OUTSOURCING: COMPARATIVE ANALYSIS – INDIA, CHINA, AND EASTERN EUROPE A Cybage perspective
Abstract Competitive pressures and sluggish economic recovery are forcing organizations across the world to look beyond local markets. Favoring this trend is the availability of better online collaboration tools and an abundance of skilled workforce in low-wage countries. The leading beneficiaries of this trend are mostly the Asian countries. On the surface, all low-wage countries offer cheap labor rates with a large pool of ready
workforce. So what differentiates them, and which location is best suited to your needs? The answer to this question becomes all important because selecting the best-fit outsourcing location can have a significant long-term impact. This whitepaper endeavors to address this predicament by presenting an analysis of the Indian, Chinese, and East European IT markets from an outsourcing perspective.
3. Comparative Study ................................................................................................................................ 5
1. Outsourcing Attractiveness Rankings: India, China, and Eastern Europe
In 2011, A. T. Kearney released a report on the attractiveness of different countries for outsourcing and offshoring. This report placed India as the leader in outsourcing with a # 1 rank based on financial attractiveness, people skills, and business environment. China was close on its heels at second position, followed by Malaysia. Countries such as Estonia and Latvia ranked in the top 15. A total of five Eastern European countries figured in the top 20. Following is a snapshot of the report:
2. Outsourcing Readiness
2.1 India
India is currently the leading provider of offshore outsourced services in the world. It has several factors working in its favor—an established India Inc. brand name, accumulated experience, early mover advantage, and matured processes.
The offshore outsourcing industry that started in India has been able to nurture the IT and BPO export sector to $47 billion, while managing to capture more than half of the industry. The Americas and Europe are the largest clients for the Indian outsourcing industry, making up 60 percent and 31 percent of the country’s IT and BPO exports, respectively. Indians are known to provide superior services with high quality. Research has shown that errors in accounting were drastically reduced by 60 percent when the work was outsourced to Indian firms. Following are the factors that work in India’s favor:
Talent: Indian professionals are highly qualified, talented, motivated, and tech-savvy.
Cost efficiency: Organizations have been able to save about 30 to 40 percent on costs by outsourcing their business processes to India.
Time zone overlap: The 10-12 hour time difference between India and the US conveniently gives companies a 24-hour work environment, with minimal or zero backlog when it comes to processing tasks.
2.2 China
The Chinese have proven time and again that their work is excellent with regards to speed and cost efficiency. The last two years have witnessed exponential growth in China’s service outsourcing industry. Figures show that the total offshore service value increased, by 65 per cent, over the value in 2010, to $23.8 billion in 2011. China aims to expand its outsourcing industry by 30 percent annually through 2015, and many companies are contemplating relocating their headquarters to China.
2.3 Eastern Europe Countries in the former Soviet Union have a good heritage of IT skills and experience, with an added advantage of being cheaper than other developed nations. They are geographically closer to Western Europe, so travel between sites is easier, and being in similar time zones makes real-time collaboration hassle-free. Even though Eastern Europe cannot begin to compete on cost or quantity when ease of management, location, and operational culture are factored in, this destination begins to look like a strong competitor, based on the following facts:
1. Highly-skilled labor: The legacy from the former Soviet Union laid a significant emphasis on engineering and sciences back in the day. It is because of this legacy that many of the resources from the countries of this region have gained deep knowledge in computer science. A labor cost lower than the one prevalent in the European Union and the US is another bonus.
2. Cultural similarities: Eastern Europeans have more in common with Westerners in terms of business culture and simple human qualities such as sense of humor and cuisines, along with creative minds of Eastern European developers, which are almost legendary.
3. Time zones: Little or no time difference at all creates perfect conditions for real-time meetings, allowing clients to fully monitor their development teams; personal meetings are just as real because Eastern Europe is actually nearshoring for Western Europe.
4. Ever-growing labor market: Constant resource shortages in the EU and the US provide scope for more IT professionals to thrive in Eastern Europe.
3. Comparative Study The following two sections present a comparative snapshot of India, China, and Eastern Europe. Various factors, such as availability and quality of labor pool, costs, geopolitical stability, processes, and infrastructure have been taken into consideration.
3.1 India and China
Parameters India China
ITO market size and process maturity
$70 billion: Annual IT services revenue (both domestic and offshore outsourcing)
Strong software development and process maturity programs, and clear branding India also boasts of a higher number of CMMI-certified providers
$20 billion: Annual IT services revenue (both domestic and offshore outsourcing)
Scarce processes and functional skills for requirement analysis, business process, design, and use- case development
English proficiency 232 million English speakers and an affinity to western culture on account of their past colonial connections with Britain
10 million English speakers, though 300 million may be learning the language
Nature of IT services
Penetrates into several segments of the IT services market including outsourced product development, BPO, KPO, and consulting
Focus remains on traditional IT outsourcing such as software and product development
Wage inflation Wage inflation continues to experience upward pressure
Annual income of an entry-level ITO worker: $8,400
Team lead (2-5 years’ experience): $17,000 Manager level: $30,800 (wage disparity increases)
Wage inflation is low, but Renminbi has been artificially maintained
China’s labor costs are cheaper, according to data from offshore outsourcing consultancy Neo Advisory
Annual income of an Entry-level ITO worker: $7,000 Team lead (2-5 years’ experience): $14,700 Manager level: $22,600 (wage disparity dips further to about 36 percent)
Infrastructure Weak investments, especially outside technology parks or special zones
Heavy investments in commerce-enabling sectors such as transportation, power supply, and broadband connections
Management maturity
Strong project management skills, continued investments to strengthen management capabilities
Advantage of entering this market in the 1960s (considering the punch-card era)
Shortage of experienced middle and senior-level management to supervise outsourcing engagements
Late entrant in the offshore industry (in the 1990s)
Supplier base Robust and competitive provider environment
Fragmented market
IT outsourcing client base
US and Europe Asian countries such as Japan
Cultural affinity Closer affinity to western culture Significant cross-cultural differences with US and European clients
Transparency Leading outsourcers promote openness More than 85 percent of outsourcing clients cited ‘Chinese inscrutability’ as a concern, according to Gartner, making relationship-building difficult
Legal systems and contractual agreements
Familiar legal system derived from the British with an independent judiciary
Contracting is similar to leading global players. It has a strong tradition of private contracting and enforcement
Derived from Soviet and continental legal principles; can be viewed as opaque, complex, and inconsistently enforced
China only recently moved away from trading agreement forms to more mature contracting capabilities
Currency risk Currency subject to market fluctuations Strong currency, but it does not float
Intellectual property
IP laws are similar to those in the western nations, but enforcing them may be a challenge
China only recently enacted IP laws, but security remains a top concern
India, China, and Eastern Europe have become synonymous with the offshore outsourcing industry. India remains a favorable destination because of its skilled labor, aggregated experience, maturity, and brand name. It will have to continue to push boundaries and move up the value chain at a reasonable cost.
China is becoming a destination of choice on account of its low cost, work ethics, and state-of-the art infrastructure. China will have to move away from the perception of being a low-cost, low-quality provider to a low-cost, high-quality supplier.
Eastern Europe is becoming a destination of choice for Western Europe, on account of its low cost, skilled labor, and cultural and geographical proximity.
As we currently stand, India is certainly dominating this market and holds a comfortable margin of lead. China and Eastern Europe, however, are fast posing a serious challenge to India. It will be interesting to see how these countries innovate and differentiate themselves from each other, and manage to stand apart from the crowd.
About Cybage Software Pvt. Ltd. Founded in 1995, Cybage Software is a leading offshore software services company offering solutions that accelerate, simplify, and enrich business processes to give its clients an edge over competition. We are an SEI CMMI Level 5 version 1.3 and ISO 27001 appraised company based in Pune, India. Our success is built on a pool of 4500 software professionals. Based on a remarkable record of quality, consistency, and outstanding technological prowess, we have partnered with more than 200 global software houses of fine repute. Our array of services includes Product Engineering (OPD), Enterprise Business Solutions, and Value Added Services. Cybage specialises in the implementation of the Offshore Development model.
The Cybage domain expertise spans across several business verticals such as Media and Entertainment, Travel and Hospitality, Healthcare and Life Sciences, Retail and Distribution, and Hi-Tech. Cybage has eight technology-focused Centers of Excellence (CoEs) – E-commerce, Enterprise Mobility, Customer Relationship Management, Business Intelligence, Enterprise Content Management, Cloud Computing, Education and Learning, and Supply Chain Management. Our unique model of operational efficiency, ExcelShore®, helps de-risk our approach and provides the best value per unit cost.
To know more about us, visit us at www.cybage.com or write to us at [email protected].
