Economics of Offshore Support in the Software Industry

As the United States is continually seeing a sluggish economy, many corporations are seeking ways to help the bottom line. Within the software development industry, many companies are taking advantage of the world economy and the emergence of highly technical third world countries like India and Pakistan.

At this time, outsourcing in India has become the rage of the industry and many of the U.S. based software companies. According to Cyber India Online Limited, companies like IBM, Dell, GE and Microsoft (CIOL) are providing and or expending their back office support out of India. Companies like Dell reportedly plan to move its entire tech-support operation there. A Nasscom-McKinsey ( study indicates that by 2008, India’s “business process outsourcing” industry will take in $21 billion and employ 1.2 million, more than 1 percent of the population. For a country that embraces technology as a way out of poverty, that’s no less than a revolution.

For businesses looking to cut costs in tight economic times, the main advantage of shifting support work to India is obvious. According to MSNBC, in New Delhi entry-level recruits earn around $3,500 a year, a fifth of what they’d get in Europe or the United States, but a decent wage in India.

India can’t provide jobs for a fourth of its English-speaking college graduates, so a call-center position may be a career, not a temp gig. Most staffers are not only well educated but also highly motivated; outsourcers say they make fewer mistakes than American employees. E-Funds International, a spin-off of the check manufacturer Deluxe, claims one of its Indian operations cut data-processing errors by 90 percent.

Indian outsourcing offers extra advantages for huge multinational companies like GE, which according to its website has set up its own mini-firm, GE Capital Services, to handle much of its back-office work. GECAS, as it’s known, is based primarily in India, though it also has centers in China, Hungary, Ireland and elsewhere. It allows the company to operate around the clock in 24 time zones. The Indian group employs 13,000 people. With that work force and an established track record, GECAS is planning to take on clients outside GE. What began, as an internal attempt at savings has thus become a business in its own right.

There are many challenges facing Indian outsourcing, including cultural ones. With language, understanding the sense of urgency and other soft skills issues, the Indians need lots of training to overcome these difference. Beyond the cultural issues, there are times where the basic infrastructure is not as advanced as in the U.S. Many companies have to install highly technical solutions; such as dedicated satellite systems to compensate for the existing Indian infrastructure. Most call centers have to install multiple backup generators in case the electricity supply breaks off (which it often does). Local water systems can also be unreliable, meaning a call center may have to build its own mini municipal government. American call centers spend most of their money on labor and less on infrastructure; in India, it’s reversed.

One risk that American companies may face is while proclaiming their cost reduction strategy to their stockholders they are forbidding there support centers to reveal their real locations. At times and in today’s heighten concerns on technology, some customers may feel uneasy or reluctant to discuss there software technical issues with a non US support engineer.

Another concern of many and may be more serious is the reservations coming from the AFL-CIO, which views foreign outsourcing as the latest way companies are taking jobs away from Americans.

Despite these issues, most analysts and companies see a bright future for overseas outsourcing—and not just in India. Admittedly, it does share some features with the dot-com bubble; it has grown astonishingly fast, and smaller companies are now being bought out. But outsourcing doesn’t appear to be headed for the same fate. Thanks to the heavy initial investment required to build a foreign outsourcing company, the Indian firms have generally been solid, and other countries are starting to copy them.

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