Captives learn to manage offshore costs

Globalisation of services will tend to play a crucial role for companies in remaining globally-competitive at a time when the talks of a global economic slowdown is doing the rounds.

Industry leaders feel that in the short-term, this may affect the IT industries, especially the services companies. But, in the longer run this will open new opportunities as more and more companies will start offshoring work to destinations including India, China and Philippines.

In a recent report on 'Navigating Economic Uncertainty: Leveraging the Services Globalisation', services globalisation advisory firm neoIT says the systematic implementation of globalisation initiatives can help companies manage the economic uncertainty. This will also lay the foundation for the next generation of opportunities in services globalisation.

Said neoIT CEO Eugene Kublanov, "Companies that move aggressively to reassess their globalisation initiatives, re-balance their portfolios and ensure that these initiatives are well-aligned with business objectives, will manage the present economic slowdown in the US more effectively." Organisations that don't take advantage of the opportunity are likely to face mounting financial and operational pressures in the next few years, he adds.

Industry leaders are of the opinion that though the CIOs are under short-term pressure when clouds of economic slowdown loom, they have to actively consider offshoring work to countries like India who have the well-proven track record of delivering projects in time.

"I feel, the immediate impact of the US slowdown will lead to more and more works being shifted to India. Companies would prefer to offshore works to their captive centres in India, who in turn will pass this onto their local partners who know the local environment more closely," said Ajay Kela, managing director & COO "" Global Operations, Symphony Services, an offshore product development services firm.

The neoIT report says, in the US economic slowdown of 2001 to 2003, most globalisation agreements were for staff augmentation that allowed companies to quickly scale up or down. Since then, most global services contracts have shifted to managed services projects designed to deliver specific results or service levels.

It, however, emphasised on the need to execute services globalisation more strategically than in the years past. "The immediate benefits of successfully implementing an enterprise-wide approach are lower costs and increased efficiency, both of which can mitigate the impact of the present economic downturn," it added.

Despite the widespread belief that India is losing out the cost advantage to many an emerging countries, the IT industry is of the opinion that India still continues as the preferred destination as far as services globalisation is concerned.

According to a recent report by Zinnov, a management consulting firm, the rise in salaries across the captive engineering R&D centres in India during the last one year, was not quite significant. In spite of them, most of the captive R&D centres have managed to restrict the attrition rate to below 18 per cent. This indicates that the captive centres are also learning the techniques of managing costs in an offshore locations, quite judiciously.

"We feel that in future, most companies would like to keep the real core work, and may be the smaller one would prefer to move their core development work to players like us. We won't be surprised if in certain cases, companies outsource 75 per cent of their R&D work to companies like us," said Kela.

The biggest advantage that India will enjoy in this regard, is a vast pool of trained manpower. The Indian government had also provided special grants to create knowledge workers, a demand that had been coming from industry body like Nasscom for the last few years.

Boston Consulting Group in an earlier report had stated that India will have a surplus of around 47 million people in the working age group by 2020, the time when China might be battling with a deficit of 3 million people in the working age group.

"This places us in an advantageous position. If groomed and trained properly, these workforce will cater to the whole world in the field of Information Technology and India will continue to remain as the global supply base for the IT industry," Neeraj Aggarwal, principal, Boston Consulting Group had told earlier.

The availability of manpower, apart from the cost will play a crucial play when the second wave of globalisation happens in the wake of an imminent economic slowdown.

"Those organisations that can manage this transformation effectively, optimise their operational costs, build flexibility into their global services supply chain and fully realise their return on globalisation will position themselves to weather the current storm and emerge as stronger competitors," said neoIT in the report.