Indian business process outsourcing companies are facing a major obstacle in going up the value chain-inability to comply to US data privacy laws.

The Safe Harbor Act and the Sarbanes Oxley Act in the US -specify stringent rules on maintaining privacy on data, which are applicable on data which is also offshored.

Outsourcing and India: Complete Coverage

But foreign companies are complaining that Indian BPOs are unable to comply with these laws leave alone providing independent certification that they are compliant with them.

Says Avinash Vashistha managing partner of California based neoIT -the world's leading offshore advisory with clients like Lucent, AMP, Pyrix among others: "It has already become a serious impediment for BPO companies in India to go up the value chain. As a result they are still over-dependent on the voice business which is not a sustainable model for long as we have competition growing from Vietnam, Philippines and even Ghana".

He points out that Indian BPOs are still not ready to include the compliance of these laws under the contractual agreement leading them to loose contracts.

Vashistha points out that the key reason for inability to comply is the lack of any specific law on data protection in the country.

However he points out a move is already on in the Indian IT Ministry to push through a legislation on this crucial issue by 2004.

neoIT's Vashistha also points out that the other impediment for BPO growth is the lack of domain expertise amongst Indian companies.

"We still don't have the core competencies in various areas like in say HR outsourcing. So companies who want to outsource work can't find the proper people".

For instance Exult wanted to outsource end-to-end HR related work to a third party but was unable to find an Indian company with the requisite expertise. Instead it has decided to set up its own captive outsourcing unit in India.

Vashistha says that Indian companies also better watch out from growing competition from other countries.

"Lot of companies are outsourcing technology based applications in Russia and using Philippines to outsource their maintenance work. The Russia-Philippines combination can pose a threat to India."

The advantages are many: Russian costs are 25 per cent to 40 per cent cheaper than in India. And while Russia has a strong base of technology savvy personnel (due to their large defense base) Philippines has a strong base of English speaking people.

neoIT also believes that dependence on the call centre business will not offer Indian companies a long term business model for success.