India reigns the Offshore Outsourcing Industry
India is the leading country for offshore outsourcing. The offshore outsourcing industry started in India and it has been able to grow the IT and BPO export sector to $47 billion and capture more than half the offshore outsourcing industry. That is not to say that India does not have challenges or is the best location for every offshore outsourcing effort, but it has an unparalleled history and size.
IT and BPO services outsourcing first started in India in the mid 1980s. The large, English speaking, low-cost workforce was the main attraction. The industry grew rapidly through the 1990s aided by the dot com boom and IT upgrades to prepare for potential Y2K bugs. The 2000s saw similar growth with work moving to India in down cycles to help companies cut costs and in boom times to capitalize on the readily available talent.
Outsourcing to India can provide significant direct cost savings. Wages, the largest component of costs, can be one tenth to one half those in the US. However, the rapid growth of outsourcing to India has lead to significant wage inflation especially for higher skilled employees. Other locations such as the Philippines, Pakistan, Indonesia and Egypt can have some less expensive resources, but the differences are not always significant.
Employee compensation is the largest cost component for any outsourcing operation whether it is web development, application maintenance, human resource outsourcing or customer care. A typical project or outsourcing effort will include a number of junior resources, and some high-skilled, senior oversight and project management. Junior resources typically provide the largest cost savings and India is no exception. In the information technology area, software engineers/ web developers with 1-4 years experience are about 11% of those in the US.
Senior software engineers/ web developers with 10 to 20 years experience are about 30% the cost of comparable resources. Similarly, IT project managers with 10 to 20 years experience are about 30% of comparable resources in the US. Junior voice and non-voice resources are about 10% to 17% of their US counterparts. At the more senior levels, high skilled BPO employees and operations mangers command about 21% to 27% of their American colleagues.
Real estate and taxes
Other common outsourcing costs are typically lower in India, but there are some exceptions. Office occupancy costs vary across cities and from central business districts to the suburbs. Most Indian outsourcing operations will have lower occupancy costs than similar US operations. Taxes in India can be high and companies pass these costs on to their customers in the US and Europe. Corporate tax rates are about 34%, higher than many other outsourcing locations. Indirect taxes i.e. value added taxes (VAT) are relatively low at 12.5%.
Work Force and Offshore Outsourcing Sector Size
Based on this workforce and its early entry into the global sourcing market, India has built the largest export sector for IT services. India exports about $50 billion in computer and IT related service. This is about four times that of the United States and almost an order of magnitude greater than any other location.
Education and Skills
The rapid growth in outsourcing to India has been built on the availability of educated and skilled workers. India’s universities produce almost 3 million new graduates each year with about 16 percent focusing on science and technology. The total number of graduates is similar to that of the United States and only second to China.
Another significant advantage for India is the prevalence of English language skills. English is typically the language of instruction at Indian universities thus most university educated Indians have a good grasp of English. However, if you have experienced the performance of a low end Indian call center, you know that the quality of English language skills can vary.
The level of technological readiness of Indian resources is relatively good. India has very low home based internet access rates, however the impact is minimized via high accessibility in universities and the workplace.