Tier II and Alternate Locations Present Fresh Outsourcing Avenues

One of the major concerns of the sourcing community is that suppliers are unable to deliver the cost and service benefits that had been agreed upon at the start of the contract. As outsourcing contracts become more specific in requirements, clients expect their suppliers to possess intimate knowledge about the industry they operate in — apart from being well-versed in specific technology areas. This is over and above the constant and overarching need to keep costs down. It’s a constant point of pain and one that I’ve seen frequently in my five years as an outsourcing analyst.  

Although outsourcing, especially to India, remains an attractive option for deriving cost savings, I see increasing concerns about the quality of the services. As the Indian economy strengthens, the currency arbitrage that the Indian IT Services vendors used so heavily to their advantage is eroding. Moreover, the rising cost of living across major IT hubs in India is fueling wage inflation and attrition, and squeezing the margins for the suppliers. For example, between 2006 and 2012, Infosys’ operating margins have fallen from about 33% to 29%, TCS’ from around 30% to 27%, and HCL’s from around 24% to 15% (all revenues considered in Indian Rupees) in the same time frame.

In this environment, I am often asked about three things: 1) the technical and delivery capabilities of smaller Tier II Indian vendors, 2) the viability of engaging with them, and 3) the feasibility of outsourcing to alternative offshore locations (other than India). To answer these questions:

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