IT Outsourcing Challenges and Solutions

A Decade of Change

Ten years back, IT outsourcing vendor from India had the opportunity to hire top notch talent from premier institutes only. However, the equation in India has changed over last ten years. While 10 years ago, the total requirement for IT companies would have been in the range of 3000+, today it is in the order of 200,000+. This has created huge supply-demand gap for quality and trained resources in Indian market and a challenge for IT outsourcing vendors including multinationals trying to establish it's presence in India. While 10 years back if an organization got 10 personnel from these outsourcing companies, it was very likely that managers were extremely happy with each one of the individuals or at least 8 out of 10 resources, today out of 10, may be there are 2 or 3 resources that create the same level of awe to managers and customers. This in turn reflects the lower value add to customer organization per vendor resource deployed.

Outsourcing IT vendors have tried to address this issue to some extent by strengthening the training process, mandating technology training and requiring certifications per year and so on but the issue of poor quality of staff remains.

IT organizations should try to perform either fixed price projects or should put the candidates thru interview process by their own organization in case of Time & Material engagement or perform engagements based on SLA (Service Level Agreements) to address the issue of not getting so desired resource quality. Project level outsourcing works well with price not to exceed clauses where Outsourcing IT vendors can manage the work and do blend the resource skill mix. The support level work need qualified and trained resources to address application issues. Most of the support work is considered as helpdesk work with scripting requirements. Lot of IT support work requires knowledge e.g. EDI mapping error, application interface issue, performance throughput issue.

The value of dollar with respect to Indian currency is declining - Outsourcing exposes risk to foreign currency fluctuation and value of dollar. Current trend and trade deficit have been putting pressure on dollar and eating up cost advantage of outsourcing and it has to be seen how long outsourcing can sustain. Indian currency (rupee) has been rising. Last year alone, the Indian currency has risen more than 12%. This in turn is putting pressure on Outsourcing IT vendors based out of India. While a currency's appreciation is linked with higher productivity, this is not the case in IT (at least nothing documented). Therefore, outsourcing vendors will negotiate rates or at times even change the working hours.

For example if offshore is working 8.8 hrs a day, the organization might increase the offshore working ours to 9 hrs a day, an effective increase of 2-3% increment in addition to rate increases. Vendors typically do not provide increased per day productivity per vendor resource to account for this increased hours & cost.

IT organizations have very little to control over it and hence the organization should move either to SLA based or fixed price based engagements to mitigate their risk of increasing cost or request for data to substantiate increased productivity

Salaries of IT personnel in USA & India have been rising – Both IT organizations and Vendors are facing the problem of increasing salary cost of IT personnel. This puts pressure on IT Managers and outsourcing vendors. Outsourcing vendors have to raise salary for all levels of people. Salaries go up on an average around 5-10% every year in India. This forces outsourcing vendors to re-negotiate billing rates for their staffs. Just to put things in perspective, salaries of entry level professional level have gone up from USD 2500 to USD 6000+ in 12 years that is more than 140% appreciations over 12 years. Similarly, salaries of project managers or mid level professionals have gone up from USD 15000 to USD 40000+ in 12 years time frame.

Also the cost of IT personnel experienced with new technologies is higher and even vendors would charge a higher rate for their personnel experienced with newer technologies for example people experienced in J2EE, Data-warehousing etc. Also vendors might not provide people with lot of experience in newer technologies to justify the higher rate. For example out of 50 J2EE developers deployed in the project, 30 odd developers might have around 1 year experience or even less experience.

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