India's Outsourcing Status Under Threat

China, Malaysia, and other countries are challenging the subcontinent, says a new study by Frost & Sullivan

India's stronghold on the shared services and outsourcing (SSO) sector, once fuelled by low-wage skilled workers, is now being challenged by other countries in the region such as China and Malaysia, according to a new study by Frost & Sullivan.

Culled from interviews with 338 Fortune 500 and Forbes 200 companies, the survey found that structural factors such as low labor costs and abundant supply of relevant skills, helped ensure India remained the top destination for SSO activities. The study was conducted between February and June 2007, covering countries such as Singapore, China, Malaysia and the Philippines, and outlined global SSO activities across seven industry verticals including technology, business financial services industry (BFSI), logistics and healthcare.

However, the study noted, India is facing increasing threat from other countries in the region due to several factors. These include India's high attrition rates, poor infrastructure, rising wages and the appreciation of the Indian rupee against the U.S. dollar.

Aroop Zutshi, president and senior partner at Frost & Sullivan, said the key drivers for SSO continued to be cost benefits through standardization, leveraging of scale benefits, and cost arbitrage in countries such as India and China.

"We've seen some challenging factors in India--its high attrition rates, intellectual property (IP) and productivity issues, and poor infrastructure--that have clearly made a significant impact on the SSO market [there]," Aroop told ZDNet Asia, on the sidelines of a media briefing Wednesday.

As a result, he noted that countries such as China, are now able to offer the same benefits India used to provide--namely, a lower cost of doing business, an available talent pool and a stable currency.

Aroop said that while China is still grappling with some challenges of its own such as language capabilities, risks to IP and some infrastructure issues, the country has begun addressing these problems and seeing some improvements.

"China is therefore, emerging as an attractive alternative location [to India] for outsourcing IT, research and development and procurement services," he said.

NICHE OPPORTUNITIESThe study also revealed that there are areas within the industry verticals which can be exploited by countries such as Malaysia, which ranked second, third and fourth in the energy, logistics and BFSI sectors, respectively.

Aroop pointed to Malaysia's stable socioeconomic environment, excellent infrastructure, low attrition rates and a fairly skilled talent pool as the country's key advantages. And while it came in fifth overall as the most popular destination for SSO activities, Malaysia continues to enjoy some niche benefits that should be further exploited, the Frost & Sullivan analyst said.

Aroop explained: "It is not [so] important to focus on overall rankings as it is to focus on the advent toward 'verticalization'--the evaluation of different core competencies and requirements, as well as the drivers and restraints, that exist [in each] vertical.

"For Malaysia to capitalize on its advantages, it must identify where it has the talent pool, where it can add value to these verticals and help [the industry] move up the value chain," he said.

The Malaysian government's bid to market the country as an outsourcing hub could prove to be a critical driving factor, he added.

However, the country must continue liberalizing its immigration policies in order to attract, as well as retain talent, Aroop said.

Frost & Sullivan estimates that the global SSO market was worth some US$930 billion last year, and is forecasted to grow to at a compound annual growth rate of 15 percent to US$1.4 trillion by 2009.

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