Alternative offshore models emerge in India

Straight outsourcing is more cost effective than setting up subsidiary, analyst claims

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Foreign companies aiming to take advantage of India's less-expensive IT and back-office employees often take one of two routes - they set up their own operations in the country, commonly referred to as "captive centres" or they outsource work.

But new market research suggests there are substantial savings in turning over software development or business processes to an outsourcer rather than setting up a subsidiary.

Forrester Research found that hidden costs raise the baseline expense per person per month at a subsidiary to £2,472, compared to the baseline cost of £2,115 per person per month to hire an outsourcer. A number of companies are shutting down their captive centres and turning to outsourcers, said Sudin Apte, senior analyst and country head for India for Forrester.

"Captives centres run as cost-centres and cannot be as competitive as a vendor offering services," Apte said.

The size of the captive centre also matters. "My experience suggests that generally the minimum economic size for a captive operation is about 1,000 staff," said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International (TPI) in Houston. A smaller staff means the expenses of real estate, infrastructure and other overhead keep the cost per person at levels too high to appeal to the parent company, he added.

More than 60 percent of the captive centres in India are struggling with escalating staff attrition and costs, according to Apte. Most of these centres have been set up with the expectation that they can do the work more cheaply than outsourcers as they will not be paying vendor margins. Money saved on the outsourcer's margins is outweighed by the inefficiency of the captive operation, he added.

Because they usually don't do leading-edge work, subsidiaries spend more than outsourcers to attract and retain staff, according to Forrester. Conversely, outsourcers provide staff growth opportunities and the chance to work on a variety of projects from various customers, Apte said.

As the Indian subsidiary does not have processes in place for offshore development, it has to rely on staff skill to get the work done, and hence hire more senior and expensive employees. "Captive centres are hiring people with an average of eight to nine years of experience for low-end work for which vendors would use staff with an average of two to three years experience," Apte said.

Outsourcers such as Symphony Services are benefiting from the shift away from setting up captive centres. Symphony, based in California, offers outsourced product engineering to software companies. Over the last 18 months, the company has integrated seven captive centres into its own operations, said President and CEO Gordon Brooks. About 1,000 staff from these captive operations have been absorbed by Symphony's operations in India, he added.

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