Brief

Threat to Indian offshoring: Hackett

The “second wave” is coming. This is a wake up call to Indian outsourcing and offshoring industry. In a recently released study titled Transforming and Offshoring Finance Processes: Timing is Everything the Hackett group has pointed out that an increasing number of companies are moving towards transformation. It points towards a decreasing reliance on Lift and Shift outsourcing models. According to Hackett, the ability to offer transformation support may be the most significant opportunity, and possibly the greatest threat that offshore markets like India will face in the next five to 10 years.

The study shows that offshoring does reduce costs significantly, however selectively integrating transformation and process improvement efforts into the globalization efforts of a company can increase these savings by over 50%. Earlier research on Lift and Shift from the Hackett Group showed that simply moving current-state processes offshore provided significant savings to the tune of $120 million annually. With the combination of process Transformation and Lift & Shift, the savings went up to $185 million annually.

The Hackett group has split up the whole outsourcing phenomena into three waves; Lift and Shift which was the first wave and is now slowly coming to an end, the second wave or Transform and then Shift has begun and finally the third wave which involves Significant Transform and then Shift.

India’s IT offshoring boom can largely be attributed to the first wave which has focused on the low-hanging fruit of basic transactional processes that could be simply moved offshore to garner labor arbitrage savings, without significant transformation. However, as companies move beyond this phase, transformation becomes not merely an option but a necessity. The rapidly increasing cost base after migration to the offshore market is a challenge that most global companies are facing. Transformation can provide an answer.

However, the coming of the second wave is a mixed blessing. Janssen said, “As the market for offshore services matures, outsourcers and captive shared service operations need to get much smarter about the services that they offer; the best will find ways to offer integrated transformation and process improvement. Any offshore solution must combine changes to the business process during and after the offshore move is made to ensure value maximization for all stakeholders.”

Transformation undoubtedly offers greater benefits to companies. However, this also means that the basic transactional outsourcing that Indian offshoring specialists thrive on is going to see a steady decline. The offshoring market is maturing and labor arbitrage is no more the universal panacea that Indian companies relied on. With the decreasing relevance of large headcounts, are Indian offshoring companies ready for this new challenge? The answer might just hold the key for survival and evolution of the Indian IT sector.