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Vipin V. Nair

The reasons that hold back companies from offshoring to low-cost destinations like India are fear of losing control, differing corporate cultures and geo-political risks.

NEW DELHI, July 3

A MERRILL Lynch survey of Chief Information Officers (CIOs) of Fortune 1000 companies in the US has revealed that more than half of them prefer to outsource software development from their own subsidiaries in India or units of European and American companies, rather than Indian software vendors.

The reasons the CIOs cited for preferring global vendors to Indian companies were easiness to explain requirements, the perceived better quality of solutions and vendor control, Merrill Lynch said in its India Offshore-focussed Survey.

While 15 per cent of the CIOs said they would prefer to outsource work to their Indian subsidiary, 37 per cent said they would give the work to the Indian arms of US/European vendors.

The rest said they would go to third party Indian vendors.

However, when it comes to outsourcing work to third parties in India, CIOs prefer Indian companies to global vendors.

The survey of 50 CIOs from telecom, financial services, insurance, manufacturing, retail and healthcare industries also found that outsourcing in 2003 to Indian vendors is expected to be almost flat at 4.2 per cent of the IT budget as against 3.8 per cent in 2002.

However, the share of IT budget outsourced to Indian companies could grow to 7.3 per cent in 2005.

Merrill Lynch says the three reasons that hold back companies from offshoring to low-cost destinations like India are fear of losing control, differing corporate cultures and geo-political risks.

"In one of our recent conversations with the CIO of a US-based IT outsourcer from the banking and financial services industry, we found some dissatisfaction with Indian vendors on quality of solutions (stemming from inadequate domain knowledge) and quality of software professionals (an execution-orientation rather than a solution-orientation), and therefore lower than expected productivity and effectively higher cost than the man-hour may suggest," the survey says.

Pricing pressure to continue: While prices declined by 0-9 per cent in 2002 for 33 per cent users of Indian IT services, in 2003, as much as 60 per cent users expect prices to decline by those levels.

The continued pricing pressure is led by existing customers renegotiating prices down to current market rates; lower thresholds for volume discounts; finer pricing being forced by outsourcing consultants and increasing global vendor competition.

"Therefore, while pricing for traditional application maintenance and development work is likely at about $17-21 for offshore (against $19-23 about eight months back), we expect a further 5-10 per cent decline," Merrill Lynch said.

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