Hamilton calls his model “the future of outsourcing in America” and argues that currency exchange rate fluctuations and other factors such as inflation (as in India) make outsourcing business to companies in India risky, as he advises American firms to vote in favour of onshoring instead of offshoring.
Onshoring or domestic outsourcing—some even call it rural outsourcing—is the new buzzword in US business circles. Already, companies such as Microsoft, Mattel and RJ Reynolds have started giving business to onshoring firms, which are sprouting across the hinterland. Which also means that business that would have otherwise been given to companies in India or the Philippines has started going to these new breed of entrepreneurs. Their rise isn’t a big worry for BPOs and call centres in India yet, but the trend cannot be ignored either.
India’s software firms’ association, Nasscom, which has been evangelising in the global arena for the Indian IT services sector, doesn’t see much reason to fear yet. “This is not exactly a new trend. US companies have had centres in interior areas such as the Midwest,” says Ameet Nivsarkar, the association’s vice-president for global trade development.
Nivsarkar, however, admits that because of a high unemployment rate, the trend is now catching on in IT services as well. Till some time ago, it was difficult to find talent in the US—as science, technology, engineering and maths streams were not favoured among students, and Asian immigrants provided the skills required by IT companies. However, it has now become easier to find talent locally.
With cost of labour being a good 25% to 50% lower, the onshoring model is immensely profitable. It also comes with the advantages of keeping the work within the US—low risks, no effect of currency fluctuations and no cross-country legal hassles. It is politically correct and complements President Obama’s policy of promoting small companies, entrepreneurship and innovation.
Indeed, that explains why Hamilton, while opening a new office location in downtown Jonesboro in June, said: “Our 300% annual growth rate is indicative of the market’s appetite for a low-cost, high-quality on-shore alternative to the traditional offshore India operations.”
Ron Hira, a professor at the Rochester Institute of Technology and an expert on outsourcing, believes that though still small, the onshoring players have a viable business model that is competitive with the offshore outsourcing business model. “The question is whether they are scaleable and can they capture a significant share of the market. If the US federal and state governments changed some policies these firms would be able to capture a larger share of the market quicker and create and retain many jobs for Americans,” he says.
Indian companies have been themselves expanding their local presence in the US in various sectors such as consulting, project management and sometimes in software design and development. They have development centers close to customer locations, in what is termed near-shoring. TCS, for instance, has 300 locally hired engineers working at its delivery centre in Cincinnati. Infosys too plans to have 15% of its employees recruited locally over time.
Currently US cities such as Kansas, Memphis, Detroit, Miami and Omaha are attractive locations for onshoring facilities because of comparatively lower costs. “In this industry, around 15-20% of the work will soon be done locally. In that way, the industry is surely changing,” says Sanjiv Kapur, senior vice-president, Patni Computer Systems, who also heads the BPO business.
Earlier this year, Patni acquired a BPO delivery centre in Texas after inking a deal with a healthcare insurance player.
Rahul L Kanodia, vice-chairman and CEO of Datamatics, which has offices in Burlington (Massachusetts) and Livonia (Detroit) says he has hired about 300 American employees. He points out that even business process outsourcing companies have had a presence in cities close to the customer’s business because of legislation that prohibits sensitive documents to leave US shores. Also, many of the IT services companies hire local talent.
Many experts say that the opportunities emerging in the US after the recession will be immense and both American and non-American companies will get to share those opportunities. Indian companies will have to co-exist with a new breed of US firms as entrepreneurship gets a leg up in a new America. Afterall, US onshoring could even become the peg that is required to survive in a world where offshoring starts losing its sheen and the advantages of labour and time arbitrage are taken away. It’s time for Indian IT services majors to start innovating.