Offshoring is an inevitably

commercial reality of the times, right?  Right! Businesses can make valuable bottom-line savings by sending functions to cheaper locations overseas, right? Right! And India is the obvious place to send those jobs, right? Well, not necessarily...at least not any more.

It’s certainly the case that the offshore phenomenon as we understand it today has become almost inextricably associated with India in the minds of most people. There have been good reasons for this. The benefits of offshoring to India are well documented, including its highly skilled, low-cost workforce.

But every silver lining has its proverbial cloud, and it could be that India is about to become the victim of its own success. The first group of companies to set up shop in India got the cream of the crop when it came to the skilled workforce, but inevitably people are a finite resource, even in a highly populated country like India.

Companies setting up over there now may find that the available talent pool is no longer the best of the best. If they want the best, they may need to poach them and there’s only one way to do that: by offering more money. When you start a price war, the only way salaries are going to go is up and that starts eating into the much-trumpeted low-cost base. But if you’re not prepared to pay that little bit extra for the best people, then you’re settling for second best and that could start to eat into the quality levels of the service and, ultimately, customer satisfaction back at home.

If you want the same high standards of personnel that the offshoring pioneers got, you need to look at other locations. China and Vietnam are today’s up and coming high-tech offshore havens with vast, skilled talent pools. There’s the Philippines. New Zealand and South Africa are both making bold moves to attract business their way. And there is also the whole of the former Eastern Bloc, particularly countries that have just acceded to the European Union.

As these locations grow in popularity and expertise, the knock-on effects are likely to be extremely serious for India. Research firm Gartner is warning that a labor crisis and rising wages could cost India as much as 40 percent of its current business process outsourcing (BPO) market share by as early as next year. Currently some 85 percent of the global BPO market sits in India.

The economic consequences for India would be tough to take. In 2004, the Indian economy raked in the equivalent of $2 billion from BPO business while the BPO workforce topped a quarter of a million people.

The impact is tightening already. "Four years ago, a typical call center employee would have earned between 5,000 to 6,000 rupees a month. Now it may be up to between 7,000 to 9,000 rupees a month," said Sujay Chohan, research director of offshore BPO at Gartner in New Delhi. He adds that the rising wages bill could lead India to follow the mistakes made by Ireland a decade ago when a similar situation occurred.

To continue to prosper, it seems likely that the Indian outsourcing industry will have to consolidate and contemplate mergers to compete with global players. Forrester Research argues that the global outsourcing industry faces sweeping consolidation in the next two years that will mean the top-tier Indian firms will have to rely on acquisitions to survive.

It is interesting as well that there are increasingly loud voices calling in to question the security of India BPO operations. While the crime rate is nowhere near as high as, for example, in South Africa and the regime does not have the human rights track record of China, there are still many who question how safe India actually is, particularly for financial services firms.

According to a study of 200 companies by management consultancy KPMG, the preparedness of Indian firms to tackle fraud is remarkably low. Only around 28 percent of the respondents claimed that they had witnessed a fraud committed by outsourcing vendors.

"Over the last few years, the frauds within the BPO sector have not only increased in occurrence but also managed to change its forms,” said KPMG India Executive Director and Head of Forensic Deepankar Sanwalka. “The development of new threats has been faster than what the BPO world could ever imagine or even come up with.”

So are India’s glory days behind it? Realistically, not for a long time. It may be that costs to companies making the move there will rise, but they will still be considerably cheaper than the domestic alternative.

Certainly NASSCOM, the Indian IT lobbying association, does not seem phased by recent developments. NASSCOM argues that wage inflation is a temporary phenomenon caused by a short-term mismatch between supply and demand and that the industry will balance it out as it matures.

"Our research shows that the Indian IT sector will remain cost competitive on the basis of total cost at least until 2015," said Sunil Mehta, the vice president of research for NASSCOM. "And the salary increases are being offset by declines in other costs like telecom, improvement in productivity and the sheer economies of scale."

That being the case, many global businesses are likely to continue to take the passage to India for some considerable time yet.

By Anna Frazzetto, VP of

Technology Solutions, Harvey Nash

It wasn’t too many years ago that I was the skeptical IT executive. Unconvinced of offshoring—its value and its feasibility. I was extremely skeptical that IT professionals—no matter how talented or experienced—in far off countries and from exotic cultures could manage IT services and projects quickly and effectively for U.S. companies.

Outsourcing I knew and understood well. For nearly two decades, I have managed effective BPO solutions for Fortune 500 and small- and mid-size businesses alike. I have seen countless ways businesses benefit from handing over certain IT functions to expert service providers who offer the right skills and methodologies and adhere to aggressive service level agreements in order to drive significant business improvements.

However, I readily admit that though I consider myself a forward-thinking technology professional, it took time for me to see the grand vision of offshoring. I love the talented IT teams I have worked with across the U.S. and did not like the idea of taking work away from them. I believe strongly that IT can be a powerful business advantage and wondered if sending IT functions overseas was simply a way of trading that advantage for a good discount on technology services.

In addition, the IT world had seen several high-profile offshore deals in India (Dell customer support for example) fail miserably. And there were also the horror stories of offshore projects quickly getting off track, taking twice as long as they should and hitting upon tough communication barriers. These early challenges were enough to keep me extremely cautious as I searched for today’s most effective offshoring opportunities and locations.

Over the last several years my skepticism has turned to rampant enthusiasm as offshoring has matured into a highly competitive global sourcing strategy that allows businesses to find the best IT services and talent worldwide for the best price. Offshoring has allowed IT teams at home to focus on more strategic business objectives and innovations as administrative and routine functions are handled by extremely skilled offshore teams.

Offshoring has also exploited remote communications and collaboration technologies, demonstrating how well work can be done and managed ANYWHERE and ANYTIME. The key to offshoring success as I see it is much like the key to outsourcing success: You must select a partner that is capable of mirroring your operations, one that follows best practice methodologies for delivery and one that creates a viable communication model for project deliverables.

I knew how well offshore was working but never had the full picture until quite recently. This April I had the pleasure, as well as the adventure, of spending time in what is quickly becoming one of the world’s premier offshoring locations: Vietnam. Harvey Nash has three highly successful offshore development centers operating in Vietnam and I traveled 22 hours across the globe to see how world-class offshore solutions are managed and delivered.

I would like to share with you some of my Vietnamese adventure—from culture shock to the comfort of world-class IT excellence—so you can see one aspect of how a skeptical IT professional becomes a cheerleader for IT change and global sourcing. Please enjoy these brief notes on Vietnam and feel free to contact your local Harvey Nash office or me directly, with any offshoring questions or insights you may have.

Touching Down on Unfamiliar Ground

They say that all airports look the same if you travel enough. The Hanoi airport was modern and bustling like the majority of the airports you run into here in the U.S. However, it was bigger and newer. I was surprised to hear English everywhere. As I quickly learned, most Vietnamese citizens are multilingual and English is widely spoken throughout the country.

While I am sometimes greeted by a driver at airports who will escort me to the hotel, in Hanoi I am greeted by one of my Vietnamese Harvey Nash counterparts who welcomed me in full traditional dress (long silk dress with white pants underneath) and with a bouquet of enormous flowers. This is how all Harvey Nash guests are greeted in Vietnam.

A New, Busy World

The flowers and the escorted drive to the hotel made me feel right at home. However, the drive to the hotel reminded me how far from home I really am. On one side of the car I saw towering modern offices while on the other side were endless, perfect rows of rice fields. Once at the hotel, I decided to take a map and a short walk around the city. The traffic was congested beyond recognition and unlike anything I have ever seen, even in New York City. There were motorcycles, cars and bicycles all driving in the same crowded streets but not obeying any discernable traffic rules. These marvelous city streets were thrilling, but I was very glad I would not be driving them those first few days.

A Hardworking Place

The next day was Sunday, which meant a bit of sightseeing for me. As I set out to visit the nearby countryside where world-famous ceramics are made and ancient temples stand, it seemed that all of Vietnam was hard at work. It was a beautiful Sunday morning but from the work going on around me, it felt like a Tuesday morning in Chicago.

Getting Down to Business

Monday morning came and it was time for me to get to work with the rest of Vietnam. I began with my first visit to the Harvey Nash Hanoi offshore development center. It is a high-tech, highly secure facility that could be placed in any Silicon Valley or Alley around the world. Both Microsoft and Intel have R&D facilities in Vietnam. The Harvey Nash development center was designed and built by many of the same experts who contributed to Microsoft’s thriving R&D center.

The development center is CMM Level 5, TMM Level 4, ISO 9001:2000 and British Standard 7799 certified and you know why from the minute you walk in. The work environment is friendly but focused with teams clearly concentrated on meeting deadlines in hemispheres and time zones far away.

Meeting the Staff

In the development center hundreds of highly skilled technologists (all with degrees and many of them advanced) work on development and quality assurance projects for businesses worldwide. Approximately 40,000 people graduate with IT degrees in Vietnam annually and that number continues to grow. Harvey Nash strives to recruit the cream of the crop from that crowd and is proud to be an employer of choice for skilled IT experts in Vietnam.

The Harvey Nash Vietnam team utilizes cutting-edge technologies. Again and again, I had to remind myself that I was thousands of miles from home in a far-off country. With the high-tech tools in front of me and English spoken all around me, it was too easy to forget that this was not the IT department of a Fortune 500 company back home.

Tracking and Measurement

Next I had the chance to witness how projects were managed on the Vietnam side of the equation. I have delivered Harvey Nash offshore solutions working from the U.S. and was excited to see how delivery looked from the other side. Once again, the processes were all too familiar. Every project is tracked and measured according to a rigorous internal measurement system. For example, we track lines of code, defects per line, defects per project, defects per developer, defects when turned over to client, number of change requests and on and on. The list is almost endless.

I admired how each developer and tester takes great pride in her or his work. Across the development center, technologists compete amongst each other to achieve the next level of quality measurement. It makes for a fun, competitive and highly effective work environment. So fun and effective, in fact, that the Harvey Nash development centers see less than 1 percent turnover annually.

Long, Successful Days

The Vietnam development centers are staffed and operated to support clients from Asia to the U.S. That means hours of operations are long and teams are taking calls and meetings as early as 5 a.m. and as late as 11 p.m. By the time I was tired and ready to go home each night, developers and project managers were preparing for their next client call. It was amazing to see teams speaking in Vietnamese and code quickly switch to English and begin discussing projects with colleagues and clients across the globe. I meanwhile was struggling to perfect small Vietnamese phrases like “thank you” and “I would like to order…”

I also saw how the Harvey Nash development center was a microcosm of Vietnam itself. Just as our offshore teams bend over backwards to serve and support clients, Vietnam as a country is bending over backwards to welcome and integrate Western businesses into its stable and rapidly growing economy. In the Harvey Nash development centers and throughout Vietnam, the quality of responsive, attentive customer service is unparalleled in the world today. Customers are treated with the utmost respect, making it once again a great pleasure to be a customer.

World-class Service the World Over

Over the next week, I dove into the development center and saw firsthand what IT leaders everywhere know well: World-class development and QA is world-class no matter where in the world it is happening. While cultural differences in Vietnam will continue to surprise and awe me—whether it’s the spicy food, how ancient customs mix so beautifully with modern life or the tricky language—I am not at all surprised that Vietnam is the next great frontier for innovation and the world’s premier source for conscientious, reliable and cost-effective IT solutions and support.

Vietnam is rapidly becoming

one of Asia’s leading high-tech corridors. One important global ambassador of IT excellence and his visit to Hanoi demonstrates this fact.

Microsoft Chairman, Bill Gates (seen here with Phan Van Khai), visited Vietnam last month, as part of Microsoft’s wider recognition of Vietnam’s information technology development. During the one-day visit, Gates met with Prime Minister Phan Van Khai and received a rapturous welcome from Vietnamese students and representatives from the information technology (IT) community, especially those in the education and training field. Gates also received a standing ovation following his address at the Hanoi University of Technology, where he participated in discussions surrounding new measures to promote the IT industry in Vietnam.

The Ministry of Post and Telematics was heavily involved in preparing the program and content of the talk between the Prime Minister and Gates. Vu Due Dam, deputy minister of Post and Telematics, said that the visit was one of the most remarkable events Vietnam’s IT sector had experienced.

“We hope that through the visit the two sides will be able to promote detailed works for a long-term and strategic partnership,” says Dam. He said cooperation between Vietnam and Microsoft regarding human resources would be very easy to develop because the government’s policy in this area is similar to Microsoft’s demands.

“The thing is to balance the supply and demand between the two sides. For instance, Microsoft should clarify its demands for the number of people they need, as well as specifications and languages for the first five years and then 10 years. Based on this information, Vietnam will be able to introduce measures to satisfy the requirements,” said Dam.

The visit, along with the recent decision by the government to license Intel to build a chip-manufacturing factory in Ho Chi Minh City, has boosted the country’s image in the information technology world. Deputy minister Dam said that Microsoft and Vietnam need to work toward establishing a level of project investment similar to Intel, for example by forming a research and development center. “We hope Bill Gates’ visit will be a remarkable milestone and hopefully result in decisive outcomes,” said Dam.

Vietnam has also received interest from IT investors from other companies, which invest in human resources to write software. “Vietnam has strong human resources and the chances of the country [receiving investment from Microsoft] in the future are looking very bright,” said Christophe Desriac, Microsoft country general manager in Vietnam.

The Ministry of Education and Training and Microsoft have already teamed up to execute the Partners in Learning Program to train 50,000 teachers in a bid to reach two million pupils at secondary schools in Vietnam over the next five years. The program will initially run in 12 provinces and cities and aims to encourage the integration of information and communication technology in teaching and studying. Its goal is to build a sustainable model of using technology to promote skills in order to help both teachers and pupils develop.

Microsoft also plans to initiate the Unlimited Potential Project using cash, curricula, equipment and software donations from the U.S. Agency for International Development and Qualcomm to upgrade and/or establish one community technology learning center in all 64 provinces and cities in Vietnam.

No Apple for India

Apple Computer Inc. has

shelved plans to build a

sprawling technical support center in Bangalore. Just three months back, Apple appeared

to be making plans to hire thousands of workers in the coming year to handle support for Macintosh computers and other Apple gear. However in May, Apple dismissed most of the 30 new hires and an Apple spokesperson said that they company had "reevaluated our plans" and decided to provide support from other countries. Another source says the decision was cost-driven as India is no longer as inexpensive as it used to be.

Small IT Services Providers Growing

Independent market analyst Datamonitor has found that the world's 50 largest IT services vendors booked combined revenue of $262 billion last year. Though they are growing, these large providers grew at a slower rate than the overall market, which indicates that might be losing out to smaller, focused vendors. Nick Mayes, Principal Analyst for Global Computing Services at Datamonitor, noted: “Pricing pressure is sweeping through infrastructure and applications services, and clients are opting for smaller outsourcing engagements rather than mega-deals.”

EDS Helps the Rise of Asian Offshoring

China and Singapore are the latest challengers to India’s dominance in the IT offshoring sector. Services giant EDS plans to expand its presence in China, and Singapore is offering tax breaks for IT investment. EDS is looking to build up its existing operations in Beijing, Chengdu, Guangzhou, Hong Kong and Shanghai, in a bid to attract more business from Chinese companies and multinationals operating in the country.