The Hindu : Cashing in on outsourcing offshore

Online edition of India's National Newspaper
Thursday, Oct 10, 2002

Business

Business

Cashing in on outsourcing offshore

By N. N. Sachitanand

BANGALORE OCT. 9. Hit by the double whammy of stagnant markets and declining margins, companies in the developed world are going all out for cost control to keep their noses above the water. A knee-jerk aspect of this is reduction in staff numbers but a longer term strategy is outsourcing of non-core goods and services.

When it comes to information technology (IT) activities, the first preference is for reputed vendors within the country as there is a level of comfort in this. In order to lower their costs, these in turn outsource manpower-intensive tasks to vendors in countries with lower manpower costs.

The next stage of offshore outsourcing is cross-border collaboration between the IT service vendors in the developed countries and vendors in countries with a fairly well-developed IT service industry, such as India and Ireland. And then comes direct outsourcing of IT services by end-user companies to reputed vendors abroad such as TCS, Wipro and Infosys in India as well as the establishment of subsidiaries by Tier 1 service vendors in lower cost countries like India.

In a brilliant exposition of global IT sourcing trends at the Nasscom-Gartner Summit 2002 , held recently in Mumbai, Rita Terdiman, Vice President and Research Director for Gartner Research, pointed out that India has so far been dominating offshore IT services delivery. This has been due to the large pool of programmers, engineers and managers, general familiarity with English, determined implementation of quality processes such as that of SEI, considerable entrepreneurial talent in the country and Government support. The Indian IT service industry, acknowledged Ms. Terdiman, has been especially adept at putting in place the processes needed for taking up outsourcing projects.

But this position of dominance can be shaken if India does not attend to its weaknesses, some of which are well known, such as poor IT infrastructure, creaking legal system, restrictive labour laws and shortage of globalisation skills. Strangely, according to Ms. Terdiman, for an IT industry which depends so much on outsourcing contracts from the U.S., there is very little cultural compatibility with American mores. The fragile security and public order environment in India is worrisome, particularly for clients wishing to outsource 24 hours by seven days a week type of work. News about sudden work stoppages due to bandhs, strikes, communal strife and political disturbances is certainly not conducive to landing more contracts from abroad.

Ms. Terdiman cited some interesting examples of feedback from U.S. customers about Indian vendors which should be an eye opener to our marketers:

"They downplay or downright deny the cultural differences.''

"They respond to questions that THEY think we should be asking or would like us to ask — rather than addressing the questions and concerns that we took painstaking efforts to document.''

"They develop great systems but they don't bring the change management skills and we have to buy that elsewhere or do it internally.''

"I want the vendor team to challenge me and my thinking, not just execute work orders — especially when they don't agree.''

"They understand my code and are excellent at executing these mechanical systems but I would like them to derive and bring me insights and innovation based on that intimate knowledge.''

The general feeling is that China poses a future competitive threat to the Indian IT services industry. That is not really so. Actually each vendor country is specialising in certain niches. For India it is application outsourcing, ITO, BPO, product development, network management and contact centres. For China it is embedded software, hardware services, localisation and application development.

What the Indian vendors need to be anxious about, says Mr. Terdiman, are:

* Intense downward pressure on pricing and margins.

* Tier 1 vendors from client countries establishing subsidiaries in India and neutralising India's local player advantage.

* Commoditisation of lower-end services.

* Market consolidation that can hit small players.

As the offshore outsourcing model matures, clients will be looking for purchasing an integrated mix of strategy, operational solutions and technology. They will also want a global delivery model that will need a local presence and a global workforce.

The challenge for Indian vendors will lie in shifting from techno-centricity to business-centricity, which means acquiring capability in business process and systems integration in addition to having technological ability. There will be a transition in demand from horizontal to vertical business solutions, necessitating acquisition of domain expertise. Indian vendors will have to graduate from process management skills to project management skills. Putting excellent security measures and disaster recovery systems into play will be of paramount importance.

Mr. Terdiman feels that India will continue its dominance in the market for offshore outsourcing of IT services in the next few years. But whether this lead will continue for long will depend on whether Indian vendors will make the changes outlined above.

Printer friendly page
Send this article to Friends by E-Mail

Business