Some analysts are predicting a dark future to IT outsourcing.

The reasons commonly advanced are:

• A depreciating dollar versus an appreciating Indian Rupee with no sign of recovery for the US dollar
• India, the current industry leader is suffering from skyrocketing attrition rates and salary increases. Tier-1 companies which already have established a significant presence in countries with cheaper labor rates like China or Eastern Europe can mitigate these risks; however the bulk of Indian providers cannot afford to go global and are left with little options; a situation that negatively impact the quality of their deliveries.

And these same analysts to conclude that with overall cost savings under the 20%, and a mediocre quality level, the goods days of outsourcing are over.

This reasoning might apply to India as a destination, but definitely not to the industry. The demand keeps growing in the USA, but ot new destinations, most to the advantage of China.

Outsourcing is not to fade away in the USA any soon:

• The tier-1 Indian companies are becoming global players; their cash situation (Infosys generates over $ 1B in profit each quarter!) associated to the favorable exchange rate between the rupee and the dollar give them a significant purchasing power, which they are eager to use. By becoming truly global players, they have the capability to adjust their offerings to every single market’s conditions
• The tier-2 and tier-3 Indian companies have lost their competitive edge, and do not have the breadth to go global. The future I can envision for them is to become either very specialized or privileged subcontractors of tier-1 Indian companies. I am sure that Indian leaders would prefer to tap into a domestic pool of talents, even if no longer at the best quality/price ratio
• The client base of the tier-2 Indian companies has started to move to other destinations, and China is leading the pack by far. Other booming destinations include Eastern Europe, Latin America, and Vietnam. These countries offer overall savings that are still over the 50%
• That said, prices in China and the others countries are also increasing rapidly. These newcomers must create a sustainable model, or they will likely face a situation similar to India’s.

  China for instance can certainly take advantage of the vast discrepancies that exist between its provinces to balance the prices in Beijing or Shanghai with the more affordable ones available in cities like Chengdu or Hangzhou, a luxury that many other destinations cannot afford, either per the small size of the country or per the poor country’s overall infrastructure.

• Unfortunately, there is another factor, and that is the decline of the education level in the USA. The country does not only produce enough engineers, but more tragically the overall education level is decreasing rapidly to say the least.

Each party involved is faced with a major challenge:

• India is faced with a profound reorganization of its IT outsourcing industry, both a flagship industry and a major source of revenue for India
• China is yet to create its own unique outsourcing model to accommodate the growth of its tier-2 providers. Since the Chinese industry is still very fragmented, China has no heavy-weight leader, and therefore this new model should be aimed primarily at tier-2 and tier-3 companies
• The USA must rethink their educational system entirely, a long haul and very complex task.

IT outsourcing will remain a growing industry in the coming years, and certainly for as long as the country does not produce enough engineers to cover its own needs.

• US large companies are likely to continue using the services of tier-1 leaders, that include the Indian ones
• US smaller size companies are likely to continue to massively redirect their sourcing to China and to a minor extent Vietnam or other emerging destinations.

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