This is either a brilliant move, or the beginning of the end.  According to an article in The Times, the Tata Group’s outsourcing arm, Tata Consultancy Services (TCS) will begin providing some services gratis.  It’s a moderately long article that details the current woes of the Indian outsourcing industry, but I’ll excerpt the key bits here.

‘Outsourcing, already regarded as a threat to Western jobs, is set to get cheaper: India’s largest IT outsourcing group is to give away services for free in an effort to lure large clients such as Wall Street’s beleaguered banks to sign off big contracts.

Shares in Tata Consultancy Services (TCS) fell by 9 per cent in morning deals in Bombay this morning – a record intraday fall for the stock.

The slump came after India’s largest private-sector employer missed earnings targets yesterday by a sizeable margin and posted its first quarter-on-quarter fall in earnings in three years.

TCS said today that it would shoulder the cost of “transition work” on selected large outsourcing contracts, a move designed to buttress future earnings.

The charges, which previously would have been paid for by customers, cover the preparatory work carried out before a function – such as the running of a piece of back-office work for a bank – is outsourced from the West to India.

“This is an investment that will be recouped as contracts proceed,” a TCS spokesman said.

Outsourcers are looking for a way to clear the heads of Western banking executives left shell-shocked by the meltdown on Wall Street and in the City.

Indian executives have complained for several months that clients in the banking sector have delayed spending decisions, often after the departure of senior executives in the wake of the sub-prime debacle.’

The discussion in The Times goes into some details about just how bad it is for TCS, and also mentions that the all of the major Indian outsourcing companies are experiencing

“…a slump in demand from the financial sector in the West.”

It seems that the recent troubles with sub-prime mortgages and other bad debt are finally having an impact the outsourcing industry.  Those of us who hoped that the efficiencies gained from outsourcing would outweigh the poor economic conditions may turn out to be disappointed.  As the piece continues…

“The slump on Wall Street has come at a bad time for India’s IT industry, which was already battling the effects of the rupee’s sharp appreciation against the dollar and annual wage inflation running at between 12 per cent and 15 per cent.”

We might want to take a couple of lessons from this news.  First, basing your outsourcing business on serving banks & financial institutions may not be a great idea, right now.  Second, the weak dollar and increased costs are finally starting to impact the Indian outsourcing industry.  Unfortunately, the same factors could begin to hurt China’s software/IT outsourcing industry.  I suspect that concerns about this are behind some of the strong motivations for many of the vendors to pull back on approaching the West and to focus, instead, on growing their domestic business.

Technorati Tags:  China, China Outsourcing