Analytical Commentary

July 13, 2009 (FinancialWire) (ValueNotes Outsourcing Watch: Insights for Investors) — Indian IT majors Infosys Technologies (NASDAQ: INFY) and Wipro Technologies (NYSE: WIT) have something in common with US-based Rural America Onshore Sourcing and Xpanxion. Rural outsourcing forms a large part of their strategy and is aimed at respective domestic markets. But this is where the similarities end. Amid recession and outsourcing backlash, companies in the US are also looking at other forms of conducting business to reduce costs. This is where most believe, rural outsourcing is expected to play a part. Cost effectiveness of establishing and maintaining centers in tier I and tier II cities is slightly less when compared to tier III cities and villages, hence the term rural outsourcing.

Building-up On Intrinsic Rural Advantages

Cost arbitrage led to the success of offshoring. Job cuts and quality issues followed, leading to opposition. Rural outsourcing seeks to capitalize on advantages and keep costs low and services running despite the recessionary trend, and Obama’s new policies. The US companies that are already either providing services, or using the rural model, outlined the following advantages: 1) lower cost of living in rural areas in the US; 2) lower operational costs; 3) proximity to the client; 4) lower risks - political and others; 5) no cultural and communication issues; 6) Lower rate of attrition; 7) lower management costs; and 8) greater customer satisfaction.

One of the biggest advantages of this form of outsourcing over offshoring is onshore presence, which eliminates any possibility of cultural or communication problems. With availability of talent, Internet and connectivity more and more companies are looking at this option. Some companies have had to relocate their operations after offshoring was not very successful. Similarly training is easier as traveling to an onshore location does not require long and arduous planning. Some of the other companies that offer rural outsourcing are Saturn Systems, Rural Sourcing Inc., Cayuse Technologies, etc. These companies also stand a greater chance of winning government contracts and registering greater customer satisfaction.

Lessons From The Expert

Rural outsourcing in India has been used to cater to the domestic market, though with limited success. Some of these companies that have set up centers in rural India include RuralShores, HOV Services, Sai BPO and DesiCrew. Infosys BPO and Wipro are looking to forge relationships with companies that are already established using a revenue-sharing model. These companies have cited their intention of increasing presence in the domestic market, as overseas markets are still to recover from the recessionary trend. The entry of bigger players will mean more business and more focus on this segment, leading to faster growth.

Challenges that rural outsourcing is likely to face in India are availability of talent and infrastructure. This has a direct impact on profitability and these are issues which need government support. While success at a smaller scale has been achieved, much improvement will be needed for large corporations to succeed.

Near, Yet So Far

The viability of rural outsourcing model in the US is even more doubtful. Its ability to replace offshoring seems a far-fetched notion as scaling up will be an issue. While it is a good option for smaller jobs, it may not be able to replace the offshoring contracts that involve thousands of jobs. This combined with tax benefits in other countries, enhanced skill sets, entry to new markets and faster turn around time have continued to drive offshoring. Most of the companies in the US will ideally be looking at using a model that will optimize returns. So while a complete shift may not be possible, projects that need greater understanding of culture and require immense training and onshore presence are likely to use US rural outsourcing. For most other voluminous jobs, offshoring may be the best bet.

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ValueNotes is an independent research firm based in Pune, India, and provides a range of custom research and business intelligence services, including India-based research outsourcing solutions. Through a constantly evolving range of products and services, the ValueNotes Outsourcing Practice (http://www.sourcingnotes.com) provides service buyers, vendors, consultants and others in the outsourcing industry with access to in-depth analysis backed by reliable primary intelligence.

“ValueNotes Outsourcing Watch: Insights for Investors” is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing. The publication analyzes events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established U.S. companies, and emerging investment opportunities.

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