Why India Is Not a Model for the Nearshore

In Latin America the respect for India’s outsourcing sector verges on reverence. The region was a latecomer on the outsourcing scene, and while it is growing fast, Latin America still accounts for less than 10% of global BPO/ITO activity. So the rose-tinted view is easy to understand. In the process of fashioning the business of global services outsourcing, Indian heritage firms created millions of good, middle-class jobs. The business model is the envy of other countries in the developing world.
For sure, the central element of India’s success in business process outsourcing — an immense pool of human technical talent combined with English language skills — warrants high praise. But Latin America, and Mexico in particular, where the fascination runs especially deep, needs to get over India as a model for business services,for two big reasons.
First, India’s rise to BPO behemoth owes in large part to the uniquely broken economy that the country had until recently. In the early 1990s, India was a country shaking off the effects of the Permit Raj, a labyrinth of regulations and licenses that made doing business in India (legal business, in any case) a nightmare of paperwork and bribes. Stories occasionally still crop up of an obscure regulation put in place 50 or 100 years ago that’s enriching a small group of inspectors by legally preventing common-sense handyman fixes. Atop this, the country was cut off from foreign inputs and technology because of high tariffs.
The services sector, however, faced relatively fewer restrictions. Indian entrepreneurs collectively formed an understanding that they should focus their energy on business services, because the structure of the economy all but prevented them from channeling their prowess into sectors like manufacturing. Infosys and Tata Consultancy Services were among the first to harness this entrepreneurial energy and exploit it, thus becoming successful global firms.
Second, even in India the future of business services is more in question than ever. The offshore model that India epitomized relied heavily upon labor arbitrage, and while India is still cheaper than many other offshore locales, the margin is shrinking fast. For example, in 2012 a junior-level software developer made about $25,000 a year in India, according to a recent article in the Wall Street Journal. Now though, that same programmer is making about $45,000. As more venture capital funds software development, programmer wages are set to continue rising at a fast clip, making the key Indian markets more expensive for software development than many nearshore markets.
With regard to classic business processes, India’s major outsourcing firms have a lost a step to their U.S. and European peers when it came to embracing the cloud. Now, as the recognition sets in, Indian engineers are plying their trade by moving applications into the cloud. The outsourcing model is moving into the “as-a-service” paradigm. The final reckoning is still a ways off, and the balance sheets of the majors paint a positive, if misleading, indicator of corporate health. But the warning signs are there. The days of Indian BPO, defined by human performance of rote billing processes and the like, are nearing an end.
Indeed, in its own way, the Indian government seems to share this view. Instead of BPO fueling the country’s future economic growth, Prime Minister Narendra Modi is emphasizing manufacturing through his “Make in India” campaign.
(image via Bloomberg)
This does not spell doom and gloom for outsourcers. Actually, in many ways the business services model is tacking in favor of the nearshore. Regular and real-time interaction among programmers, epitomized by Agile software development methodologies, is becoming a key trait of successful software development. Consumer trends could drive rapid growth of video game development in Mexico, just as demand for niche BPO, including knowledge and legal services, promises opportunity for firms from Uruguay to Jamaica. Going forward, outsourcing will be less about cost and more about having the right talent at the right place in order to deliver in-demand services.
There are inklings of Indian BPO moving toward the United States. Earlier this year the Times of India reported on the growing trend of CEOs of Indian global services firms moving their offices to the U.S. The article noted that the companies in question (Wipro, Infosys, and Cognizant) made the move because of a “need to build deeper engagements with key customers as Indian IT’s competitiveness vis-à-vis global players diminishes and as mobile and cloud transform the technology world.”
Across the nearshore, we tend to coo at quadrant graphics whenever they show the leading position of Indian heritage firms. Among the most impressed in Latin America are some firms in Mexico. They express a high regard for Indian businesses that often seems to be followed by a silent question: “Why don’t we have that?” The Mexicans should console themselves with the fact that they have an economy that is more competitive globally than India’s.
For Latin America as a whole to move forward in the delivery of global services, creating good jobs and moving up the value chain, it will have to forge its own path. They should draw the best lessons that India offers — the focus on technical education and directing those with that education toward good careers in business — and look beyond the Banga-lore of India’s outsourcing prowess.