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Outsourcing to India

Learn about outsourcing to India and why companies choose the country.

Outsourcing to India has become a popular practice for U.S. companies. [©Jupiter Images, 2010]
©Jupiter Images, 2010
Outsourcing to India has become a popular practice for U.S. companies.

Outsourcing to India is the most popular choice for outsourcing in the United States. According to Cyber Futuristics, nearly 82 percent of companies based in the United States rank India as their first choice for outsourcing. The outsourcing market in India is growing rapidly, having increased from $800 million in 2000 to an estimated $17 billion in 2008. The most common services being outsourced to India include information technology (IT) services, such as software development, and data entry services, such as medical transcription.

How Outsourcing Works

Outsourcing is the process of contracting with another company to perform a specified set of services. These services are not generally considered to be part of the core business for the client company requesting the outsourcing and nearly every company outsources to some extent. The company that provides the outsourcing services is a third-party provider, more commonly called a service provider. Outsourcing has become popular because a service can be performed more efficiently by a company that specializes in that task.

A company can outsource a distinct business process or it can outsource an entire operation as is the case in business process outsourcing (BPO). This type of outsourcing can include the complete services of a call center, human resources department or claims processing department. BPO contracts can therefore be very large, sometimes covering a number of years and involving hundreds of millions of dollars. In addition, the employees in the department being outsourced are frequently transferred to the service provider.

A company that is short on time frequently uses multisourcing to meet a tight deadline. The internal staff is combined with a variety of outsourcing service providers to complete the tasks required by a new project as quickly as possible. Multisourcing is commonly performed by smaller companies, such a startup firm in software development.

The success of an outsourcing mission requires the support of executives in the client company, the ability of the client to manage its service providers and adequate communication with the employees that will be affected. The professionals who manage the outsourcing work must also be skilled in project management, understand service level agreements and adapt quickly to changes in the business. Offshore outsourcing has additional challenges due to differences in culture, language and time zone.

Advantages of Outsourcing

The primary advantage of outsourcing is that it allows companies to cut costs and remain competitive in their market. Companies that offshore outsourcing can usually reduce their operating costs by half since the service providers are able to use labor that is cheaper and more efficient. Technology and training costs are frequently lower as well. Outsourcing also allows companies to increase their productivity by allowing them to focus on their core business. This results in higher quality products at a lower price.

Potential Drawbacks of Outsourcing

There are some inherent risks with relying on another company. The client will be adversely affected if the service provider is unable to fulfill the contract due to bankruptcy, insufficient funding or labor difficulties. Service providers generally have many clients and are therefore more likely to be owed money by some of the other clients.

Companies considering offshore outsourcing should take into account the interests of customers and employees. People are generally opposed to offshore outsourcing and employees of the client company are especially likely to feel threatened by outsourcing. The immediate advantages of outsourcing may be outweighed by business and labor problems in the future.

Indias Outsourcing Dominance

India is almost synonymous with outsourcing and provides 44 percent of the world's outsourcing market for back office and software services, according to Thomas & Alex Financial Management Services. Major corporations in almost 100 countries use India for outsourcing.

India opened its markets at the right time and its economy is growing at the rate of seven to eight percent each year. This country also has a business environment that is conducive to outsourcing and generally provides a favorable combination of cost and quality with good customer service. India also has a culture that is relatively compatible with the United States.

India is currently experiencing great technical growth, making it an especially good choice for IT outsourcing. India produces 2.1 million college graduates each year with 120,000 of them in IT, giving it the largest number of IT professionals in the world and the largest English-speaking population of any country.

India has specific advantages over other countries that also perform outsourcing. The skills required for IT outsourcing are possessed by one-fourth of the engineers in India, whereas only 10 percent of the engineers in China and Russia have these skills. India has a stable democratic government and is generally considered to be a responsible nation by the rest of the world. It also has governmental policies that are favorable to outsourcing and a mature legal system.

Outlook for Outsourcing to India

Market experts believe that India will continue to lead the outsourcing market for the foreseeable future, although several factors may erode this dominance. The offshore industry may soon enter its maturity phase, and China is beginning to compete with India for market share. India also has slightly higher wages than competing countries, such as China and the Philippines.

Outsourcing Resources

There are international organizations that provide current information on suppliers in addition to news on the latest trends and developments in outsourcing. For example, The Outsourcing Institute is a professional organization with a free membership that is dedicated to providing consulting and networking opportunities for its members.

The National Association of Software and Services Companies (NASSCOM) is a global trade organization that provides an interface to the Indian IT outsourcing industry. It has over 1,200 member companies and strongly advocates free global trade in India. NASSCOM strongly encourages its members to adhere to the highest management practices and quality standards while remaining competitive in the highly volatile IT market. It also conducts various training programs to allow IT professionals in India to improve their skills.

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