Outsourcing Strategies: India Plus One

As new destinations continue to come up, and India begins to lose some of its outsourcing market share, a term that’s increasingly used in industry jargon these days is ‘India plus one’. In other words, a diversified portfolio consists of the sourcing staple, India, and at least one other location. A recent article in the Economic Times that I want to reference, discusses how too much dependence on India these days is seen to be a risk. It’s a slightly biased article justifying that argument with events like the Mumbai terror attack and the Satyam scandal, while conveniently leaving out the many political issues in China, or the drugs violence and corruption in Latin America. However there are a few points it brings up that I’d like to touch on.

The first is that India currently dominates the outsourcing market, no doubt about that. More than 60% of the US firms on a recent Capgemini survey outsourcing to India, as compared to 27% to China and 25% to Latin America. However sourcing trends show that India’s lead, while staying strong, will continue decreasing – and buy side companies would be well advised to look for effective combinations of India with other locations.

One of those combinations that the article highlights as working well is the India2 + 1 strategy – “two India locations (one a main city like Bangalore or Chennai, and the other a Tier II or Tier III location like Mysore or Noida), plus another geography”. Consulting firm TPI says this is an approach that many firms are considering in order to balance geopolitical risk.

The second point to take from this article is that there are geographies that can be alternatives to India. The main one at the moment is of course China. Apart from the number of engineers the country produces and the labor cost, firms also want a piece of China’s massive domestic market. As a result, China sees mostly shared service and captive centers being set up, which can not only outsource to the US, but can also quickly be made market-facing to serve the Chinese. By contrast, the main offshore model in India is the third party provider.

However China is not the only viable alternative to India. Forrester recently put out a list of countries that qualify – Argentina, Brazil and Mexico make the cut in Latin America – Argentina for its low wages, Brazil for its large young workforce, and Mexico for its technical and IT knowledge. However it’s clear from even a quick glance over those characteristics that India has all three, while most countries only have one or two. It’s what accounts for India’s supremacy in outsourcing.

In conclusion, no one market is going to be as dominant as India, as the article says. However as a key tenet of a diversified sourcing strategy, go for an India plus something model. China and Latin America are usually the best complements.