback from US based companies that have been outsourcing work to a wholly owned subsidiary in India. Am I the only one to find that the advantages are getting less all the time. At one time, the lower wage rates, English speaking language, level of education skills and the convenience of handing over a work list at the end of our day, with finished product being delivered when we start work next day, were all a clear benefit compared to the inefficiency of working with remote management in a different culture.

Now, the gap in salary levels is reducing, the expectation of substantial annual salary increases remains and employment attrition rates run at 20% pa regardless of the state of the global economy, the burden of the bureaucracy is a major handicap, the recent service taxes have raised operating costs, and the "deemed" acceptable rate of "cost plus" transfer pricing agreements is being challenged by the Indian Tax Authorities up to the 20% level based on inappropriate peer reviews that are not close peers and do not take into account the risk, working capital and absence of sales and marketing expense advantages provided by a US contract parter.

Maybe its time to start looking elsewhere?

Answers

Chris Shumate Accounting Manager • November 26, 2012

Simon - Great idea about looking elsewhere. How about back to America? I understand the reason for outsourcing parts of businesses to other countries. But, how about American companies start rebuilding our nation, rather than (re)building others, especially if the benefits are not what they used to be. If a company wants to outsource its HR and PR function, it hires a PEO. If a company needs tax work done, it hires a CPA. If a company needs a call center that it does not wish to employee, there could be a market for it to be outsourced here in the U.S.

Paul Major Director of Finance & Corporate Controller • November 26, 2012

Simon, a really good question. I think the advantages are now reduced as well.

Ted Monohon VP -Finance / Controller • November 26, 2012

You are correct in all your observations. A former company I worked for encountered the exact same issues you have raised. Once you account for the lost productivity due to the time zone difference and communication difficulties, we actually believed it was costing us money to be in India. I think it only makes sense to be in India if you are of scale similar to a Fortune 500 company that has the existing legal, tax, technology infrastructure to properly maintain and invest in the processes and procedures. We eventually shuttered our India operations. I have heard the "new" place for outsourcing is now moving to the Phillipines. I think the experience people are seeing with India will continue to have companies (Finance) take a hard look at all the intangible and hard to quantify costs of having foreign operations in places like India.

Malak Kazan VP, Special Projects • November 26, 2012

The evolving value proposition most outsourcing firms put forward are domain expertise in these processes, optimize efficiency of the processes, and have business impact to the bottom line. As a client, these are strong inputs to the business case for outsourcing yet should be coupled with the impact on the longer term strategy of sustainable growth (customer acquisition and retention) as well as the core competencies that differentiate it in the marketplace. As a general principle, any customer facing processes should stay local (to a stateside or same continental outsourcing firm) especially for post sales services calls to existing customers. Outsourcing needs to be looked at as "strategic" partnership that has to be managed. To the original question, stop outsourcing to India, it depends on the relationship management, quality of the outsourcing firm, and the resultant business impact.

Regis Quirin Director of Finance • November 27, 2012

Economics 101 - India provided US companies with educated workers and a low cost structure. As everyone outsourced to India, costs rose and more companies began to chase fewer educated employees.

In the short-run, companies will look to educated Emerging Market economies to outsource. Yes a company I previously worked with outsourced their call center operations to the Philipines and were very satisified.

Chris Holtzer Senior Manager - Strategic Analysis • November 27, 2012

I would say it's always time to look elsewhere (Not necessarily time to move, but time to look). Whether your workforce is in China, India, US, or some other country, keeping your eye on the costs is always appropriate.

I have done evaluations for multiple companies that involved either outsourcing or bring work back to the US. With increasing wages and the cost to ship, compounded with the working capital and lack of flexibility, it is a tough choice.

My best advice is to never forget the "Non-financial" impacts of the change. As "finance" guys we sometimes forget that the best financial decision isn't always the best business decision. (Culture, Reputation, etc)

I strongly suggest that you have an analyst build a break even model that is unique to your business and have it handy and updated at all times. As you start to approach the point that a move is fiscally responsible, then you are prepared, and you also have a strong position to negotiate the costs of the change. When you know exactly what it costs to stay or go, you have strong leverage to manage your position.

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Is it time to stop outsourcing to India?

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