Source: sify.com

Bangalore: Hit by rampant attrition, high costs, operational problems, lack of scale and poor delivery track record, captive centres in India are losing ground to the R&D service providers who see quick growth.

Ajay Kela, Chief Operating Officer and Managing Director, Symphony Services, said in the next 10 years, 75 per cent of the outsourced product development work would be with the service providers. At present captives get 75 per cent of the work, and only 25 per cent is given to service providers.

Indian market

Kela expects the global product development outsourcing market to touch $14 billion by 2010, up from the present $9 billion. The Indian market is worth about $3.5 billion, he said.

Analysts, too, are optimistic about the growth of the R&D service providers. Forrester Research in a note said by 2009, diminished reliance on the captive strategy would accelerate third-party market for product development.

About 60 per cent of captive centres fail to meet expectation, and in the next three to four years, 40-60 per cent of captives would either stop work or partner with the Indian service providers, Forrester added.

High costs are one of the main problems for the captives. According to Forrester, a captive centre of 150 people can cost $2 million a year more than using a third-party provider for the same work.

Also, in most instances, the work in captives is mundane and related to old projects, leading to high attrition level. Srinivasan Chandrasekhar, Senior Vice-President, Aztecsoft, said companies often offshore low-end work. Skilled people hired by the captives have different expectations and they leave, he explained.

Weak processes

Many captives fail because of their own weak processes. Forrester Research said processes designed to work within the four walls of the company buckle when deployed at a global level.

Moreover, because captives do not invest enough in process improvement measures such as CMMI, Six Sigma, or security certifications, their resource utilisation is at least five to 10 per cent poorer than the industry average of 75 per cent, Forrester said.

Companies having captives outsource because it is not possible for them to develop all the competencies.

Source: www.businessweek.com
With Indian wages rising and the rupee strengthening against the dollar, some IT services companies are opening facilities in the U.S.

It’s hardly news when India’s Tata Consultancy Services (TCS) opens a new outsourcing facility, unless it happens to be in Ohio.

TCS, one of the world’s top hired guns for corporate IT and back-office services, opened its first U.S. software development center in a suburb of Cincinnati on Mar. 16. And it’s hardly alone. Rivals including Accenture and India’s Wipro are pursuing similar ventures in unexpected places around the U.S., from Oregon to Arizona to Georgia.

Make no mistake. There’s still plenty of money to be saved by shipping work to far-away places with cheaper labor. Yet the economics of outsourcing are changing: With wages rising sharply in India and the dollar’s value sliding against the Indian rupee, “there’s been a 30% change in cost over the last year,” says Andy Singleton, chief executive of Assembla, a company that organizes distributed software development teams. Three years ago, it didn’t make sense for Assembla to hire anyone in the U.S. because labor costs were so low in India. But now, “as costs change, we end up with a lot more Americans,” Singleton says.

Niche Opportunities for the U.S.

While India is still a great deal for many companies that want to cut costs on high-tech workers, some experts predict the labor savings there could evaporate in 5 to 10 years. That has spurred some interest in lower-cost labor markets in the U.S. “We’ve seen quite a few small, rural sourcing projects,” says Doug Brown, partner of Brown-Wilson Group, an outsourcing consultancy.

If nothing else, these new IT facilities in unexpected places provide an intriguing alternative to Silicon Valley and other pricey high-tech hotbeds. A July, 2007, report from the Information Technology Association of America (ITAA) estimated that midsize metropolitan areas and rural communities could provide a 30% cost savings over top-tier IT hubs in the U.S. The report acknowledged that overseas outsourcing is here to stay, but stressed there might be a niche opportunities in low-cost domestic outsourcing.

Tata says it opened the new software center in Milford, about 16 miles northeast of Cincinnati, because it is trying to be more global and it also wanted to show its commitment to the U.S. The facility is expected to employ up to 1,000 people. “People have criticized the Indian outsourcing industry as exporting people and not investing in the U.S.,” says Gabriel Rozman, executive vice-president of emerging markets at TCS.

Cheaper Cost of Living

Rozman says TCS chose Milford in part because of its proximity to customers in the Midwest and on East Coast, as well as its strong talent pool. It also helps that the cost of living in the greater Cincinnati area is nearly 10% below the national average, according to the American Chamber of Commerce Researchers Assn. (ACCRA). And compared to Silicon Valley, the cost of living is 42% lower.

The notion that lower-cost U.S. markets might be ripe for outsourcing businesses began percolating a few years back. Accenture (ACN), which already had considerable outsourcing operations in major U.S. markets, announced a five-year deal in late 2006 to manage Cayuse Technologies, an outsourcing business started by the Umatilla tribes on a reservation in Northeast Oregon .

Kathy Brittain White latched onto the idea even earlier, starting Rural Sourcing in Durham, N.C., and Jonesboro, Ark., back in 2004. “Why do we have to go offshore when there are many areas in the U.S. where there are good universities and 50% less cost of living?” asks Brittain White. The cost of living in Jonesboro is 45% lower than in Silicon Valley and 13% below the national average, according to the ACCRA.

Shortage of Talent

It wasn’t until more recently, though, that foreign outsourcing firms began setting up shop in the U.S. Aside from TCS, India’s Wipro announced in August, 2007, that it would open a global software development center in Atlanta with plans to hire 500 workers. Brown says his firm has done some site evaluations in the rural Southwest around Phoenix and Albuquerque for foreign companies interested in starting outsourcing operations in the U.S.

But one big obstacle to this trend is the limited availability of highly skilled IT professionals, according to the ITAA report. AT&T (T), for example, had trouble finding talent when it agreed to move 5,000 jobs back to the U.S. from India, forcing the company to set up a training program.

At least one outsourcing firm in the Cincinnati area is concerned that Tata will boost competition for talent. “I will certainly now have competition that I’ll run up against [in recruiting],” says John Bostick, chief executive of dbaDirect, a database outsourcing firm. DbaDirect is located in Florence, Ky., about 30 miles from the Tata’s new center. Still, Bostick says he’s happy to welcome TCS to the neighborhood. “Inevitably it will help the economy by bringing capital to the area.”