Opinion: Post-Mumbai, India’s outsourcing bubble could burst

The terrorist attacks in Mumbai have cast a dark shadow over India’s status as the world’s largest offshore outsourcing ­location.

Many of the world’s leading ­offshore outsourcing suppliers have their headquarters in Mumbai and many ­Western banks are located within the city.

A spate of terror attacks in India over the past 10 years, culminating in the Mumbai attacks, must call into question the wisdom of Western organisations locating critical business services, ­operated by local outsourcing companies, in India.

Any organisation considering ­offshoring will usually take a number of issues into account. These include cost, geographical and political stability, skills base and tax transparency. Following the Mumbai attacks, organisations will now pay more heed to issues of geopolitical ­stability, especially given the heightened tensions between India and Pakistan, the Kashmiri issue and now the open ­terrorism by Islamic fundamentalist groups. All in all, this now begins to make India look very unpredictable.

This unpredictability is heightened when one takes into account the apparent overall tactic of militant groups of ­disrupting and destroying business ­interests. Remember that Mumbai is the financial capital of India and the terrorists appeared to single out US and UK ­citizens. It is not hard to see a situation arising in which militant groups turn their interests directly to outsourcing centres that are providing significant business-critical services to global businesses and financial institutions.

Although many of the large ­organisations with interests in India have dismissed the effects of the attacks, saying they will not affect outsourcing or have a serious impact in the future, are they right? Given that Western interests in India could become a target for terrorists, I think there will naturally be some ­concern over India’s future security ­landscape. Businesses may now think twice before turning to India for ­outsourcing services.

In view of this, we as lawyers will also have to rethink our views when advising our clients. In particular, we should be considering the potential issues around risk and security and be advising our clients to undertake security audits as part of the due diligence process prior to ­selecting an outsourcing supplier located in India.

In addition, outsourcing lawyers must now begin to pay more attention to ­practical risk issues such as the supplier’s disaster recovery and business continuity plans. All too often disaster recovery is an afterthought at the end of a long ­negotiation process. It should now be a paramount issue when advising clients that are outsourcing to the Indian ­subcontinent.

A full disaster recovery programme can be expensive, but it is usually necessary, particularly for financial services ­organisations which are required to have disaster recovery plans in place as a ­regulatory requirement, as detailed in the Financial Services Authority’s handbook.

But undertaking security audits and risk assessments is a new thing. They are expensive and not necessarily required if you were outsourcing to, say, Scotland. These will be extra costs that will now have to be factored into a deal, and India is already seeing high wage inflation and ­rising costs.

Will these latest terrorist attacks see a ­reduction in the number of companies ­offshoring to India?

Only time will tell. Increased political volatility will add to the concerns of businesses seeking economic but stable locations for their business-­critical services. Perhaps the Indian ­outsourcing sensation looks a lot more fragile than it used to.