Iron Curtain strikes back

Kolkata: For Indian IT oursourcing companies riding on the crest of the low-cost, high-quality and productivity wave, the recently published report by Pierre Audoin Consultants (PAC) may prove to be a cause for worry.

Some of the new and emerging destinations from which the Indian IT outsourcers are anticipating competition are Ireland, Israel, Canada, the Philippines, South Africa, Mexico, Ukraine, Russia, the Czech Republic, Poland, China, Pakistan, Brazil and Argentina.

Is Indian IT getting expensive? Yes. And there is one more formidable rival. If you go through the report ''Offshore Romania 2003'' prepared earlier this month by PAC. The report projects the East European country Romania as the ideal outsourcing alternative to India with costs almost 50 per cent less.

Not only is the cost of using and providing IT services in Romania much cheaper than in India, the report adds, the country is also home to an abundance of well-educated and highly-skilled workers who better understand Western European culture rather than their Asian counterparts. Thus, the answer for Indian companies is to site their operations in those countries and use their worker skills.

The PAC report points out that the cost of employing a recently-qualified graduate from an approved specialist university is estimated at $6,500 a year, while experienced project managers could be recruited for between $21,500 and $32,000.

''Strategic Review 2003'' says India has so far been more competitive cost-wise than its closest rivals — Ireland, Canada and South Africa. The average IT employee cost per year in India is $5,880 compared to Ireland ($28,000), Israel ($25,000), Canada ($28,174) and South Africa ($18,000). However, IT employee costs in Romania are substantially less at $2,360.

While Romania seems attractive in terms of lower costs, some issues need sorting out. IT spending in Romania is the lowest in the region. E-commerce is proscribed by lack of legislation.

But, the industry''s enthusiasm is buoyed by the government support. The government''s IT Vision for Romania is encapsulated in the following: "Romania should aspire to become the ''Internet hub'' for the Black Sea region. The Romanian IT industry will be leading regional supplier of Internet-based services, specialised software, and contract manufacturing by 2010 by leveraging national competitive advantages...

"An effective public-private partnership in IT sector will assure a competitive and consistent rules-based business environment, inflows of FDI [foreign direct investment] and promotion of Romania as a centre of IT excellence." Goals: "Romania should increase its IT industry exports from the existing level of $630 million in 2000 to $1 billion by 2004, $4 billion by 2007 and a target of $10 billion by 2010."

These are ambitious plans against which India is bracing itself for future competition. Curiously, the Indian IT industry do not seem overtly worried by the emergence of these new outsourcing destinations. All recent research and analyst reports as well as Nasscom''s in-house research, based on customer interactions, indicate that India will remain the most preferred outsourcing destination status in the coming years.

India''s strong value proposition in terms of quality and productivity advantages to the tune of 25 to 30 per cent coupled with cost (60-75 per cent) and customer satisfaction (85 per cent) are key factors for making India an attractive outsourcing destination.

For example, the US banking, finance and insurance services sector has received productivity gains of 15 to 20 percent, and customer satisfaction of almost 85 per cent due to offshoring to India resulting in saving of the order of $6 to 8 billion in the last four years.

In terms of global competitiveness, the following table indicates India''s competitive advantage:

Parameter	India	Ireland	Israel	Canada	Philippines	South Africa
Industry size ($ million, 2000)	6,200	6,700	2,600	NA	1,000	NA
IT employee cost ($ per year)	5,800	28,000	25,000	28,174	6,500	18,000
No of CMM Level 5 certifications	48	0	0	NA	0	0
Main positives	English, quality project management, new services lines.	Large development centres of tech companies Microsoft and Dell	Shrink-wrapped software production	Quality, compatible cultures.	Language skills	Language skills
Main negatives	Ordinary infrastructure, perceived geopolitical risks.	High costs	Regional turmoil	High cost	Low availability of skilled project managers	Low level of outsourcing penetration.

Source: Nasscom and CIO

Parameter	India	Chile	Malaysia	Vietnam	Romania
Industry size ($ million, 2000)	6,200	NA	NA	NA	NA
IT employee cost ($ per year)	5,800	NA	7,200	7,200	2,360
No of CMM Level 5 certifications	48	0	0	0	0
Main positives	English, quality project management, new services lines.	Good infrastructure, high level of education	Strong government support.	Strong government support	Good government system
Main negatives	Ordinary infrastructure, perceived geopolitical risks.	Small size.	Absence of large pool of programmers	Poor infrastructure	Political instability.

Source: Nasscom and CIO

In order to preserve and build on its lead in IT services and business process outsourcing (BPO), India needs to take several important initiatives: