Part IV: How do successful multinationals approach India?

Is offshoring in India worth the political risk?

Offshoring has become a volatile issue in Europe and the United States. If the world economy remains sluggish and unemployment rises in developed countries, the debate could intensify. Yet the initial impact, paradoxically, has been to create a higher awareness of the advantages of offshoring, particularly for small and midsize businesses, and to make the practice more common.

Should politicians in the developed world succeed in passing protectionist legislation, the debate's long-term impact could be less benign for companies that are seeking to cut their costs. But convincing arguments justify weathering the storm and extracting more value from offshoring.

As the offshoring sector evolves, globally and in India, the focus will expand from reducing costs to exploiting value-added opportunities and generating revenues. One multinational finance group created an analytical group in Delhi that uses sophisticated mathematical models to examine transactions. Low labour costs allow the group to analyse even small ones. As a result, the company has prevented about $50 million in attempted fraud and approves many more transactions than it did before.

Airlines, telecom providers, and other companies serving a large customer base can use this sort of analytical talent to improve their marketing and to scrutinise suspect transactions.

But India's offshoring success has generated more and more demand for its skilled workers. About 150 foreign companies have set up offshoring subsidiaries there, and they compete for talent with local suppliers such as Infosys Technologies [Get Quote], Tata Consultancy Services [Get Quote] and Wipro [Get Quote] Technologies. Recently, the demand for skilled software engineers and managers has pushed salaries higher and triggered a talent war for the best people, particularly in IT centers such as Bangalore and Hyderabad. Multinationals should be aware of these trends when they calculate the benefits of offshoring, though efforts are now under way to increase the supply of suitable Indian workers.

Next: Will infrastructure be a problem?

Adil S Zainulbhai is a director in McKinsey's Mumbai office. This commentary first appeared in India Abroad, the newspaper owned by rediff.com