The pros, cons and alternatives to outsourcing IT in India

Businesses worldwide are feeling the pressure to maintain their leading position through digital transformation. But, in an increasingly competitive market, many believe the only cost-effective route is to outsource. With 5.4 million IT professionals working for a fraction of some western counterparts, the world’s largest outsourcing destination is India.

Where once the perception of the sub-continent was as a cut-price overseas call-centre, it is now seen as a cost-effective resource for highly-skilled tech talent. NASSCOM’s 2023 strategic review, found that nearly 60% of the world’s leading companies outsource their IT projects to India, especially for software and web development.

While India has cemented its position as the undisputed “IT outsourcing capital of the world”, it is not without a few drawbacks, which we will examine in this article.

Overview – what’s in this article:

• Outsourcing – origin and evolution
• Current state of the tech outsourcing market
• Pros and cons of outsourcing IT to India
• Varied experiences of Indian outsourcing
• Best practices for outsourcing IT to India
• Exploring outsourcing alternatives
• The benefits of FDM’s consultant model

Outsourcing – origin and evolution

Outsourcing is a business strategy that emerged in 1989, gaining prominence in the latter part of the 20th century. It involves the strategic use of external resources to handle activities traditionally managed by internal staff and resources.

The current approach to outsourcing emphasises forming strategic partnerships to achieve enhanced results. There are two main types of outsourcing: business process outsourcing (BPO) and information technology outsourcing (ITO).

Outsourcing is generally associated with going offshore: delegating operations to an international company to access skilled labour at a cost advantage. In 2021, India emerged as the most attractive offshore destination due to its financial appeal, along with the availability of skilled staff and expertise.

The most commonly outsourced services to India include software development, software engineering, and BPO services.

The current state of the tech outsourcing market

In a 2023 Deloitte survey, global business services (GBS) organisations are focused on cost reduction as their no. 1 objective in tightening economic conditions. GBS models are becoming more agile, digital, and cost efficient by moving more work to cost-efficient locations.

Information technology is the most outsourced industry, with 37% of IT operations going offshore. This market looks set to continue expanding, with 49.6% of businesses stating that they would raise their outsourcing percentage in the coming year.

The United States and the United Kingdom are the biggest tech outsourcing customers, at 68% of large US companies and 48% of UK companies.

Where is the money being spent?

In the Indian IT sector, the top trends reflect the nation’s push into advanced technologies including:

1. Hyper automation – increasing productivity of business processes with Artificial Intelligence, Machine Learning and Robotic Process Automation. India’s booming Generative AI market size of USD 1.1billion is expected to multiply 15 times by 2030.
2. Internet of Things (IoT) – AI-powered systems enabling machine-to-machine data sharing to monitor business processes and maximise cost efficiencies. The Indian IoT industry was valued at USD 4.98 billion in 2020 and is predicted to grow to USD 9.28 billion by 2025.
3. App development – the rising demand for business agility is generating rapid growth in India’s app development sector. Revenue in this market is projected to reach USD 2.14bn in 2023 and nearly double that by 2025.
4. Cloud technologies – the post COVID era has seen increased reliance on cloud technologies to carry out business operations. In 2021, Google set up its second Cloud Region in New Delhi. And the government’s initiatives like the Cloud Vision for India 2020 aim to position India as a major global hub for cloud computing services.
5. DevOps – a set of practices combining IT operations to speed up the software development life cycle. The Indian DevOps market is expected to grow at a CAGR of 23.23% during 2020-2025.

Pros and cons of outsourcing IT to India

Outsourcing IT to India offers several benefits, primarily driven by the desire to reduce overhead costs. However, companies are increasingly recognising potential downsides.

This is an overview of the advantages, potential disadvantages, and possible alternatives.

Advantages include:

Cost effectiveness: Around 70% of companies cite cost advantages as the primary reason for outsourcing IT to India. For example, the average salary of a Software Developer in Australia is around 5 times the average in India, enabling companies to save as much as 80% on workforce costs.

Qualified talent: The Indian education system places heavy focus on mathematics, primarily as a tool for an eventual engineering career, and produces 2.6 million STEM graduates annually. This vast pool of skilled talent allows overseas companies to quickly scale their operations.

Ease of communication: With over 120 million native speakers India is the world’s second-largest English-speaking country after the USA, removing a language barrier when working with many western clients.

Government support: India’s government welcomes foreign business and supports the local IT outsourcing sector with incentives, tax benefits and initiatives like Digital India to transform the country into a digitally empowered society and knowledge economy.

Strong Infrastructure: India has developed world-class digital infrastructure, creating tech hubs in cities like Bengaluru (formerly Bangalore), the “Silicon Valley of India”, where 80% of the global IT companies operate. Along with other major cities like Hyderabad, Chennai, and Pune, well-established technology parks offer state-of-the-art facilities and high-speed connectivity.

Time zone advantage: At around 5 hours difference, India’s geographic location actually provides a time-zone advantage for businesses outsourcing from Australia. The gap is small enough to allow team communication but large enough to enable round-the-clock services like tech support, leading to improved operational efficiency.

Potential disadvantages include:

Hidden IT outsourcing costs: A common mistake made when outsourcing IT services is overlooking the total cost of engagement. That cost advantage diminishes every year as the rupee gains value and vendors take more aggressive measures towards their own bottom line, pushing up prices.

Efficient strategy is crucial to avoid budget blowouts, requiring a trusted project manager to ensure all the multiple components are on track.

Initiating a project with hardware, software systems, and the right staff can involve a transition period of weeks or months incurring expenses with limited productivity.

Reliability of facilities: Although investing heavily in its business parks’ infrastructure, India still confronts unstable internet and power, leading to potentially costly downtimes.

Fewer competitive options: India’s major IT hubs like Bengaluru and Pune are becoming oversaturated with software and BPO companies, making it difficult for newer businesses to enter. High real estate prices in the business parks are another barrier to entry.

Skill set uncertainty: While Indian developers are strong in maths and logic (outscoring American counterparts by 11% in competitions) they didn’t perform as well in mainstream programming languages. The sheer scale of the tech workforce means there will be a huge variation in the quality of talent on offer. Thorough due diligence is advised to ensure required standards are met.

Risk of cybersecurity attack: In the past year, 67% of Indian government and IT service companies reported a surge of over 50% in disruptive attacks. Although there is increased investment in countermeasures, it still raises serious concerns about your data security and privacy.

Intellectual property risk: While India’s legal system officially protects copyright, there can be a relaxed approach to enforcing the laws around intellectual property rights. This poses a potential risk to international companies outsourcing software development, requiring careful consideration and robust legal safeguards to mitigate such concerns.

Employment complications: Employment and labour laws in India are highly intricate. There are numerous laws relating to working hours compliance, minimum wage norms, employee benefits, tax regulations, etc.

Staff retention rate: Although Indian employees show a higher commitment to their jobs than the global average, the India IT industry is seeing attrition rates of over 20% pa, which can create significant, and expensive, project delays. Despite a mandatory 90-day notice period, tech sector employees are known to switch jobs frequently.

Reasons range from limited opportunities for advancement and the perception of certain outsourced roles, such as technical support, as unstimulating. A major motivating factor is the increasing realisation of the disparity between their salary compared to the rate billed to offshore companies. In response to the growing demand for skilled talent, offers of even a relatively small pay rise will be pursued.

Varied experiences of outsourcing IT to India:
Successes and challenges for overseas companies

Microsoft’s collaboration with Infosys

In 2010, Microsoft partnered with Infosys Technologies (an Indian vendor) and signed a three-year deal to manage important parts of its global internal IT operations. Today they are collaborating to jointly develop industry solutions to accelerate adoption of GenAI.

Infosys also recently partnered with US-based Nvidia to help businesses enhance productivity through the utilisation of GenAI apps and solutions.

IBM falls short of hoped for competitive advantage

Slow to transition to emerging technologies, IBM outsourced to India to cut costs, typically paying experts in India around US$17,000, compared with US$100,000 for a senior IT specialist in the U.S. In 2017, the company employed 130,000 people in India, and 100,000 people at its American offices. However, the quality of services was compromised, and IBM began a long decline in sales.

American Express faces information security issues

American Express (AMEX) began offshoring business process operations in India in 1994 with Infosys Ltd and Tata Consultancy Services. However, AMEX was once sued for sending customer calls to India. Complainants alleged that AMEX violated the Right to Financial Privacy Act and Consumer Protection Act. Information security concerns have forced some corporations to relocate their call centres back to the U.S.

Best practices for outsourcing IT to India

Following best practices will help ensure a smooth experience when choosing to outsource your IT to India. Here are some suggestions.

Choose wisely

It follows that the quality of your outsourced project greatly depends on the quality of your provider.

In a competitive landscape it can be a challenge to find a service provider that best suits your needs. Reading customer reviews to better understand their strengths and shortcomings is a good start, but it is advisable to go further.

Delve into their website, scrutinise case studies, and interact with products they’ve previously developed to assess design, speed, and functionality.

Protect your data

A key concern when working with an offshore company is the security of your IP. An NDA, an agreement signed between a client company and its partner software development company, will legally bind the supplier’s team to keep all project-related data confidential.

Note that NDA rules may vary from one country to another, so ensure you study those that apply in India before creating one.

Start with a trial case

To better assess a provider’s capabilities, ask their team to work on a trial software development project.

Your decision to continue working with them can be based on their performance in such areas as:

• Communication: Does their outsourced team ask important questions? Can they follow instructions effectively?
• Trustworthiness: Is your outsourced team open and honest about their processes? Do they deliver on their promises?
• Time management: Does your outsourcing partner provide progress updates? Are they able to meet submission deadlines?

Some investment in time and resources may be required to conduct a test project but it provides good insurance against significant problems in the future.

Create a communication plan

Reliable channels of communication between your in-house and outsourced Indian teams are crucial to an outsourced project’s success.

Designate dedicated platforms for regular catchups and urgent communication, using tools like Microsoft Teams and WhatsApp, to prevent delays and financial losses.

Draft a Service Level Agreement (SLA)

Cleary define goals and monitor performance. An SLA is a critical component of any technology vendor contract, defining the level of service you expect from a vendor, laying out the metrics by which service is measured, as well as remedies or penalties should the agreed-on service levels not be achieved.

Exploring outsourcing alternatives

An alternative to offshore outsourcing is ‘onshore outsourcing’ or domestic outsourcing, wherein services are acquired from a company within the same country.

This route is favoured by some for reasons such as easy communication – in terms of language, proximity, and time zone – shared cultural understanding, and efficiencies which can ultimately lead to cost-savings. It can also avoid some of the disadvantages of offshore outsourcing such as quality control and IP protection difficulties.

There has been a recent trend for Australian manufacturers to rethink importing and bring their goods production back onshore – or ‘reshoring’.

Meanwhile, outsourcing to meet digital demands overseas is on the rise. While India remains the number one choice globally, other countries are gaining ground. The top ranking alternatives include The Philippines, Ukraine, Poland, Brazil, Mexico, Malaysia and Argentina, each with their own pros and cons.

The benefits of FDM’s consultant model

FDM’s consulting services essentially embody all the advantages of onshore outsourcing but with the talent operating within your own teams.

Our graduate, ex-forces and returners programs offer the flexibility and agility to fill short-term skills gaps and a steady talent pipeline to meet long-term goals.

• Tailored, hybrid tech talent solutions
• High retention rate
• 24-month talent guarantee
• Option for fee-free transition to permanent

FDM Consultants remain our employees, removing headcount budget and admin concerns with all onsite management tasks such as payroll, sick leave or upskilling handled by us.

Check out our consultant services or get in touch to find out how we can help you drive your digital transformation.