Outsourcing becoming unprofitable business – a major new trend
Sonia Chopra
Mar. 15, 2005

In recent days the escalating cost of employment in India, lack of qualified work force and deflation service prices have made outsourcing a tough business. The Western companies in India are running around to save even one cent. The escalating cost of living and shortage of qualified workforce is putting a solid pressure on wage increase. On top of that the companies have to keep 20% excess work force to accommodate turn over and other issues. The clients in the West are always threatening to stop business, not pay etc. based on quality and delivery of services on schedule. All these have made outsourcing a painful business. On top of those countries like Poland, Philippines, South Africa and so on are competing heavily lowering the prices and providing additional incentive to the clients.

The future of outsourcing business will really depend on India’s ability to keep inflation down. There is no way people can work for a low wage when real inflation is drive all prices higher. There is heavy supply of the BPO and IT services in the world and every country is trying to get their fair share. This makes the outsourcing business less profitable.

While employee salaries have gone up by an average of 20 per cent every year, the average revenue per hour (for a single terminal) has declined by about 15 per cent over the past three years, from $14 to $12.

Says Raman Roy, chairman and managing director, Wipro Spectramind Services Ltd, one of the biggest BPOs in India, "The inflationary aspects on compensation, real estate and others used to be mitigated by the depreciating rupee. With the rupee appreciating or staying stable, it definitely creates a pressure on the bottom line."

The impact of the price slash and the depreciating dollar? If three years ago, a BPO earned close to Rs 700 an hour, it now gets just over Rs 500 for the same effort.

For every employee who quits, a company spends another Rs 40,000 to Rs 55,000 in recruiting and training a replacement. Even after training, it takes the new employee at least three months to reach an optimum productivity level. "There's a shortage of people," points out outsourcing experts.

What is then the future? Some Indian companies have tried to branch out into premium pricing environments – the vertical markets in IT. That is where India is failing. It was a easy honey moon for Indian companies to offer cheap services with less than par alary in the country and Indian rupees trading at a lower value than then the fair market values. But when these factors are taken out, Indian companies find they are nowhere.

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