Inside offshoring: Location, location, location

India is the name most commonly associated with offshore outsourcing and, as such, was the focus of silicon.com's recent fact-finding trip to the subcontinent. A wealth of qualified graduates promises to keep India at the top of the tree for some time but other Asian countries are catching up fast, along with the emerging 'nearshore' cheap bases in Eastern European countries.

Even within India itself, some IT companies are being forced to look away from the high-tech hotspots of Bangalore and New Delhi. Chennai (Madras) is going from strength to strength, with the likes of Xansa investing heavily in new facilities there.

Others, such as niche Bangalore-based offshore outsourcing firm MindTree Consulting, are looking to smaller cities where there is still a plentiful supply of graduates. S. Janakiraman, president and CEO of MindTree's R&D services, said: "We are looking at the 'B' and 'C' class cities like Mangalore."

China is classed by most people as the likely rival to India, given that it's pretty much the only country that can match and beat India for cost and the numbers of graduates.

Perhaps not surprisingly, the Indian vendors are all keen to play down any immediate threat from China.

Simha HNLN, COO at Mumbai-based telecoms sector outsourcing firm Mahindra BT, said: "China is not more than 'embryonic stage' in this industry. Its culture is very much command and control. China would have to go through the problems and that lifecycle to build that infrastructure. From a perspective of maturing, the emerging countries are at least 10 to 15 years behind India."

Sudip Banerjee, president of enterprise solutions at Wipro, said there are many issues that put China some way behind India.

"In China, there's no scale there at the moment. Western companies are concerned over IP, the legal system, dispute resolution. These are areas China is far behind, and then there's the language."

Despite dismissing China, however, most of the big Indian players are already investing in their own operations there and, in some cases, are outsourcing work to China to maintain a competitive edge over rivals.

Nandan Nilekani, CEO, president and MD at Infosys, said his company is spending $5m to set up a China-based subsidiary.

"We're looking at work for our global multinational clients as well as for local Chinese companies," he said.

This is part of Infosys' strategy to brand itself as a global IT services player. The company does work for US companies in Canada and is investing $20m in a new global consulting practice.

For UK and European companies looking at offshore outsourcing, the 'nearshore' alternatives in Eastern Europe are increasingly attractive. Wipro already has a small operation in Reading in the UK for onsite work, and the company is looking at European bases as well.

"We will probably look at a centre in Eastern Europe to address the market in Germany," said Banerjee. "It will also be a possible alternative nearshore for UK systems."

LogicaCMG is another vendor pushing the 'nearshore' - or, to quote marketing-speak, 'right shore' - alternatives.

Alan Forder, operations director of outsourcing services at LogicaCMG in Bangalore, said the hybrid model is reassuring for many customers.

"We have big application centres in Wales, the Czech Republic and Germany. The split is about being able to do the customer-facing thing. An example is our Britannia Airways contract where the project management and business analyst people who need front-end integration work with the client onsite."

But Forder is convinced India will remain for many years yet the first choice of location for offshore outsourcing.

"One of the key advantages India has had is its association with English. You probably need 10 years to get that quality of English [in another country]. India has been building up that IT background for 20 years so now they have enough techies and experts."

According to Gartner's most recent market analysis, India dominates the offshore sector, taking around 90 per cent of the total revenues. Ireland is classed as India's main competitor, closely followed by the 'nearshore' countries. China and Russia currently lack the resources or infrastructure to really challenge India, according to the analyst house.

One thing is for sure - whether it takes place in India, China or the Czech Republic - offshore outsourcing is here to stay as a key part of any business' IT strategy.

G K Prasanna, VP technology infrastructure services at Wipro, said: "We've not even scratched the surface on what's possible. We'll be able to do more work remotely. It's not about offshoring, it's about remote, with Intel and other manufacturers all making their devices more remotely manageable."