While offshoring to India offers savings of up to 50% on labor costs, enterprises thinking of offshoring smaller initiatives should reconsider. The high technical skills and best-practices of the leading offshore providers are available only to enterprises considering offshoring the work of at least fifty staff. Avoid the very high risk in selecting and using a smaller offshore supplier.

Large Offshore Suppliers Have Good Track Record

The leading offshore providers in India have established excellent track records in the quality of application development support and in their ability to provide labor cost savings of up to 50% relative to North American and European domestic labor costs.

Smaller Players Are a Mixed Bag

Below the level of the European and North American major players such as Accenture, Capgemini, and IBM, there are a large number of small players - ranging from informal alliances of independent contractors, to firms of hundreds of employees and contractors. The situation in India is identical. There are thousands of tier-two firms, each of whom claims extensive expertise. 

As in Europe and the US, some smaller Indian players are very competent, but many are not. Most of these offshore providers have little or no physical presence in Europe or North America. Additionally, most do not have well-developed methodologies for managing projects and validating specifications and results with clients who sleep while they work.

Large Players Available Only for Large Initiatives

The large Indian outsourcers are focused on large clients. For example, Tata Consultancy Services employs over 60,000 people, but claims only 500 customers. Their sales and delivery processes are geared to large enterprises and initiatives. Even if a small client was able to negotiate an agreement, that client would have no leverage to get service priority equal to larger clients. The best staffs are assigned to the most complex and profitable projects, not to projects associated with small- to mid-sized enterprises (SMEs)

SMEs considering offshoring work to India are limited to working with one of the many smaller firms. They face several challenges:

• Limited sales presence outside of India makes searching for viable candidates difficult.
• Unfamiliar references make the evaluation process challenging, and SMEs will likely need to visit the prospective suppliers in India.
• Limited experience of the enterprise and most of the Indian firms make the contractual process complex.
• Overall challenges may arise in the ongoing management process, which leads to significant time delays, quality problems, and cost overruns.

Recommendations

1.Master outsourcing first. Enterprises with no experience or poor experience with contracting out IT work must gain that experience close to home before attempting offshoring - even with one of the major outsourcing providers. Outsourcing is risky in itself and offshoring adds significant new risks in to the mix. It's a poor place to learn the basics.

2.Combine initiatives to get scale. The larger the total relationship, the more likely that a major player will take interest. When an enterprise is planning to outsource, bigger is better.

3.Forget the big suppliers unless the initiative is big. The major firms will be interested in contracts requiring fifty or more of their staff. For anything less, the smaller firms are the only option.

4.Use trusted contacts for references. As is the case with smaller domestic players, positive references by trusted sources are the best way to find potential offshore candidates. Even then, question whether the success was in a similar context and whether it was due to overall organizational processes and discipline or due to superhuman effort by one or more exceptional contactors.

5.Push back on offshoring if unsure of delivery. Many boards and CFOs are pushing for offshoring to tap labor cost reductions. Unless the process and risks are understood, and the enterprise is able to deal with a major Indian player or has a trusted reference for a smaller player, offshoring creates major risks related to late delivery and unsatisfactory quality.

Bottom Line

While the major Indian offshore players are very competent and can save significant costs, they are only accessible for large initiatives. Think twice before offshoring to a small unknown offshore supplier, and not at all if there is no proven outsourcing or contracting experience in the enterprise. Management may be pushing for offshoring, but if the situation is not right, it is better to quickly say "no" and proceed with conventional approaches.