It is astounding to see the growth of the Indian outsourcing sector in spite of the many challenges it faces. In this paper an attempt has been made to identify these challenges along with very brief recommendations.

1. Global Sourcing
Outsourcing and
Offshoring, Economy,
Cost and Expertise Challenges in Indian
Information Technology
Increasing Attrition, Wages, Outsourcing and Offshoring
and Competition, Shortage Service Sector
of Talent
Tags: India, IT, Outsourcing
Lack of Innovation, new
Business Models,
Protectionism, Skilled Talent
By,
Uday Shankar AB

2. TABLE OF CONTENTS
1. Introduction ................................................................................................................................................. 2
2. Study............................................................................................................................................................ 2
3. Challenges in the Indian IT Outsourcing/Offshoring Sector ............................................................................. 2
3.1 People ..................................................................................................................................................... 3
3.1.1 Talent Quality/Shortage of Skilled People .......................................................................................... 3
3.1.2 Increasing Wages .............................................................................................................................. 3
3.1.3 High Attrition .................................................................................................................................... 4
2.2 Economy ................................................................................................................................................. 4
2.2.1 High Inflation fuelled by Rising Infrastructure and Utility Costs ........................................................... 4
3.2.2 Increasing Competition from IT outsourcing firms from China, Eastern Europe, Russia, Philippines,
Vietnam and Middle East ........................................................................................................................... 4
3.2.3 Anti-Offshoring Sentiment and Protectionism from Developed Economies like USA and Europe .......... 5
3.3.4 Increased Captive Offshoring by Many Product Companies ................................................................ 5
3.3.5 Slowing Economy in US and European Union...................................................................................... 5
3.3 Government ............................................................................................................................................ 5
3.3.1 Bureaucracy and Corruption .............................................................................................................. 5
3.4 Organizational ......................................................................................................................................... 6
3.4.1 Declining Profit Margins .................................................................................................................... 6
3.4.2 Lack of Innovation ............................................................................................................................. 6
3.4.3 Lack of Own Product Portfolio and No Presence in Product Space ....................................................... 6
3.4.4 Legacy Business Model’s like Time and Material, Fixed Price .............................................................. 7
4. Post Script .................................................................................................................................................... 7
5. References ................................................................................................................................................... 8

3. Global Sourcing
Challenges in Indian Information Technology
Outsourcing and Offshoring Service Sector
1. INTRODUCTION
The rapid growth of the IT industry over the last 10-20 years has been one of the key features of economic development across
the world. IT now outshines itself by its spread in to almost every other industry such as pharmaceuticals, manufacturing,
education etc. However it is very important to note one of the phenomenon’s that has helped the IT industry grow and shape
itself in the recent times, IT Outsourcing and Offshoring.
IT Outsourcing and Offshoring has become a key source of increased export earnings and an important driver in the
transformation of the domestic economy and its international interface for many Asian economies. In the recent years, East
Asian countries have been successful in capturing a large share of the global sourcing of IT, with India emerging as a major
center for IT services offshoring.
The Indian IT industry now plays a major role in the global information technology space catering to multiple IT companies
spread across the world, with its share expected to increase to US$225 billion by 20201. ICT research and advisory firm
Canada-based XMG Global said in its study that in 2010-11, annual revenues from IT-BPO sector for India and China is
estimated to have grown to US$76 billion and $35.76 billion with a global outsourcing industry share of 43.7% and 28.7%
respectively2 3.
However this sector continues to face many challenges in the many aspects such as people, economy, and government. Though
it is astounding to see the growth of the sector in spite of such challenges it is important to identify and find solutions to these
challenges in the near short to long term. In the paper that follows below an attempt has been made to identify such challenges
and propose very brief recommendations.
2. STUDY
The conduct of this study relies on qualitative and descriptive methods. The information has been gathered from literature
reviews, company strategies, online articles and use of social media for polling 4 and the use of discussion forums5 for different
viewpoints.
3. CHALLENGES IN THE INDIAN IT OUTSOURCING/OFFSHORING SECTOR
Challenges6 identified below are more in the context of the company to country rather than a customer to provider level. It is
important to address these issues because addressing them will help Indian IT firms stay sustainable and competitive in the
global race of IT supremacy.
In the discussion below it is not intended to cover the nuances of communicational and cultural challenges 7 such as (1) Mindset
about Management Hierarchy, (2) Attitudes Towards Appointments and Deadlines, (3) Meaning of Agreements and
Commitments, (4) Results vs. Process Orientation, (5) Directness - Especially in Addressing Disagreements.
1
Information technology in India, http://en.wikipedia.org/wiki/Information_technology_in_India
2 XMG Global Publications, http://www.xmg-global.com/
3
China steadily closing gap with India as top BPO destination, http://articles.economictimes.indiatimes.com/2010-11-
12/news/27606950_1_offshore-countries-outsourcing-industry-global-outsourcing
4
http://polls.linkedin.com/vote/141497/phgzu
5
http://www.linkedin.com/answers/international/offshoring-outsourcing/INT_OFO/863769-23327640
6
BPO industry in India – new challenges http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=52063
7
Culture Matters: 5 Challenges India Offshore Teams Face in Working with Americans,
http://www.sourcingmag.com/content/c060814a.asp

4. Challenge Map: Outsourcing Challenges in the Indian IT Outsourcing/Offshoring Sector
3.1 PEOPLE
3.1.1 TALENT QUALITY/SHORTAGE OF SKILLED PEOPLE
India is being confronted with a potential shortage of skilled workers for the next decade. It estimated that currently only about
25% of the country's technical graduates and 10 to 15 % of general college graduates are suitable for employment in the
offshore IT and BPO industries respectively.
In a recent WSJ research publication8 it was found that engineering colleges in India now have seats for 1.5 million students,
nearly four times the 390,000 available in 2000, but 75% of technical graduates and more than 85% of general graduates are
unemployable by India's high-growth global industries, including information technology and call centers.
Considering the aggressive growth projections, India needs an additional 300,000 new employees every year for the next few
years, which is still a fraction of the graduating class each year 9 . Nasscom in a report said the outsourcing industry was
expected to face a shortage of 262,000 professionals by 2012.
Some steps that could be taken to cater this problem are (1) governments should increase funding’s to educational institutions
for better facilities and educational standards along with vigilant eye on the quality of education imparted in these institutions
monitored via independent associations and committees, and (2) universities need take proactive and effective measures to
bridge the huge gap between academia and industry
3.1.2 INCREASING WAGES
Employees in India are expected to see a salary hike of 12.9% this year, among the highest in the world, as industries are
benefiting from the country's robust economic growth, according to Aon Hewitt, a global HR consultancy group 10. Specifically
speaking, the IT outsourcing sector is projected to see a salary increase of 12% which has indeed hovered in the same range for
many previous years.
8
India Graduates Millions, but Too Few Are Fit to Hire, http://online.wsj.com/article/SB10001424052748703515504576142092863219826.html
9
High wages, attrition compel IT sector to look beyond India, http://economictimes.indiatimes.com/opinion/guest-writer/high-wages-attrition-compel-it-
sector-to-look-beyond-india/articleshow/2781205.cms
10
India to see 12.9% salary hike in 2011: study, http://www.business-standard.com/india/news/india-to-see-129-salary-hike-in-2011-study/128256/on

5. Cost arbitrage is one of the most important elements in offshoring and with salaries in India rising to such high levels it is only
going to reduce this arbitrage capacity.
One of the approaches to cater this challenge is to use the expertise gained in India to setup subsidiaries in locations that
provide better cost leverage such as Philippines, Vietnam, China etc. It is also important to increase the value delivered per
dollar spent by increasing efficiency and productivity along with being more innovative.
3.1.3 HIGH ATTRITION
Indian job market has been witnessing double-digit attrition levels in many sectors, with IT sector11 leading the pack. Analysts
say attrition rates vary by 20%-40% in some firms, while the top ones averages at least 15%. The attrition rates in few of
leading companies were Infosys BPO 28%, Wipro BPO 18% and TCS BPO 21-22%12. At such alarming levels companies need
to spend considerable time and effort in hiring and training the talent pool.
Attrition has been primarily due to (1) the poaching of employees between firms in their attempt to meet the growing need for
technically qualified and fluent English-speaking manpower, and (2) due to employees moving from one firm to another in
search of a better career path13.
Some steps that could be taken to cater this problem are to increase focus on employee retention programs such as (1) rewards
and recognition, (2) options to choose a career path, (3) encouragement and help for higher studies, (4) provide better work
place environment, (5) flexible work option, and (6) employee stock options.
2.2 ECONOMY
2.2.1 HIGH INFLATION FUELLED BY RISING INFRASTRUCTURE AND UTILITY COSTS
India and many other Asian countries have been struggling with a high inflation and interest rates over the last few years. So
fears are now growing that a runaway inflation could possible slowdown the abrupt growth of economy, which were among the
fastest to recuperate from the global financial crisis 14.
Infrastructural bottlenecks are starting to plague the Indian outsourcing industry with issues such as lack of office space, rising
rental costs and real estate prices in first tier cities. Transport infrastructure, including roads, airlines and railways have also not
been able to keep up with the spillovers of growth in the ITES and IT industry. It has resulted in a kind of catch 22 situation
where in high inflation requires high salaries but high salaries cause high inflation.
A collaborated and concentrated need for better economic and monetary policies at a national and state level and dedicated
focus on building distributed infrastructure across different cities will help a long way in tackling this problem. The fact that
majority of the IT sourcing comes from Mumbai, Pune, New Delhi, Bangalore and Chennai is a stark example that emphasizes
the need to focus higher importance to introduce policies that encourage more locations, thereby reducing the stress and
dependency on these locations.
3.2.2 INCREASING COM PETITION FROM IT OUTSOURCING FIRMS FROM CHINA, EASTERN EUROPE,
RUSSIA, PHILIPPINES, VIETNAM AND MIDDLE EAST
One of the main competitors for India within the Asian region is China. Similar to India, China has a large talent pool, with 1.6
million engineering graduates and 9.6 million young professional graduates. China also has a well-developed domestic IT
industry, which is able to engage in outsourced IT operations. However, China lags far behind India in the availability of
English-speaking capabilities.
The assessment of core capabilities indicates that though there is some competition from other Asian countries, it is rather
limited. However, as labor costs rise in India and other capacity constraints becoming binding (as mentioned above), and as
other Asian governments promote their outsourcing industries, India will start to face increasing competition within the region,
especially at the lower end from players like Vietnam and the Philippines and at the middle and higher end, from China and to a
limited extent Malaysia and Singapore. But as one multinational CEO commented, “India is currently a long way ahead of other
countries in the Asian region from availability of manpower to managerial skills and maturity of the delivery model 15.
11
High wages, attrition compel IT sector to look beyond India, http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=53421
12
Attrition in Indian BPO Industry, http://www.bpoindia.org/research/attrition.shtml
13
http://static.globaltrade.net/files/pdf/20100316134721.pdf
14
India slowdown, high inflation likely to persist, http://in.reuters.com/article/2011/06/24/idINIndia-57891120110624
15
http://static.globaltrade.net/files/pdf/20100316134721.pdf

6. However considering these global developments across different countries it is important to ensure that Indian IT companies
continue to build their competitive advantage in Innovation, Quality, Communication Skills and High End IT Services.
3.2.3 ANTI-OFFSHORING SENTIMENT AND PROTECTIONISM FROM DEVELOPED ECONOMIES LIKE
USA AND EUROPE
With the recent global economic recession many countries are resorting to protectionism, taking measures to discourage the
outsourcing offshoring sector. USA especially has been very vehemently 16 pursuing this, although there has also been belief
that it is being pursued more as a political agenda.
Considering the reasoning that to be competitive companies need to find sources of low price & high expertise, it is inevitable
to sustain an agenda where companies are not allowed to maneuver across borders. Though there have been thoughts, especially
in US to pass law to heavily discourage such practices it has not resulted in considerable losses for Indian IT firms.
So what it means to India is that more and more companies would try not to offshore their services outside US and EU since
that would result in tax or monetary impositions to such companies.
However to better shield the companies of any such laws and trade barriers companies should actively look at diversifying their
customer base from the current primary base which is US. Internal domestic market, though not a big share, could be an
potential opportunity in such efforts along with focusing on other emerging nations.
3.3.4 INCREASED CAPTIVE OFFSHORING BY MANY PRODUCT COMPANIES
Many global IT companies after having outsourced their services to India and having built up a good feel and confidence in the
local atmosphere are setting up their own local subsidiaries in India. Global majors such as Intel, Accenture, Cisco, IBM all
have huge workforces in India and have majority of their work operated from India. Thus captive offshoring has in a way hit
the local Indian IT players resulting in loss of revenues along with also creating high competition for talent within the firms.
Hence Indian IT firms have to come up with better synergistic business models that make better economic and operational
sense for global IT companies to outsource their operations to Indian IT firms than to setup captive offshoring facilities.
3.3.5 SLOWING ECONOMY IN US AND EUROPEAN UNION
The global economic crisis of 2008 has caused a major dent in the US and EU economies. Many later events such as the
downgrade of US Debt Rating17, Greece Debt Crisis18 and in general the European PIIGS Debt crisis19 is bringing down the
hope in the economy. It is causing fear and worry in the citizens, investors community, corporations and legislators.
Companies need to ensure that their growth plans/projections are realistic and are not too bullish on any single aspect. The
economies across the globe are highly interconnected and companies need to understand and plan their actions accordingly.
3.3 GOVERNMENT
3.3.1 BUREAUCRACY AND CORRUPTION
Political and bureaucratic corruption 20 in India is and has been a major concern over many decades. A study conducted
by Transparency International in India found that more than 45% of Indians had first-hand experience of paying
bribes or influence peddling to get jobs done in public offices successfully 21.
It was also found in a business survey across 12 economies that India’s civil servants are the least efficient among their Asian
16
Obama Speaks Out Against Offshore Outsourcing, http://www.cio.com/article/447091/Obama_Speaks_Out_Against_Offshore_Outsourcing
17
S.& P. Downgrades Debt Rating of U.S. for the First Time, http://www.nytimes.com/2011/08/06/business/us-debt-
downgraded-by-sp.html
18
Greece Debt Crisis http://www.ft.com/indepth/greece-debt-crisis
19
European Debt Crisis, What’s up with the PIIGS? http://www.marketoracle.co.uk/Article19330.html
20
Corruption in India http://en.wikipedia.org/wiki/Corruption_in_India
21
http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results

7. peers. In its report, Hong Kong-based Political & Economic Risk Consultancy (PERC) described India’s bureaucracy as
“suffocating” and said working with the country's civil servants was a "slow and painful" process 22.
Political and bureaucratic corruption is embedded in the roots of India and efforts such as Right to Information Act 2005 23,
Lokayuktha24 and Jan Lokpal Bill25 will help combat this evil. However more concerted efforts at national, local and grass-
roots level by governments, industry associations and citizens to combat corruption such as Lokpal revolution will be important
for many years to come.
3.4 ORGANIZATIONAL
3.4.1 DECLINING PROFIT MARGINS
Unlike the past, when a portion of rising salary and other operational costs were passed on to customers, clients are now
denying to share any burden transfer citing low demand in their own businesses. It is primarily because salaries have gone up
significantly over the past 15 years, but the billing rates have remained quite restrained in comparison.
Indian IT firms' 'pyramid model' wherein low cost, fresh engineering graduates are taken into the system every year to deliver
projects at nearly 30% profit margin is under pressure as salaries continue to rise. Financial analysts have forecasted 26 a 1-3 %
fall in profit margins for TCS, Infosys and Wipro with much of this fall attributed to wage hikes.
It is also that most of the outsourcing providers are highly dependent on cost leverage, which is the difference of absolute
salaries paid in India compared to a high wage country from where the work is being shifted. Hence with growing wages and
increased competition from other countries, it is important for such providers to move in to other competitive advantages such
as different business models, higher end services etc., to be sustainable in the long run.
3.4.2 LACK OF INNOVATION
There hasn’t been much work that has been done by an Indian company to have come up with significant innovations in self-
developed products or in business models. It is believed that India has not yet realized its full potential for innovation because
its education and research institutes do not encourage a culture of experimentation and the exchange of ideas between
disciplines27.
Education in India, right from primary college is more of a culture of “learn-what-is-told”, rather than “learn-on-your-own-
with-experiments”. Teachers teach you from pre-defined set of books all those years and students are expected to answer in the
exact way as mentioned in the books.
Hence the education culture needs to encourage thinking, innovation, experimenting instead of discouraging the student to do
so. There is a great change required in the education system in India to make the education to promote experiments, innovation
and unless this happens from ground level28. It is also recommended that India should encourage stronger competition among
enterprises, commercialize new knowledge, and foster research and development for poor and grass-root enterprises.
3.4.3 LACK OF OWN PRODUCT PORTFOLIO AND NO PRESENCE IN PRODUCT SPACE
India still lacks a product ecosystem compared to the highly encouraging atmosphere in that of US Silicon Valley. Investors,
banks, customers, partners and the general society along with government is Indian software product averse per say. It looks
like Indians have a mindset of anything from foreign is good in quality which has been the case of software products.
When the Indian IT firms commenced operations, they did not have access to the risk capital required for product start-ups, all
they had was access to huge human capital, which they used to build world class service companies. It is important to realize
that building a product requires both risk capital and sharp understanding of the market.
22
India’s ‘suffocating bureaucracy’ worst in Asia: Survey, http://zeenews.india.com/news/nation/india-s-suffocating-bureaucracy-worst-in-asia-
survey_536445.html
23
http://rti.gov.in/
24
http://en.wikipedia.org/wiki/Lokayukta
25
Lokpal Bill, http://en.wikipedia.org/wiki/Lokpal
26
TCS, Infosys, Wipro margins to fall, http://economictimes.indiatimes.com/tech/ites/tcs-infosys-wipro-margins-to-fall-as-us-outsourcing-customers-like-
walmart-home-depot-cisco-ericson-cut-rates/articleshow/9180107.cms
27
India 'lagging behind' in innovation race, http://www.scidev.net/en/news/india-lagging-behind-in-innovation-race.html
28
Lack of entrepreneurship & innovation in India - root cause in education system? http://sollerthoughts.co.uk/2009/02/23/entrepreneurship-innovation-in-
india-root-cause-in-education-system/

8. However with the years of experience of providing IT services all over the world, Indian IT industry and its workforce have
now acquired a good understanding of the market. It is also that the risk capital to invest in developing products is now
available to startup companies in India and established IT companies have the financial strength to self-fund product
development29. Hence there should be substantial focus by IT majors to focus efforts towards building their own product
portfolio. It is my opinion that contribution of IT-ITES will be marginal in contribution towards Indian GDP compared what
technology product companies could do.
3.4.4 LEGACY BUSINESS MODEL’S LIKE TIME AND MATERIAL, FIXED PRICE
Since the beginning of Indian IT space, Time & Material and Fixed Price business models coupled with onshore and offshore
models have been the primary growth engines of the Indian outsourcing industry and now it is high time for things to change.
It is especially because as IT services move higher-up in the value chain towards innovation process outsourcing such models
render difficulty in quantifying and evaluating the efforts.
Many companies such as Infosys, MindTree and ITISL 30 are actively exploring and establishing business models such as
revenue sharing which are considered to be better than the prevailing models.
4. POST SCRIPT
Increased competition from emerging IT locations, falling profit margins, gloomy global economy and war for talent have
emerged has the foremost challenges in the current Indian IT scene. Challenges apart from these such as Data Security,
Currency Fluctuation, Quality of service and Cultural issues are still negligible in comparison. The focus of this paper was to
highlight the issues currently facing the Indian IT industry and en-route provide feasible brief recommendations. To be able to
be competitive & self-sustainable in the long run Indian IT firms have to continually innovate their business models, employee
practices, cost structures along with working in close association with Industry bodies & Governmental organizations.
29
Time is now ripe for emergence of IT product companies in India, http://www.indianexpress.com/news/time-is-now-ripe-for-emergence-of-it-
product/233438/
30
Business Models, http://www.itisl.com/MainGroup/abtBusModels.aspx

9. 5. REFERENCES
 Information technology in India, http://en.wikipedia.org/wiki/Information_technology_in_India
 XMG Global Publications, http://www.xmg-global.com/
 China steadily closing gap with India as top BPO destination, http://articles.economictimes.indiatimes.com/2010-11-
12/news/27606950_1_offshore-countries-outsourcing-industry-global-outsourcing
 LinkedIn Polls, http://polls.linkedin.com/vote/141497/phgzu
 LinkedIn Discussion Forum, http://www.linkedin.com/answers/international/offshoring-outsourcing/INT_OFO/863769-
23327640
 India Graduates Millions, but Too Few Are Fit to Hire,
http://online.wsj.com/article/SB10001424052748703515504576142092863219826.html
 High wages, attrition compel IT sector to look beyond India, http://economictimes.indiatimes.com/opinion/guest-
writer/high-wages-attrition-compel-it-sector-to-look-beyond-india/articleshow/2781205.cms
 India to see 12.9% salary hike in 2011: study, http://www.business-standard.com/india/news/india-to-see-129-salary-
hike-in-2011-study/128256/on
 High wages, attrition compel IT sector to look beyond India,
http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=53421
 Attrition in Indian BPO Industry, http://www.bpoindia.org/research/attrition.shtml
 http://static.globaltrade.net/files/pdf/20100316134721.pdf
 India slowdown, high inflation likely to persist, http://in.reuters.com/article/2011/06/24/idINIndia-57891120110624
 http://static.globaltrade.net/files/pdf/20100316134721.pdf
 Obama Speaks Out Against Offshore Outsourcing,
http://www.cio.com/article/447091/Obama_Speaks_Out_Against_Offshore_Outsourcing
 Corruption in India http://en.wikipedia.org/wiki/Corruption_in_India
 http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results
 India’s ‘suffocating bureaucracy’ worst in Asia: Survey, http://zeenews.india.com/news/nation/india-s-suffocating-
bureaucracy-worst-in-asia-survey_536445.html
 RTI in India, http://rti.gov.in/
 Lokayukta, http://en.wikipedia.org/wiki/Lokayukta
 Lokpal Bill, http://en.wikipedia.org/wiki/Lokpal
 TCS, Infosys, Wipro margins to fall, http://economictimes.indiatimes.com/tech/ites/tcs-infosys-wipro-margins-to-fall-as-
us-outsourcing-customers-like-walmart-home-depot-cisco-ericson-cut-rates/articleshow/9180107.cms
 India 'lagging behind' in innovation race, http://www.scidev.net/en/news/india-lagging-behind-in-innovation-race.html
 Lack of entrepreneurship & innovation in India - root cause in education system?
http://sollerthoughts.co.uk/2009/02/23/entrepreneurship-innovation-in-india-root-cause-in-education-system/
 Time is now ripe for emergence of IT product companies in India, http://www.indianexpress.com/news/time-is-now-ripe-
for-emergence-of-it-product/233438/
 Business Models, http://www.itisl.com/MainGroup/abtBusModels.aspx