Monday, August 27, 2007

Rethinking the Off-Shore Model

I was talking with a colleague the other day. We got into a discussion on outsourcing. We did not get into a heavy debate on the socio-economic-political ramifications. The discussion centered on cost to the outsourcer and the outsourcee.

The discussion turned to India. "How can you compete?" my colleague asked. I think it is getting easier to compete. This article from have to register) talks to the changing economic situations in India.

The rupee is beginning to appreciate against the dollar. The author thinks the rupee can reach 15 to the dollar in the next 20 years. For the life of me I can't find where the rupee is trading today. Trust me, it is a lot more than 15:1.

If your business model has you competing on cost - suddenly you are finding that the cost difference is not such a slam-dunk as it has been for the last 5-7 years. As costs rise because of the stronger rupee, you become less profitable. Your competitive advantage erodes.

The author points India to the Japanese of the 1980's when the yen strengthened against the dollar:

For product lines where they made the highest margins, such as the Lexus, they continued production in Japan. However, for lower-priced models -- where their profit margins were lower and would have been eroded further by the rising yen
-- they moved production to the U.S. They protected their margins on non-premium products by moving production -- and therefore shifting costs -- into dollar-denominated areas.
Indian outsourcers will be forced to raise their prices to meet their costs. They will also have to look for other areas of competitive advantage. They will have to "change the mix of activities carried out in India versus other countries."

The author also feels that the Indian companies will further evolve and become global companies that are just based in India.

You have to compete on value.

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