Outsourcers take services south of the border in 2008

Indian offshore providers look to Central and South America for outsourcing facilities to keep U.S. customers happy

Outsourcing and offshoring won't necessarily fall out of favor next year, but the locations to which U.S. companies send their business will expand beyond India to South America, Eastern Europe and even the United States.

Mexico and Brazil have long been popular vacation destinations, and in 2008 these locales could become prime targets for offshore providers looking to expand their footprints outside of India.

Offshoring remains popular -- nearly 45% of 221 U.S. companies polled in 2007 by Forrester Research say they currently do or plan to work with offshore providers -- and many Indian companies are adding to the locations from which they can provide their services.

"Offshore companies grew very rapidly because they started with a small base of customers and were able to get more money out of those customers," says Christine Ferrussi Ross, vice president and research director at Forrester Research. "Offshoring to India still has cost benefits,but it is becoming a riskier business endeavor and the bar is being raised for those providers."

Among the risks working with an Indian provider are talent attrition, increasing costs and more complexity in the contracts, she says. These providers are running out of local talent to recruit for positions, which increases the costs to U.S. customers. And the dropping value of the U.S. dollar could motivate some Indian companies to require contracts be paid out in Indian rupees. U.S. customers could also face the possibility that the Indian offshore market is tapped.

"All the low-hanging fruit is taken, so if you are just starting out and want to go offshore, it's riskier and the rates aren’t as good as they used to be," Ross says.

These challenges -- along with a desire to become global service providers -- are motivating Indian offshore providers to establish facilities in geographic areas outside of their own. For instance, Wipro, India's third-largest outsourcer behind Tata Consultancy Services (TCS) and Infosys Technologies, in 2007 set up its first U.S. development center in Altanta, Ga., and also established a location in Monterrey, Mexico.

"As the Indian cities get more expensive, Brazil, Mexico and the Philippines are become more popular than India and even China, from our perspective," Ross says. "Many companies are even toying with the idea of setting up shop in 'middle-of-nowhere U.S.' to see if they can make the model work in different locations."

Such nearshore or onshore locations could serve two purposes: U.S. customers may feel more comfortable sending certain work closer to their own borders; and Indian providers can expand their geographic reach to attract new customers while also keeping current customers happy.

Locations such as Mexico can also keep costs down and improve relations between customers and service providers. According to a Forrester Research report, "Nearshore efforts in Mexico carry estimated operating costs 20% to 30% lower than U.S.-based operations. Overhead costs are typically less than those associated with an offshore relationship because of reduced telecom costs, travel costs and due-diligence costs."

Some such as WatchGuard are looking to the Philippines to continue offshoring, but at a more appealing location. Company executives a few months ago cited attrition as their main cause for not renewing their contract with an undisclosed Indian provider.

Locating an outsourcing facility closer to the United States also could make contracts more successful. For instance, being geographically closer would enable U.S. vendor managers to more easily collaborate with providers in Mexico or in South American locations. Such collaboration could help U.S. companies and their providers incorporate best practices and processes into the contracts

"One thing we are telling our clients is to better manage their relations with their offshore providers," Ross says. "The contract with the outsourcer begins when the contract is signed, and ongoing collaboration on the expectations and the services delivered will give customers better results."

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Copyright © 2007 IDG Communications, Inc.