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The pressure to reduce costs comes from several fronts, notably the strengthening rupee against the U.S. dollar, rising salary costs in India, and the need to spend on new service centers around the world to serve customers locally and compete with multinationals.The rupee has appreciated by about 12 percent against the dollar since the beginning of the year. The appreciation pushes down the revenue in rupees earned in the U.S. by Indian companies, even as staff costs in India rise. The U.S. is the largest market for Indian outsourcers, accounting for about two thirds of revenue earned abroad.
Troubled by high staff attrition in India, which often disrupts work on projects, customers in the U.S. are increasingly looking for alternative countries for their outsourcing projects, industry analysts say.
The move by customers comes as Indian outsourcers are aggressively cutting costs. Some of the costcutting could impact quality of service, giving customers another incentive to take outsourcing projects elsewhere.
The frequent staffing changes caused by attrition, combined with increased staff costs, have lowered customer satisfaction with outsourcing to India, said Sudin Apte, senior analyst and country head for India with Forrester Research. For the first time, some customers are making a concerted effort to find alternative locations, he said.
As Indian outsourcers trim costs, there are concerns that it will impact quality of service, particularly if they start to employ less experienced staff to reduce salary costs, said Siddharth Pai, a partner at the outsourcing consultancy Technology Partners International TPI, in Houston.
Demand for higher prices to offset the weakening dollar is also putting customers off, Apte said. And maintaining quality while cutting costs is a tough balancing act, he noted.
The impact is likely to be greatest on smaller outsourcers, since the larger ones have more alternatives for cutting costs. Smaller providers will likely be acquired eventually, or will have to differentiate themselves and move away from commoditytype services, Apte said.
Thats the strategy of KPIT Cummins Infosystems, a small outsourcer that serves the manufacturing and financial services sectors. Offering a broad range of services, including IT, product design and business process outsourcing, to a few vertical markets, will help it compete better with larger players like Wipro and Infosys Technologies, said Sachin Tikekar, the companys chief operating officer.
KPIT Cummins is trying to counter the impact of the weak dollar on its margins by getting into higher value businesses like product design and reusable components, he added.
For sure, the news from India is not all bad. Top outsourcers like Wipro, Infosys and Tata Consultancy Services managed to report higher margins in the last quarter, mainly through currency hedging, improved productivity and cost cutting.
Indias advantage is that there is not yet a clear alternative to the country for offshoring. While places like China, the Philippines and Latin America are emerging as alternatives, many analysts say India still has superiority in processes and quality, and it allows customers to quickly scale the number of staff working on their projects.
Where else in the world can one company go out and hire 17,000 new graduates, and make them deliver with minimal training, asked Pai. Salary increases are high mainly among senior and middlelevel staff. Entrylevel salaries have gone up by 6 percent per year over the last five years, is in tune with the rate of inflation in India and not too worrisome, he said.
Indian providers accounted for 24 percent of the outsourcing contracts advised by TPI in the third quarter, up from 20 percent in the first half of the year. Indian companies are winning larger contracts than before, and being invited to bid for more contracts, particularly those involving application development and maintenance, Pai said.
But costs for Indian companies will rise further as they set up facilities closer to their customers, where costs are often higher than at home. Wipro, for example, is setting up a software development facility in Atlanta, Georgia.
Some clients want services delivered from locations in the same time zones, or simply closer to them geographically. European customers tend to prefer delivery from Eastern Europe, particularly for business process outsourcing, while some U.S. customers prefer delivery from Latin America for remote infrastructure management.
In many ways, Indian outsourcing companies are having to emulate the big multinational services companies they compete with, such as IBM Corp., which already have a worldwide presence. This means costly investments, and Indian outsourcing companies will have to reconcile themselves to smaller profit margins in the future, Pai said.
The alternative is to pass more of the costcutting onto customers, which will lower satisfaction levels further and cause more customers to look elsewhere.
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