NETWORK WORLD NEWSLETTER: MARK EHR ON OUTSOURCING 11/17/04 Today's focus: India shoots itself in the foot with new tax
Dear [EMAIL PROTECTED], In this issue: * Emerging offshore outsourcing destinations ready to take on ��India * Links related to Outsourcing * Featured reader resource _______________________________________________________________ This newsletter is sponsored by Intel IT Productivity; Increasing ROI Learn how to effectively measure employee productivity, manage IT investments and reduce the Total Cost of Ownership in enterprise data management. Visit Intel's IT Productivity center. Click here to download white papers, books and IDC Research. http://www.fattail.com/redir/redirect.asp?CID=88383 _______________________________________________________________ DOWNLOAD INDUSTRY WHITE PAPERS NOW NW Fusion's White Paper Library is your source for the latest industry white papers. Recent additions to the library include white papers on WLAN Security; IT Documentation; protecting the internal network from worms, Trojan horses, and other malware threats; measuring employee productivity and more. Click here to download: http://www.fattail.com/redir/redirect.asp?CID=88313 _______________________________________________________________ Today's focus: India shoots itself in the foot with new tax By Mark Ehr On Sept. 28, India shot its outsourcing market in the foot. On that date, India's finance ministry announced an income tax of more than 36% on foreign firms that have software, R&D, or customer service operations in India. The tax was enacted ostensibly to discourage foreign-owned service providers, such as EDS and Perot Systems, from establishing wholly owned operations in the country. Instead, the theory goes, these companies would send offshore outsourcing work to service providers owned by native Indians in order to avoid the tax. This tax could potentially affect a number of U.S. outsourcers that have set up shop in India. EDS, for example, has more than 1,000 employees in India providing business process outsourcing and help desk/call center outsourcing services as part of its "Best Shore" program. Perot Systems also has a large presence in India, which was expanded in December 2003 when it bought out its Indian joint-venture partner, HCL Technologies, for $105 million. The tax is not the end of new taxes in the country, however. India also has taxes on the drawing board that would tax activities conducted over international private leased connections, which would affect nearly every company that must transmit voice and data to and from India. The country is also considering the introduction of a national value-added tax, which would replace state-to-state customs duties known as octroi. (And how much do you want to bet that the new taxes will be higher than the ones they replace?) In my opinion, this approach is inherently flawed and will result in a flood of the country's foreign-owned services operations moving elsewhere. These companies located their offshore subsidiaries in India to help their customers save costs and take advantage of "follow-the-sun" time zone differences. Critics of offshore outsourcing fear higher risks in terms of potential loss of intellectual property and loss of control over projects, but these risks were mitigated to some extent through the creation of wholly- or majority-owned offshore subsidiaries. These units allowed the U.S. parent companies to exert a substantial amount of control - more than if the work was outsourced to native Indian firm. My impression is that India's government reasoned that if it exacted a large tax on these companies, they would feel encouraged to either send the work to wholly-owned Indian companies or to take on majority partners that are native Indians. This approach is fundamentally flawed-and this is why. Over the past few weeks, I have been researching alternate offshore outsourcing locations, including Pakistan and Vietnam, and there are some compelling business cases out there (even more so now). For example, I have been in contact with Nguyen Huu Le, who is the Chairman of TMA Solutions in Vietnam. TMA is a 7-year-old privately held outsourcing company based in Ho Chi Minh City with 350 employees (and well on the way to over 600 in 2005). TMA is a software development outsourcer that counts Nortel, Lucent and NTT-Data as its customers. According to Le, companies are increasingly considering Vietnam as an offshore outsource destination for a number of reasons, including lower cost and attrition rates than other countries, including India. TMA claims that Vietnam's average costs for development resources are 80% less than the U.S., 50% less than India, and 30% less than China. The company also claims that attrition rates of high-tech personnel in Vietnam, currently at 6%, are considerably lower than other countries - India, for example, is currently around 40% and growing (note that turnover rates in some areas, such as call centers, are close to 100% in India). On the downside, telecommunications costs in Vietnam are considerably higher than other countries - a 128K-bit/sec link, for example, can cost as much as $2,000 per month. Pakistan is also an emerging player in the offshore outsourcing market. Its proximity to India, and lack of taxes such as those described above, could make it a very attractive alternative. Turnover rates in Pakistan currently are less than 20% - not as low as Vietnam, but considerably lower than its larger neighbor. In addition, the average technical Pakistani speaks better English, as Pakistan's official language is English and it is widely spoken by the country's upper class and government workers. If you are considering an offshore outsourcing venture, or if you are one of the companies affected by the new Indian tax, I would encourage you to consider other countries, including Pakistan, China, and Vietnam. All of these countries have growing bases of highly skilled personnel, and their cost structures are lower than India's (even before the new tax was enacted). I welcome your ideas, suggestions and comments on the subject of outsourcing; my e-mail address is below. Thanks for reading. RELATED EDITORIAL LINKS TMA Solutions http://www.tmasolutions.com/ The Extended Enterprise Issue Network World, 11/15/04 http://www.nwfusion.com/ee/2004/ _______________________________________________________________ To contact: Mark Ehr Mark Ehr is a Research Director with Enterprise Management Associates in Boulder, Colo., a leading market research firm focusing exclusively on all aspects of enterprise management software and services. Mark has more than 20 years of experience working with distributed systems, applications and networks. His current focuses at EMA are applications and systems management, mobile and wireless, enterprise application integration, security, and Web services. He can be reached via e-mail at <mailto:[EMAIL PROTECTED]> _______________________________________________________________ This newsletter is sponsored by Intel IT Productivity; Increasing ROI Learn how to effectively measure employee productivity, manage IT investments and reduce the Total Cost of Ownership in enterprise data management. Visit Intel's IT Productivity center. 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