There was big debate recently on the phenomenon of reshoring, i.e. reversing the offshoring / outsourcing decisions of the past many years in IT / BPO Services. The fact is the reshoring debate is more political than economic. While increasing labour
costs in offshore locations have taken away a reasonable portion of cost advantages, they are still significant.
India’s market share in the global IT services market is still less than 10%. Indian companies’ penetration in Europe is especially low and this market has been growing faster for them. While Indian companies are moving up the value chain to offset the commoditization of traditional service lines, projects are more complex with non-traditional deal constructs and companies need to hire more overseas. The net impact on these companies will be determined by their execution ability.
Cost Analysis of Offshore vs NearShore
An entry-level engineer in India costs about US$8,000, less than 20% of his/her counterpart in the US. Also, offshoring may not only be a function of costs, but also be driven by a lack of availability of certain IT services skills in the western countries. Offshoring also offers the user corporations a lot more flexibility—there is no need to maintain full-time large teams and skills can be acquired ‘on tap’. Finally as offshored projects get more complex, customer satisfaction issues with offshored projects will be no different than those with onshore/outsourced projects.
Despite the rapid rise over the past 15 years, India’s market share in the global IT services market is still extremely small, even if one adjusts for the fact that offshoring brings down IT budgets. Also, the proportion of IT services that can be offshored can be debated but Indian companies have been targeting various new service lines over the past few years. Indian companies have been able to grow reasonably well in that geography. This has been driven by their low penetration in Europe and the relatively low prevalence of offshoring adopted by European companies. This geography still presents ample scope for growth.
As Indian IT companies have grown larger, they have gained expertise in new segments and targeted larger outsourcing deals across multiple service lines. We believe that this process will continue. As older service lines get commoditised, newer ones will drive growth and help offset any pressure on average realisations. An increasing proportion of fixed price contracts in the revenue mix can also help realisation, depending on individual companies’ abilities to execute.