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Nearshoring: India's hot new IT
opportunity
By Indrajit Basu
KOLKATA - The global economic slowdown that has
resulted in reduced IT spending worldwide has no doubt
pushed Indian IT companies towards the offshore
advantage, but another new business model that is
emerging as a hot opportunity is nearshore outsourcing,
or specifically, nearshoring to Canada.
Nearshore outsourcing, as the name implies, is
outsourcing to a nearby territory that is accessible by
short travel or telephone in the same or neighboring
time zone. It is a direct fallout of Sep 11, 2001, which
highlighted the need for, and raised awareness of,
business continuity and disaster recovery to almost
mission-critical levels. And this in turn has led
companies as well as governments, particularly from the
US, to rethink their outsourcing strategies for software
development and servicing.
According to industry
sources, companies have realized that strong labor
arbitrage need not necessarily be the prime driver for
decisions on offshore outsourcing, because offshore
outsourcing, too, has its unique limitations and works
well only when the partner operates in a conducive
environment. And, US-based decision makers perceive the
continual India-Pakistan standoff over Kashmir as the
biggest threat to the secure political environment in
India.
"Though September 11 was one of the
triggers for US companies to think of nearshore more
aggressively, in the Indian context it was December 12
[2002 attack on the Indian parliament by Pakistani
terrorists] and the subsequent Indo-Pak war fears that
it generated, that were more important factors", says V
Shankar, head of IT services at iFlex Solutions.
"Factors such as political stability and peace
definitely have an impact and in this context the travel
advisories did affect Indian companies to the extent
that clients delayed decisions with the period for
closure going up from approximately three months to six
to eight months," said an official of India's Tata
Consultancy Services (TCS), who added, "It is in this
context that nearshore has gained significance."
But why Canada (and not another neighboring
country, like Mexico)? A recent Goldman Sachs survey
states that post-Sep 11, there has been a tendency among
US corporations at large to go nearshore to countries
like Canada because in the overall global offshore
market share, Canada is now ranked third only after
Ireland. Apart from the obvious advantage of the
proximity to US markets, Canada also offers a clear
competitive edge in terms of costs. For instance, the
2002 edition of Competitive Alternatives, a KPMG LLP
study, said that overall costs for Canadian cities are
generally 10 to 20 percent lower than their regional US
counterparts.
No doubt, therefore, that top
Indian IT companies are moving in fast. Already, the top
three Indian IT companies - Infosys, Wipro and TCS -
have set up bases in Canada. For these companies, which
are already leaders in the offshore space, the nearshore
option comes as an added advantage (besides the cost
advantage that KPMG highlighted): The Canadian market
itself offers untapped potential for Indian IT
companies. According to the NASSCOM-McKinsey report
2002, by traditionally focusing on the US and UK, Indian
companies had largely ignored the potential of Canada.
"Canada is an ideal nearshore destination for
Indian companies, given its proximity to the US market
and the fact that there are no visa hassles between the
two countries. We have been actively interacting with
trade promotion delegations from Canada and providing a
channel for companies on both sides to interact," said
Sangeeta Gupta, vice-president, NASSCOM - the National
Association of Software and Services Companies.
The awareness is getting stronger and the
"nearshoring to Canada" lucre has had the Indian IT
companies craft expansion plans already. Wipro
Technologies, for instance, which set up its development
center in Windsor, Canada, as recently as September this
year to provide clients in North America a nearshore
destination for their projects, is reportedly planning
to scale up the Canadian center from 200 to 500 heads
shortly.
TCS Canada, which was the early mover
and which has set up three offices in that country
already - Montreal, Ottawa and Toronto - is setting up
yet another specialized research and development center
in Toronto. And Infosys, which currently employs 75
people in its Toronto development center, plans to
expand to about 500 people over two to three years.
There are even more reasons that make Canada a
good nearshore outsourcing base for Indian companies.
"Besides a favorable exchange rate, Canada, as a
nearshore alternative, offers other benefits for Indian
IT consulting groups serving US companies, including
language, physical and cultural proximity, strong
government relations and trade agreements like the
NAFTA," said TCS officials. "With people reluctant to
travel overseas, the near shore option has taken off.
Canada leads this segment, followed by Mexico, the
Caribbean and Venezuela," they added.
According
to Sudip Banerjee of Wipro Technologies, "Several
studies have found Canada to be the lowest cost country
in software, R&D and corporate services in addition
to electronic assembly. According to Industry Canada,
R&D expenditure in the ICT [information and
communication technology] sector in 2001 was expected to
touch $5.3 billion, a 45.8 percent of the total Canadian
private R&D. Thus, for Indian IT companies seeking
to move up the value chain and focusing on R&D
services, it could be a very good bet."
A few
also see nearshore as a logical fallout of the upward
movement of Indian companies along the value chain.
"While it is nothing new for larger companies, they are
now in a position to provide the proof-of-concept to
customers through the nearshore model," said Sangita
Singh of Wipro, adding, "Perhaps five to 10 years from
now, Indian companies will not be just offshore players,
but truly global in their outlook and operations."
(©2002 Asia Times Online Co Ltd. All rights
reserved. Please contact content@atimes.com
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