Assessing offshore destinations- First stop: India

The strategy

Pentalog was nominated as the 458th company in Europe and Middle East for positive growth in 2008, according to Deloitte Technology Fast 500 EMEA. In 2009 Pentalog’s sales clearly raised above the EUR 10M to 13.5 M. But more importantly, Pentalog was able to generate profits which would typically be found in companies 2 or 3 times larger than us. The conclusion is that for 2010 we want to reinvest these profits wisely, without wasting them. We have some new projects on the launch but also some new locations under observation.
Taking in consideration the global outsourcing map, the Eastern European solution is responding to social and cultural issues and kept both parties between protectionism and competitive relocation. The quality of work, especially for complex outsourcing assignments, will keep Eastern Europe as a premier destination for nearshore projects. Asia is mostly a matter of cost reduction, when constraints of time shift, flow of goods, people and culture are not obstacles. Asian countries inspire us by their ability to upload hundreds of collaborators but worry us because of functional aspects and communication.
After a deep analysis we decided to go for three variants: India, Russia and Tunisia.

Definitely… India

It took India one decade to reinvent the outsourcing industry and stay ahead of all trends. The evolution of India started when the country was primarily a back-office destination for software development firms and contact centers in Western economies. The country has come a long way since then, and long strides have been taken in infrastructure and incentives to stimulate its outsourcing industry. India became fast a significant player and enabler for outsourcing growth. Many global firms have set up their outsourcing capabilities in India. For example IBM announced in March 2009 that 5000 jobs would be cut in the USA and many of them transferred to India.
India is undoubtedly the most mature offshore nation today, blessed with almost 3.5 million graduates (non-technology courses) and over 500,000 technical graduates being churned annually. The labor cost is significantly cheaper as compared to any U.S. cities. The monthly salary of an entry-level techie (for example in Chennai) is $280 to $300 and for an entry - level BPO executive is $200 to $220 (Global Services Media- Top 50 emerging outsourcing cities).
But there are some difficulties without a doubt, as highlighted in recent articles and studies (Gartner, McKinsey) announcing that this problems could bring a slowdown in the growth of offshore business in India. The country's IT service providers will experience a growth revival that could lead to spikes in wage inflation and attrition. To balance those trends, vendors will continue to move work to tier two cities, such as Pune and Chennai.
As an explanation, there are of course the consequences of the global economic crisis: customers tend to decrease the volume of their operations, they seek to renegotiate prices. But before that, there are also high turnover rates, salary inflation, infrastructure problems, the Satyam scandal, the attack in Mumbai… India’s reputation was affected lately.
Terrorism is one of the most sensitive problems for the Western companies operating in India. The attacks in Mumbai from November 2008 raised risks and also some question marks for those who wanted to operate in India. Executives began to search for alternative locations, where the risk of terrorist attacks was much lower- like China.
Corporate scandals also changed the perspective in the mind of many executives. After some doubtful corporate governance practices were put in the spotlight, companies began to abandon India. For example - Dell is now offering premium support services in US. Delta Airlines also announced in April 2009 that it will close its subsidiaries from India.
Also currency movements could dethrone India from its position. The rupee began in late 2006 to strengthen against the dollar and maintained this positive trend until 2008. The fluctuations showed how fast a cost advantage can erode. Companies are extremely sensitive to the parity rupee – dollar and a new downward movement could again hurt badly the Indian economy. Everything that is imported to the USA is becoming more and more expensive, and this is profiting the local American production.
But still…India is “a must” and it will keep its offshore leading position for some while. Indeed, in terms of resources, tens of thousands of young engineers in computer science graduate every year from Indian universities. At this level, no other country can compete, not even China, who faces linguistic problems that hinder the development of the country on offshore markets. One needs to pay 10 to 15% more for English-speaking resources there and the key destinations where one can find these rare gems are already saturated. So prices go up even much faster than in India…And with their experience, Indians know how to benefit from the rise of other offshore nearshore destinations. Most of the giant Indian companies have subsidiaries in Eastern Europe and they are in the process of settling in Mexico or Brazil.

The story - “Everything’s possible in India”

What was so surprising about India is the dilapidated state of its cities, whose population is growing faster than infrastructure can adapt. Pentalog visited 3 cities (Chennai and Bangalore, Pondicherry - having less than one million inhabitants).
The central question about the availability of human resources from both a technical and linguistic point of view, proved to be more difficult than what we had anticipated. According to Pentalog's policy – that all developers should be able to work in at least two European languages- our search for partners in India was limited by the language skills- French speaking was mandatory in our searches. Pentalog searched for young project managers and entrepreneurs, technical experts in the areas of interest (embedded systems), but also academics, students and teachers who could help us assess the level of technical expertise and the level of French in the cities where we went. People working in R&D centers and other special schools (IT and avionics sectors) were also part of our research target.
Even in Pondicherry, IT students who learn French were very rare… less than 5% at the Pondicherry Engineering College that we visited. The network of “Alliances Francaises” and “Campus France” are very present and active throughout the country, but ultimately, there are only a few hundred Indian IT students who study in France each year and few of them in the areas that interest us the most. Pentalog encountered a major IT player in the Indian avionics sector in Chennai and they estimated that only 1% of their 1500 embedded engineers in their sector are francophone. They took the gamble of language training with the local “Alliance Francaise” in order to expand their operations in France. It’s a long term investment. And as suggested by an Indian entrepreneur we met in Bangalore, requesting an aeronautical IT engineer to spend time learning a foreign language, to the detriment of his technical progress in his profession, may have him leave the company. There is also the solution to employ translators who would work alongside the engineers but we know that translating is not easy especially when dealing with subjects on such a high level of criticality and sophistication. Apparently some big companies do, so it must work at least partially so, however, Pentalog remains skeptical.
On the technical side, throughout India, there are many of the experts that we were looking for. There are maybe 15 000 in the country. But these people want to work for big name companies, directly for the end customer, and are loyal employees when they work on high-level projects. We heard about the average attrition rate of 20% in India, and when talking about the companies in embedded aeronautics, one comes up with a figure of around 8%. It is definitely not easy to recruit.
But besides all these difficulties which Pentalog has clearly understood, there is no doubt that the Indians also know how to demonstrate their seriousness and maturity in the offshore business. From the meetings that we held, it suggested that there really is something to do there. Several times we were told, “Everything’s possible in India” and we started to believe this. Nevertheless, the investments that should be deemed essential in building something solid in India would certainly be more costly and the process, more complex than in our previous locations.
Pentalog should visit at least 2 more cities in order to have a better perspective. Coimbatore and Hyderabad were often mentioned as interesting in the exchanges we had… In any case, if we launch and manage the challenge, it would be quite a performance and it would be the icing on the cake for Pentalog’s offshore business.