11/09/2007

Trends in the Outsourcing, Shared Services and Offshoring Market

Alsbridge CEO and Collaborative Outsourcing pioneer, Ben Trowbridge, says, as the outsourcing industry moves into 2007, higher priority must be placed on staying cost competitive and staying ahead of global trends in the sourcing market.

"Companies want to see the results of their sourcing projects turn out successfully," observed Trowbridge. "In this regard, we believe our predictions of the market will prove beneficial to industry leaders and buyers in all stages of the sourcing lifecycle."

Alsbridge proprietary data, public information and current industry trends have led Trowbridge to offer his predictions for 2007:


Because of a tightening U.S. labor supply in technology, accounting and other processes, U.S.-based companies will accelerate their outsourcing strategies to stay competitive.

Contrary to prevailing opinion, cost of labor in India will remain neutral when compared with wage inflation in the U.S. The offshore trend will not subside.

Contrary to prevailing opinion, China will still lag other markets, mainly India, as a destination for English language driven BPO, or shared services centers due to language, low national birthrate, Intellectual Property and other legal issues. The exception will be those companies who have a market strategy to sell into the China market, which will override the former comments.

New areas of Eastern Europe will open up and should be evaluated as local authorities jump on the outsourcing, shared services and offshore boom.

The "location" decision will become more challenging due to shifting political and threat profiles.
The major Private Equity firms will again review acquisition and rationalization of the large outsourced provider market. The fact that no deals were done in 2006 does not mean they have lost interest.

Outsourcing of procurement will gain momentum in 2007 as certain providers begin to achieve true scale and market share as others continue to challenge them. The business case will become the velocity case.

Indian providers will continue to grow their global presence and win even more complex deals. The challenge will be to move from their high margin man-time "voice" pricing to true outsourcing price structures.
Throughout next year, the thriving U.S. providers begin to fall into one of two groups:

“The Transformers" -- Those that offer transformational outsourcing as a result of taking on multiple process silos, thereby gaining enough mass to affect change.

“OAP providers" -- Those who focus on single functional areas, often within a single vertical market, and offer outsourcing as a product (OAP).

Shared services centers, where clients choose to outsource to a center owned by the company, will continue to represent as much as half of the offshoring activities with Indian providers starting to participate more and more, creating hybrid solutions eventually poised for outsourcing. U.S.-based outsourcers will lag in adopting this solution area.

Knowledge Process Outsourcing (KPO) will grow significantly over next 3 years and generally go to captive centers, or be outsourced as a part of hybrid transactions. Research and Engineering will grow significantly as an offshored service.

"Future trends are easy to identify if you know what indicators really make a difference," says Trowbridge. "You have to know how to read between the lines when it comes to revenue numbers released by outsourcing providers. While an interesting statistic, forecasts must be evaluated based on labor statistics, birth rates, economic indicators and hard-to-find, internal corporate activities not released to the general public."

Trowbridge says his company gathers data from a variety of sources, including customers, providers, government agencies, research firms and trade and business media from around the world for the use of helping clients make informed decisions.


About Ben Trowbridge


Best known as a thought leader in the evolution of Outsourcing, Ben Trowbridge is a proven leader with more than 20 years of diversified global experience as Managing Partner, CEO and Senior Executive with proven experience in hundreds of outsourcing, shared services and offshore transactions as a consultant and buyer executive. In acknowledgment of his achievements Ben has been nominated for various Innovations in Outsourcing awards and is a recognized leader in all areas of IT and BPO sourcing and relationship management.

He has created a number of new, and now proven, sourcing models to include the Sourcing Alignment System (SAS)(TM), JVsourcing(TM) Methodology, FastSource(TM) and the Market Reality Assessment (MRA).

He has led and supervised sourcing transactions ranging from $150 million to $2.2 billion for a variety of activities such as F&A, HR and IT across multiple industries to include: transportation, consumer products, telecommunication, manufacturing, retail, technology, entertainment and energy/utility industries.

Ben previously served as Managing Partner and as a Founder of Ernst & Young's Outsourcing Services Business, which was sold, as part of one of the largest consulting services sale to Capgemini for $10.5B Euros in 2000. Prior to Ernst & Young, Ben served in a variety of executive roles at EDS during a number of high growth years. Prior to his civilian career Ben served in the U.S. Marine Corps attaining the rank of Captain.

11/07/2007

The next wave of globalisation: Offshoring R&D to India and China

Entrepreneur-turned-academic Vivek Wadhwa is up front about his use of offshoring and importing foreign talent in a previous professional life as founder and CEO of two technology companies. "I was one of the first to outsource software development to Russia in the early '90s. I was one of the first to use H-1B visas to bring workers to the U.S.A.," Wadhwa says. "Why did I do that? Because it was cheaper."

That tactic is even more lucrative for corporations today, says Wadhwa: "When you have a person on H-1B waiting for a green card, you have them captive for six to 10 years."

Wadhwa, who was addressing an audience at Harvard University, where he is now a Wertheim Fellow at Harvard Law School's Labor and Worklife Program , says outsourcing work to lower-cost countries and importing temporary foreign workers is all part of a larger globalisation transformation that is happening "an order of magnitude faster than the industrial revolution." According to Wadhwa, the ramifications of globalisation will be much greater than the industrial revolution. "It will impact our standard of living here in the U.S. in the next five to 10 years."

For better or worse? That depends on whom you ask, says Wadhwa. And it may be beside the point. "Globalisation is the reality," Wadhwa says. "Whether you like it or not, it's happening."

It's no longer just "low-end" work like call centre positions or data entry or even midlevel programming that's being shipped to China and India. High-value research and development work also is moving offshore, says Pete Engardio, a BusinessWeek senior editor who has been writing about globalisation for 20 years in addition to being a Harvard Law School Wertheim Fellow. And while cost is still the major driver, it's also about where talent and capabilities are available - and where they are available in mass.

Challenging conventional wisdom about engineering talent, Visa arguments

In fact, globalisation is happening so fast, academics like Wadhwa (also an executive in residence at Duke University's Pratt School of Engineering can't keep pace. Inspired by his students, Wadhwa decided to fill the void with some research of his own.

"I had four or five students come up to me one week and ask, 'What courses can we take that will make us outsourcing-proof?'" says Wadhwa. "These students were paying megabucks to study there and should be very well sought after and yet they were worried about their jobs. That didn't make sense to me." He and his students began to explore what he describes as commonly accepted misinformation about graduation rates around the globe and the "skills shortage" forcing U.S. companies to go abroad.

According to the U.S. Department of Education, America matriculates 70,000 students with undergraduate degrees in engineering every year, versus 350,000 produced by India and 600,000 produced by China. But China's numbers, which Wadhwa calls "propaganda," include "short cycle" degrees and rely on a looser definition of engineering. "The Chinese government told the provinces they had to produce more engineering degrees," Wadhwa says, "and the provinces gave them what they wanted."

India's numbers also include two-year diplomas. As a result, India and China can promote themselves as engineering-degree machines but "the vast majority of the graduates are unemployable," he says. (Wadhwa is currently getting a mix of cheers and jeers for his BusinessWeek.com column from Oct. 26, "The Science Education Myth", in which he cites an Urban Institute study that claims that U.S. schools are turning out more capable science and engineering graduates than the job market can support.)

As for the talent crunch argument that Bill Gates and others employ when lobbying for more foreign worker visas, Wadhwa also pushes back. He and his students surveyed 78 leaders at U.S. companies that were outsourcing high-tech work. The majority said they had trouble finding qualified candidates in the U.S. However those same respondents recorded job acceptance rates of greater than 60 percent, with those rates either remaining constant or increasing, and time to fill an open position of four months or less.

There's a shortage all right, says Wadhwa, but it's "a shortage of engineers below market price that work day and night like slave labour."

When asked about issues like the productivity and quality of Indian and Chinese employees versus their American counterparts, there was little debate among respondents to Wadhwa's survey. Eight-seven percent said U.S. workers were as productive as or more so than Indian or Chinese workers, and 96 percent said that their U.S. locations produced equal or higher quality work than their centres in China and India.

The advantage with U.S. workers, according to survey respondents, included communication skills, understanding of U.S. industry, business acumen, education and proximity. Chinese workers were valued for their low labour cost and willingness to work long hours, while Indian workers were sought after for their low labour cost, work ethic, English skills and technical knowledge.

The view from India, where R&D is rising

In spite of the survey respondents' praise of American workers, the offshoring of engineering and IT work to China and India continues for a variety of reasons, including the availability and cost of labour, and its proximity to new product markets.

BusinessWeek's Engardio described for the audience what he saw on his latest trips to Asia. Bangalore, the capital of India's IT industry, is home to Motorola's R&D lab, where employees designed 40 percent of the value of company's latest RAZR models.

Next door at NXP (a company spun off from Philips Semiconductors), workers are designing the chip sets for high definition televisions. General Electric's campus, called the Jack Welch Technology Center, features lovely low-slung buildings, first-class gyms and food courts-and much of GE's product design work. Ten percent of GE's Indian researchers are working on products the company plans to introduce in the next six months, 70 percent are working on products to be released in three to five years and 20 percent are doing very early stage work on products that won't be released for more than a decade.

"When I talk to economists or I read a lot of the public discussion of outsourcing, they still draw a lot of distinctions between what's being done 'here' and what's being done 'there,'" says Engardio. "They'll say the high-end stuff is done here (in the U.S.). The low-end, repetitive stuff is done 'there.'" That's not true, says Engardio. GE and Motorola aren't just employing coders or call center workers abroad, "they're employing scientists."

North of Bangalore, Hyderabad has a booming biotech industrial zone, says Engardio, that stretches for miles, housing 37 contract research organisations. "Three years ago, you could not get a major pharmaceutical company to say they would shift R&D to India," Engardio says. "Today they're doing it. Big pharma is gearing up big time."

The same day Wadhwa and Engardio conducted their seminar at Harvard, General Motors announced its plans to build an advanced research centre in Shanghai to develop hybrid and other leading-edge car technologies. "There are great quantitative and qualitative leaps in what is being doing in Asia," Engardio says.

And it's not just massive multinational corporations setting up R&D shops in Asia. Top-tier Indian IT service providers, once known for pure software development, are going after R&D business too, says Engardio. Satyam has set up a huge, industrial engineering facility. HCL Technologies is doing avionics work for Boeing's 787 Dreamliner. Tata Consultancy Services actually designed a forklift for a U.S. company that was getting by its Japanese competitor and wanted to drastically reduce costs, says Engardio.

How is all this high-end work getting done if the vast majority of engineering undergraduates in India are indeed "unemployable" out of school and India produces fewer than 1,000 PhDs a year (compared to nearly 8,000 in the U.S.)?

For one thing, says Wadhwa, the multinationals and third-party contractors are more than happy to train local graduates who may not be ready to hit the ground running. Some have set up their own six-month "finishing schools" to do just that. The problem with post-graduate degree production in India is proving to be no barrier, says Wadhwa, because many of the researchers and scientists currently working there were educated in the U.S.

Due to the difficulty of obtaining work visas or green cards in the United States, these workers have sought greener pastures in India, China and elsewhere, he says.

For its part, China is actually working on improving its educational system the way it improved its manufacturing processes over the last two decades, according to Wadhwa. But India doesn't have to produce its own post-graduate degrees, says Engardio. "We're talking about chemists and molecular biologists with master's degrees or PhDs coming from U.S. to India where it's not doom and gloom," Engardio says. "There's a lot of opportunity."

While R&D goes offshore, innovation stays. For now.

When you're talking about offshoring, Engardio says, the conversation is no longer just about costs. It's also about where talent and capabilities are available. Though cost-cutting remains the driver behind offshoring, Engardio says this work won't come back to the U.S. as India's wages or other costs rise. "The shift is permanent," Engardio says.

In other words, American workers may be terrific. But they're expensive. And there aren't enough of them, according to Engardio. If the U.S. held on to more of the foreign-born students awarded advanced degrees, there might not be as many of them available in India or China either, according to Wadhwa.

One of the drivers of this R&D shift overseas is the rise of virtual prototyping. That ability to design and test machines on a computer has made design work more mobile. And engineers trained in the necessary software are plentiful in India. That's good, says Engardio, because these companies need "lots and lots of engineers."

Also integral to the shift of product R&D offshore is the focus on embedded software. Fifty percent of the value in new cars, for example, is in the dashboard, Engardio says. "There's a tremendous need for engineering and software expertise," he says, "and the Indian IT services companies like Wipro and Tata have that. They are now the biggest industrial design companies in the world."

The dynamic turns R&D offshoring into a slightly different numbers game. "If you want to keep up and have to introduce this kind of innovation and the myriad services you need to offer, it would be very difficult to do in the U.S. just due to workforce capacity issues," Engardio says.

Then there's the other reason R&D is increasingly headquartered in India and China: proximity to emerging markets.

Cisco now has 2,000 people doing R&D in India. "The head of that centre sits in an office and looks like a modern day Pharaoh with the scale of building under way around him," says Engardio. "He says in five years, they will have 10,000 people. And by the way, I'm not looking for average engineers. I want innovators. These are no cheap bodies." Why? He's not looking at the U.S. as his major market for product sales. He's looking at emerging technology greenfields markets like Dubai in the United Arab Emirates and Saudi Arabia.

"All the new developments outfitted with next generation telecom networks we'll never see in the U.S.," says Engardio. "The next generation of services is going to be in Asia." So Cisco is situating the design work in India. "Is it going to work out?" asks Engardio. "Who knows? But it seems like the right bet."

Anything that a company's customer touches and feels will remain harder to offshore to India, China or anywhere else, says Engardio. And perhaps, most important, so too the innovation itself. The product ideas happen at headquarters and are executed elsewhere.

"The only thing (India) isn't doing is owning the intellectual property. The multinationals are pulling the strings and staying at the top of the food chain, which is why the debate over whether this is good or bad for the United States is very, very murky," says Engardio, "The American companies have India working for us, in a way."


11/06/2007

2008 FAO Forecast

The FAO market is in for a wild ride next year. Here is a list of changes that are occurring at mach speed:

The Suppliers:

  1. FAO outsourcing will cleave in two. The Indian suppliers will dominate version A: transaction-based outsourcing. Version B: FAO with business insight. David Poole, Vice President and Deputy Chief Executive of Global Business Process Outsourcing, Capgemini, says this version focuses less on taking out cost and more about improving the value of the business through more efficient processes. He says the traditional providers and some of the Indian players will move up the value chain to participate in Version B.

    Rich deMoll, Global Managing Director, BPO, HP, sees a bigger separation between the Tier-1 suppliers and the other tiers. "2008 is going to distinguish the Tier-1 players from the rest of the pack," he says.

  2. There will be more supplier consolidation. Poole, head of NA BPO, predicts large suppliers will acquire niche players who have the needed specialization skills or software as a service (SaaS) players who have the desired applications. "The goal is to broaden their scope of services," says the Capgemini executive. The Everest Research Institute says "captives, technology providers, and niche suppliers will be the prime acquisition targets in 2008."

  3. Buyers want suppliers who specialize. Suppliers that can add value to a buyer's top line have to specialize in verticals since many of them have unique challenges. Financial services companies have different concerns than energy suppliers, for example. Martin Cook, GSO, Outsourcing, Capgemini, says vertical specialization "will emerge as a key differentiator for Tier-1 suppliers."

    The need for specialization will enforce the sector's continuing consolidation, continues Cook. "Suppliers will augment their solution portfolio through acquisitions," he says. He points to Capgemini's purchase of Kanbay as an example of this trend.

  4. Suppliers will increasingly target the higher end of mid-market buyers, companies with annual revenue ranging US$2-5 billion points out Katrina Menzigian, Vice President for FAO, Everest Research Institute. "These buyers are actively exploring FAO options and present a large market potential," she says.

  5. Suppliers will evolve their delivery models, especially in the area of platform-based technology solutions, in order to create viable business cases for serving this segment of the market. Menzigian predicts 2008 will see increased market discourse on the viability and appeal of platform-based FAO solutions. "The drive towards building FAO platforms will further fuel merger and acquisition activities as suppliers build out their capabilities," she says.

    Gianni Giacomelli, Head of BPO Strategy and Marketing at SAP, points out that many suppliers, irrespective of what segment they are in, are already starting to change the way they deliver services. He says they are increasing automation to reduce their dependency on "now often exhausted" labor arbitrage.

  6. The Buyers:

  7. CFOs will worry more about how outsourcing can grow their businesses. Poole says buyers now tell him they want to grow their businesses three percent a year instead of asking him to take out one percent of cost. He says the new focus will make outsourcing more valuable; however, suppliers still need to take out cost because the savings fund the business transformation.

    Giacomelli adds that innovation is the key for business growth, and labor arbitrage alone does not get buyers there. Reengineering processes and related systems will, and buyers are waking up to this.

  8. Buyers are divesting themselves of brick-and-mortar assets like shared services centers. DeMoll says they are trying to sell them to outsourcing suppliers, especially in India, or private equity partners. Another option: keeping them but having them service government entities.

  9. Buyers will focus on sustainability. DeMoll says next year labor arbitrage will just be the entry price. Buyers want more than just cost savings; the HP executive says buyers want to change their business model. Suppliers will have to demonstrate they can sustain the business case for outsourcing.

    Anoop Sagoo, Accenture, agrees. "We're seeing a distinct shift in focus to a more sophisticated value proposition focusing more on business outcomes," he reports.

    "Buyers definitely want to build on their initial cost-savings-centric engagements to drive additional savings and enhanced business performance," adds Menzigian. However, she says "it's not clear the extent to which buyers are willing to trade their customized solutions for platform-based solutions which could potentially deliver the additional functionality and performance they desire in a cost-effective manner." The buyers will start to work out this conundrum next year.

    Giacomelli says this shift will "emphasize seamless process integration across towers." Their focus will be on designing processes and systems to do so. However, the SAP exec points out "suppliers will still need economies of scale to be sustainable and will continue pushing some level of standardization around their own best practices."

  10. The Deals:

  11. Mature FAO buyers are beginning to seek out more integrated solutions for key process areas such as Order-to-Cash (O2C) and Procure-to-Pay (P2P), observes Menzigian. She says the goal is "to target a larger cost base, while also driving greater business performance through pre-integrated solutions designed to provide increased visibility and effectiveness across the end-to-end process."

  12. Big-Bang deals will be fewer. Menzigian predicts the market will see a rise in the number of deals that surgically target opportunities to drive value in terms of both operational and strategic gains. O2C/P2P serve as an example.

  13. Current FAO buyers will move up the value chain. "Buyers are asking us, 'What else can you do for me?'" DeMoll reports. New services that build sustainability include analytics for decision modeling and data mining. "Buyers who have gotten past the transactional savings now want an analytic platform with tools and brain power in a low-cost environment," DeMoll reports.

    Sagoo says FAO is becoming more complex. Buyers now want to outsource more complex aspects of the FAO process than in previous years. He points out Accenture is managing the information around BT's profitability data. "A few years ago people would have laughed at the possibility. Today, buyers want to outsource to get high-performance finance."

    Or they want to cover multiple geographies. For example, Accenture's FAO engagement with Microsoft includes 92 geographies. The Everest Research Institute predicts suppliers will diversify their location portfolio next year. Good choices: Tier-2 Indian cities, Eastern European locales, Mexico, China, and the Philippines. Next year the FAO market "moves towards a truly global sourcing model," says its 2008 Forecast report.

  14. Buyers will want bundled solutions that include finance and accounting. Sagoo says buyers are realizing finance and accounting is really just the back end of a bigger process. "We're seeing buyers looking across processes," he says. The most obvious combos are procurement and HR.

  15. To get more value from transaction services, suppliers are using more electronic flow through. Cook says buyers who have already realized significant savings through labor arbitrage now look to automation to achieve greater savings. DeMoll adds buyers and suppliers will share the gains as improved way of doing things provides more business value, like improving business metrics like day sales outstanding.

  16. The Influencers:

  17. Cook says process innovation and business insight will begin to replace labor arbitrage as the key drivers for FAO. They require a mix of onshore/offshore delivery to deliver higher level value, he explains.

  18. Buyers will start to look at the integration of process change with technology change. DeMoll says in the past when buyers wanted to change a process from end-to-end, the suppliers bumped up against the internal IT department. HP solved the problem by bundling the two; "we deliver process change as a service," he explains.

  19. The FAO value proposition will expand beyond outsourcing. Sagoo says some buyers want to partner with their FAO supplier "to create a go-to-market portion of the deal. Buyers are beginning to think out of the box," he says.

  20. Buyers will create a number of internal shared services, which they will turn into captives or transition to BPO. "The momentum is building for hybrid service delivery, which will prompt a lot of rethinking of how to deliver such services. People who understand both the business and technology side of things will be in high demand," says Giacomelli. This will encourage BPO providers to look for help in the software vendors and will expose those software vendors who are not able to proactively help.

  21. The Market:

  22. FAO will continue to grow in 2008. DeMoll says HP is seeing "increased demand. This was the busiest summer I've had in my outsourcing career," he says.

    One reason: FAO has a proven track record. "This reinforces the model and encourages more companies to try it. Success is driving the increased demand," he adds. Fear of hard times in 2008 is helping, too; cost containment pressures are building. And many are trying to take advantage of the global business model, he continues. Another driver: The Everest Research Institute reports US$600 million of FAO contracts are up for renewal in 2008.

  23. Human capital management is a key contributor to the continued growth of the FAO market. "As in-house departments continue to struggle to hire and retain qualified finance and accounting professionals and IT departments continue with similar challenges, the value proposition offered by experienced FAO suppliers gains in appeal," says Menzigian.

ITO Forecasts for 2008

Cost is still "a major factor" in IT outsourcing. But, according to Sergey Karas, Vice President, Global Strategy at Luxoft, Russia's largest ITO service provider, "globalness is the main driver today, along with access to skills not available in house."

The size of ITO contracts continues to be smaller because of multi-sourcing. Karas predicts that by 2008 multi-sourcing even among offshoring deals will be mainstream such that buyers will pass over providers offering delivery from only one country.

Pat Adamiak, Vice President Portfolio Marketing and Alliances, Outsourcing Services, HP, says the main trend in ITO today is "a lot of pressure from customers to deliver a lot more innovative ways to do ITO." He cites two examples. Today, most data centers are still architected on a deal-by-deal basis. "But in the future, there will be a world-class center based around blades, world-class architecture, etc., which will allow transfer of data center deals to move faster."

Desktop services are another example. Today, the desktop is very multi-tower and cobbled together. "In 2008, we will see a much more integrated desktop offering. It will focus categories more on end-user perspectives and needs instead of today's desktop, with categories that are by process," she says. For example, the desktop of 2008 will be more advanced for mobile people, along with the categories for standard needs. The desktop needs of a clerical person or call center person are different from a road warrior.

Another reaction to client demand is that 2008 will also bring a move toward automating how service providers deliver services, Adamiak states. This will bring a lot of provider consolidation to allow more leverage. HP purchased Mercury and Opsware this year to have a stronger software services arm. IBM made several similar acquisitions in 2007. "Combining automation with the trend of local delivery makes it easier to move to a sophisticated global delivery and move services around," he says.

Market Growth

According to Everest Research Institute, the overall IT Outsourcing (ITO) market will continue on a steady mature growth. Everest's analysis shows that ITO penetrates the Fortune 100 by about 80 percent already. Ross Tisnovsky, Vice President, Research (ITO), says this penetration suggests that most of the ITO activity in 2008 will be happening in the mid-size (e.g., Fortune 1000) client segment.

"We are also likely to see further decline in mega-deals, both in terms of number and the size," Tisnovsky predicts. "As fewer mega-deals get announced, most of the play in the mega-deal segment will shift to renewals and re-competes. These trends are likely to intensify competition resulting in additional pricing pressure across ITO."

Although the small and medium business (SMB) segment remains largely under-penetrated in terms of ITO, Everest Research Institute does not predict major changes and efforts coming in this market segment. Everest expects it to remain under-leveraged, due to the issues of low-scale of outsourced processes and the provider's high cost of the sale. "Both are hard to overcome in the SMB market," Tisnovsky explains.

Infrastructure

Infrastructure outsourcing (IO) will continue growing at a sustained pace in line with the rest of the IT industry. "Under the calm surface of the market, we will see significant share shifts as the Remote Infrastructure Management Outsourcing (RIMO) model continues gaining market share, growing at 60 to 70 percent," Tisnovsky predicts. As RIMO gains share, the traditional model of IO will start to show a declining trend around 2010.

Tisnovsky advises buyers looking to make decisions in the next two to five years to investigate whether RIMO is good or bad for them. "Some will find that RIMO is not cost-effective for them. Others will want to get rid of assets, and RIMO won't work in that case."

A shift toward asset-light deals in both RIMO and traditional models will result in revenue deflation as assets start getting excluded from the scope of IO engagements. "We estimate that the asset-light deals are usually 60 to 70 percent smaller than the corresponding asset-heavy deal. Thus, the shift toward the asset-light deals is likely to result in improved margins, but will affect the top-line growth, says Tisnovsky.

He adds that aggressive adoption of labor arbitrage by both RIMO and traditional providers is also likely to add to the pricing pressure in the IO industry.

Karas of Luxoft predicts that the strong adoption of ITO in European companies in 2007 will continue in 2008, with companies actively seeking services delivered by a nearshore, Eastern European provider. But not all locations--nearshore or offshore--are equal, and value depends on expertise as well as other cost factors.

He points out Eastern Europe is not a good location for application maintenance, for example, because it requires more expensive skill sets. China is great, he says, for low-complexity, large projects where communication and time zone differences are not critical (as they are in application maintenance). In application development, where project specs and architecture may not be very clear, the location of the development team is critical because interactions need to take place in real time.

"New regions, such as Russia and Ukraine are now included in Gartner's "leaders" tier; this allows companies to fight for sending work to providers in these regions. Outsourcing to a service provider in a non-mainstream region still sometimes raises eyebrows because of common stereotypes and perceived risks," says Karas.

But he predicts that labor arbitrage will inevitably go away as the market becomes more efficient and hourly rates for certain skills become the same.

Application Development and Maintenance

According to Everest Research Institute, demand for ADM services is likely to continue slowing down, resulting in a more sustainable pace of growth of about seven percent (down from its 12 percent growth in the last couple of years).

"We estimate that the penetration of offshoring into the ADM headcount of IT services companies is approaching about 40 percent and is likely to start showing signs of saturation," says Tisnovsky. Most buyers are already comfortable with their current ratio of offshore work.

This maturation of the offshore trend will result in a shift of value in ADM from labor arbitrage into more complex areas of ADM (e.g., process improvement and application portfolio rationalization). Tisnovsky predicts this value shift will result in buyers' driving consolidation of their service provider portfolios and push toward more partnership-based relationships.

Luxoft's Karas says software performance and product testing has recently made its way into the outsourcing arena. He says in 2008 the scope will broaden beyond traditional functional and system integration testing to also encompass overall system performance and scalability, usability, and security, thus bringing higher value to the client organization. This will require suppliers to offer new outsourcing services in the market in the areas of system performance engineering, test automation, and regression testing efficiency.

Karas says, "Providers providing ground-up software product development and engineering support for client offerings will pick up steam in 2008 as transformational and innovative outsourcing grows, especially in the automotive, industrial, electronics, and telecommunications equipment industries."

He predicts that Agile, which started taking root in the development community and in outsourcing engagements during 2007, will see greater adoption in 2008, as a strong tool in helping to speed time to market. "It will be critical to have a provider that has mastered Agile," Karas states.

He also points to a trend of major multinationals selecting providers other than the large Indian players "when there are a lot of parameters around the criticality--such as mission-critical applications, and real-time transactional systems." Deutsche Bank, for instance, chose Luxoft over large Indian players for its global CRM application. "Some companies feel they will have more leverage, more control, and more escalation power with a mid-size provider," Karas says. "Deutsche Bank communicates directly with our senior executives, and that level of relationship takes on a tremendous role in achieving value."

"The economy is changing pace and it's a global world, so competition is tighter and companies need to replace their applications with minimum risk," states Keras. He predicts companies in 2008 will "do even bolder moves with outsourcing and it will become more like an ecosystem."

He notes another trend: verticalization. Karas predicts it will become an important provider-selection criteria. "Service providers with certain domain expertise that can speak the language of the business, think and talk like the client, and thus react more quickly will easily differentiate themselves from other providers," he explains.

ITO in Health Care

Siemens has noticed a trend of fewer large outsourcing deals in the healthcare industry. Further, the provider notes that most deals are shrinking from longer historical contract term lengths to five to seven years now. While both of these trends can signal a strategy toward best-of-breed multi-sourcing deals, Jim Way, Vice President Managed Services Operations, Siemens Medical Solutions, says they signal a different phenomenon in healthcare outsourcing.

"Potential clients are saying to us, 'Come in and do a good job on our pain points; and if you do well, we'll give you more work,'" says Way. He explains this demand arises from two areas. First, many healthcare organizations are still dipping their toes in the waters of outsourcing.

Second, more and more CIOs are now involved in the outsourcing decision, not just the CEO and COO, and fewer CIOs are losing their jobs to an outsourcing provider. "This frees them to consider using outsourcing solution instead of a threat to their jobs," says Way.

Still, the CIOs currently have a comfort level with doing only pain-point deals. The main pain points areas today are: (1) help desk, (2) application support (legacy systems, implementing and supporting new systems, and (3) the one-time project of improving the network infrastructure (enabling implementing new advanced systems).

Way notes that the clinical concentration for systems now is not financial. It's implementing new systems, transitioning from old systems, and also outsourcing the help desk. He adds that "at Siemens, we're changing the way we support some services, such as the help desk, because more and more incoming calls are from physicians and clinicians who don't have time to troubleshoot anything."

Finally, the Siemens executive says, "Our potential customers are now demanding 'What are you going to do to help my business?' and 'How can IT enable what we want to do?'"

Buyers and providers, more than ever, need to remember that relationship management is critical for outsourcing success, he warns. "It's the key to ensuring a satisfied client and extending the contract."

Lessons from Outsourcing Journal:

  • Cost is still a major factor in IT outsourcing, but globalness is the main driver today, along with access to skills not available in house.
  • By 2008, multi-sourcing even among offshoring deals will be mainstream such that buyers will pass over providers offering delivery from only one country.
  • 2008 will see a much more integrated desktop offering. It will focus categories more on end-user perspectives (such as mobile workers) and needs instead of today's desktop, with categories that are by process.
  • ITO penetrates the Fortune 100 by about 80 percent already. This penetration suggests that most of the ITO activity in 2008 will be happening in the mid-size (e.g., Fortune 1000) client segment.
  • Although the small and medium business (SMB) segment remains largely under-penetrated in terms of ITO, this market segment is expected to remain under-leveraged, due to the issues of low-scale of outsourced processes and the provider's high cost of the sale.
  • The remote Infrastructure Management Outsourcing (RIMO) model continues gaining market share, growing at 60 to 70 percent. As RIMO gains share, the traditional model of IO will start to show declining trend around 2010.
  • A shift toward asset-light deals in both RIMO and traditional models will result in revenue deflation as assets start getting excluded from the scope of IO engagements. Asset-light deals are usually 60 to 70 percent smaller than the corresponding asset-heavy deal.
  • The strong adoption of ITO in European companies in 2007 will continue in 2008, with companies actively seeking services delivered by a nearshore Eastern European provider.
  • For ADM, major multinationals are selecting providers other than the large Indian players when there are a lot of parameters around the criticality--such as mission-critical applications and real-time transactional systems.
  • Agile, which started taking root in the development community and in outsourcing engagements during 2007, will see greater adoption in 2008, as a strong tool in helping to speed time to market. It will be critical to have a provider that has mastered Agile.
  • Verticalization is another ITO trend and will soon become an important provider-selection criteria. Service providers with certain domain expertise that can speak the language of the business, think and talk like the client, and thus react more quickly will easily differentiate themselves from other providers.
  • In health care outsourcing, more and more CIOs are now involved in the outsourcing decision, not just the CEO and COO, and fewer CIOs are losing their jobs to an outsourcing provider. This frees them to consider using outsourcing solution instead of a threat to their jobs.
  • Health care CIOs currently have a comfort level with doing only pain-point deals. The main pain point areas in health care today are: (1) help desk, (2) application support (legacy systems, implementing and supporting new systems, and (3) the one-time project of improving the network infrastructure (enabling implementing new advanced systems).

2007's Landmark Events and What They Auger for 2008

What a year! Wipro set up shop in the United States. This year's subprime mortgage mess will actually help outsourcing next year. And non-traditional suppliers won some big outsourcing deals. Here's what it all means and a guess at how these events might impact the industry in the next 12 months.

1. The Indian pure-play suppliers solidified their place in the global marketplace.

David Poole, Vice President and Deputy Chief Executive of Global Business Process for Capgemini, says this year they signed a number of large infrastructure deals "that are the bread and butter of the traditional players. We watched as they tried to mitigate the slaughter."

Martin Cook, GSO, Outsourcing, Capgemini, agrees that the Indian suppliers "have changed the face of the market." But he predicts they may face difficulties in 2008. One relates to growth. "As they get bigger, they have to have bigger contracts," he explains. And they will have to change their market position; "once you compete on price, how to you create value?" Cook asks. He says the only way to do that is to grow. "They will have to make some dramatic moves over the course of the coming year," he says. 2009 might even be the year the industry hears a profits warning from an Indian Tier-1, he posits.

2. Software-as-a-Service (SaaS) will continue to gain traction.

Cook says this year's growing acceptance "is the first step in a long march." Capgemini, for example, is working with Google on the enterprise level of Google applications; it's providing wraparound services to handle things like migration, integration, and the authority to use the software. Cook points out Capgemini has also developed a SaaS solution using SAP for one of its key markets, utilities. "We are betting there is an advantage in embracing it first," says Cook.

Poole, the head of NA BPO, says ITO buyers "don't want to pay as much as they have in the past for software services." And they are tired of paying to make improvements in their ERP systems, he adds. Today, "buyers want their applications overnight, even in HRO and FAO," he says.

Poole says next year buyers will grow "increasingly tired" of managing the application infrastructure that supports specific business processes. He predicts BPO suppliers will partner with or purchase SaaS companies to service this emerging requirement.

3. Wipro expands its global footprint in the United States.

First, it bought Infocrossing. This contributes to the continuing trend of four to five mega players and then a lot of successful small niche players in ITO, says Pat Adamiak, Vice President, Portofolio, Marketing, and Alliances, HP. "This signals the aggressiveness of the Indian players," he says.

Ross Tisnovsky, Vice President, ITO Research for the Everest Research Institute, says this acquisition signifies "a departure from the Indian's conservative attitude toward IT assets abroad." He says this apparent willingness to engage in asset-heavy transactions "will open a new chapter in the competitive dynamics in infrastructure outsourcing."

Then, Wipro set up a small software development captive in the United States, creating US jobs. "Five years ago, many American jobs went offshore to India. We will see a reversal of this in the years to come, as some of these jobs will return back to the United States," says Michael Beygelman, Senior Vice President, Adecco North America. In addition, Indian suppliers want to tap into the US's excellent infrastructure. He believes the US real estate and outsourcing employment markets will benefit in 2008 and 2009 as more Indian suppliers set up shop here because they are discovering it might be cheaper to operate in US secondary markets rather than to do everything from India.

4. China becomes not only the home of service providers; it becomes a multi-million-dollar outsourcing market.

Cook says suppliers are inking deals to service Chinese companies. "The Chinese market is too big and too rich to do it all in-house," says Cook.

5. Standardization takes hold.

Adamiak calls this "services productization." He says the major suppliers have been creating standardized building blocks for services to automate processes. He likens this standardization to the auto industry. "The industry will start to see the benefits of standardization in 2008," he says.

Pat Goepel, President of HR Services for Fidelity Investments, agrees. "Lift and shift is dead," he says. "Standardization will be the hallmark of more deals going forward."

6. Consolidation continues in the human resources (HRO) and recruitment process outsourcing (RPO) world.

Three important transactions occurred this spring. In May Beeline purchased Employer Services Corporation. Then in June Kenexa purchased StraightSource (after acquiring BrassRing in November 2006); and FutureStep, the RPO arm of Korn/Ferry, purchased the Newman Group. In August Hewitt Associates purchased RealLife HR. Then Adecco purchased TalentTrack.

"There are too many RPO firms trying to get RPO market share," says Kim Davis, former President of TalentTrack and now an Adecco Senior Vice President . He says smaller firms will increasingly become challenged as the larger firms continue to build infrastructure and regain the competitive advantage away from the smaller pure-play RPO firms. "They have found out how difficult it is to compete on a national or global playing field given their size," he says. Today, most buyers want to work with RPO providers that they can grow in to, with a global reach, not service providers they can grow out of. "Because the world is flat, TalentTrack as a standalone couldn't compete in a global environment," he continues.

In the HRO world, Northgate purchased Arinso International in June and Mouchel Parkman purchased HBS in August.

As for the big players, the Adecco executive says a mixture of three reasons is driving the buying spree: the need for product extension, the desire to enter a new market, or the necessity of acquiring infrastructure that would take too long to build.

7. Tier-2 suppliers may face a challenge next year.

Cook mentions the woes of LogicaCMG, the union of a British and Dutch company. It sacked its president because of a series of disappoint results. Six month later it still can't find an appropriate candidate. "They can't find a celebrity to take over," says Cook. "Tier-2 companies are having a difficult time finding their place and becoming a Tier-1." He suggests some may be good candidates for the Indians suppliers to purchase.

8. The megadeals are disappearing.

"The first three quarters of 2007 show the megadeal segment of the market-deals with $1 billion in total contract value or $200 million in annual contract value-- is in a long-term decline," says Tisnovsky. These deals dropped in both number and size. He says this continuing trend "is reshaping the outsourcing industry."

Jim Way, Vice President of Operations for Managed Services, Siemens says the trend today is to do pieces of a function, not everything. "Third-generation buyers are scared because they didn't get what they were promised in the past. They don't want to hand over all the keys to the kingdom. Today they just want to outsource their pain points," he explains.

9. Non-traditional suppliers win big deals.

The biggie is the US Army's training deal with Raytheon. Cook says Raytheon, a non-traditional outsourcing supplier, captured a $11.2 billion deal by leveraging its market domain expertise. (That, he says, is how traditional suppliers can compete with their Indian counterparts.) Telecommunications services providers also won many large deals this year. Cook asks, "Are they morphing into broader-based competitors in both ITO and BPO?"

10. Supplier switching is happening at a record rate.

Way says experienced buyers today are disgruntled and want to go in a different direction with a new supplier. "Buyers like the concept of outsourcing but haven't been pleased with their current suppliers," says the Siemens executive. "Even though they have a bad taste in their mouths, they don't want to take the function back in-house." He predicts the industry "will see more of that in 2008."

11. Suppliers will find innovative ways to get paid.

Poole predicts next year buyers and suppliers will increasingly align key interests to enable suppliers to share in the financial impact buyers realize from improved processes.

12. 2007 was the best year ever "for private equity firms to goggle up suppliers and release value," observes Cook.

He says outsourcing suppliers are a favorite of private equity firms because "they have significant revenue locked in over time."

The only failure this year was Atos and CSC. "But they got closer than ever before," he says. He thinks someone "will crack the code" by 2009.

The current credit crunch in the private equity market may hamstring outsourcing suppliers next year. Goepel says hard-to-find capital will slow down some of the merger talks "at a time when long-term investment is critical to outsourcing's success." Cook agrees, saying, "I think there will be a lull next year."

13. The subprime fallout will help outsourcing.

The credit crunch may benefit the industry next year because merger and acquisition activity will be lower. "We will see a positive blip in the outsourcing marketplace because outsourcing is a positive alternative to mergers and acquisitions. We'll enjoy growth," says Cook.

14. The US election will bring healthcare into greater focus for HR suppliers.

Goepel says the election and the recent GM/UAW contract negotiations made everyone more aware of the costs of healthcare. That will drive more companies to outsource their benefits and change the way HR companies handle healthcare. He predicts buyers, "who are no longer paternalistic," will turn to their suppliers to help employees figure out their healthcare options. "HR suppliers are on the front lines and have expertise in providing the support that employees need to make important decisions around their healthcare and benefits."

15. On another healthcare front, Way says healthcare outsourcing used to be a strategic decision.

This year healthcare providers were more focused on cost. "They want us to provide better service at half the cost," he says with a laugh. Siemens tries to provide better service that's budget neutral, he adds.

16. Consolidation occurred in the outsourcing advisory industry.

Information Services Group purchased TPI in October. EquaTerra purchased Morgan Chambers. "These changes will affect how deals get done," says Adamiak.

17. Offshoring is still an emotional issue for the C-suite.

Way says some of his prospective buyers are "torn between trying to make a good business decision and protecting their image." Siemens has some customers that have a clause in their contracts that allow them to pull out if they Siemens offshores any services. He expresses surprise, considering the cost and quality the supplier can provide from India.

18. The United States remains the largest outsourcing marketplace.

The Dutch market is "hot," according to Cook. But the big surprise is France is becoming an outsourcing powerhouse. "French multinationals are realizing they can't do business without outsourcing," says Cook. He predicts some big deals will come out of France next year.

Labor will be the driving factor that changes outsourcing in 2008. How companies determine who to hire and where they will work will affect the indust

Labor will be the driving factor that changes outsourcing in 2008. How companies determine who to hire and where they will work will affect the industry in two ways.

First, labor arbitrage is undergoing a metamorphosis. In the past, the megatrend was to use labor arbitrage wherever possible. Buyers found they could enjoy cost really significant savings with no impact on quality if their suppliers used labor in low-cost areas. The equation was simple: tasks that could be done remotely moved offshore.

Today, that equation is changing. Today buyers want to alter how they use employees. But now it's not just sending them offshore. Now buyers want to change other services in which labor is a component. This is changing the fundamental way suppliers provide services.

For example, how the industry thinks about providing IT infrastructure is changing dramatically. First, a component of IT infrastructure labor is moving offshore. But more importantly, other components of the labor equation are transforming because of the advantages provided by the offshore model. This is enabling a completely different kind of IT infrastructure outsourcing. 2008 will be the year remote infrastructure management outsourcing (RIMO) takes deep root.

Offshoring Leads to the Rise of RIMO

The RIMO model facilitates an asset-light outsourcing deal. Now the necessity of transferring assets has vanished. In fact, transferring assets can be a detriment in this kind of outsourcing. RIMO is moving the industry away from a one-size-fits-all model that's all inclusive to an offering comprised of a series of components suppliers can use in a plug-and-play world to optimize their infrastructure environment.

Buyers of traditional IT infrastructure deals had to buy into a trade-off of loss of control and up-front investment while hoping for a long-term cost reduction. In the RIMO world, buyers still retain control of their IT assets. For some buyers, retaining control gives them more corporate flexibility. However, now there is more management responsibility.

In most cases the cost savings are the same or greater when comparing the RIMO model versus the traditional one. So the decision is: how do you want to manage IT assets?

The Offshore Equilibrium

Trend two: outsourcing is starting to see the limits of labor arbitrage. Until now, the industry experienced an unconstrained movement of work offshore. If the supplier could document the process so someone else could perform it, off it went.

Ever since offshoring began in 1991, we have wondered just how far businesses can extend the offshore model. How many applications and what business processes can cost less through labor arbitrage? Where is the boundary between what companies can and can't offshore?

Until now there were no boundaries in sight. The stellar performance of the Indian offshore sector seemed limitless.

Now, however, we are beginning to see restrictions. We see early signs that large, experienced corporations with mature relationships are discovering limits to what they can offshore. These companies have tried to push work into remote management either by fiat or by contract. But the work somehow repurposes itself. No amount of contractual guarantees or organizational determination seems to solve the problem. That's because they've butted up against offshore equilibrium, which determines the percentage of work that outsourcing buyers can offshore, either to a third party or their own captive.

In 2008 buyers will begin to seriously bump up against those limits.

What are these limits? We have found two things always affect the offshore equilibrium:

  • Buyers only face the equilibrium's challenge in mature relationships
  • Each buyer has different, idiosyncratic factors that change the equilibrium percentages

Three things constrain the amount of work buyers can send offshore. They are:

  • The buyer's corporate culture
  • The buyer's industry or vertical
  • The buyer's internal organization. For example, is its IT centralized or federated?

Historically, pundits posited that the equilibrium would follow Pareto's Principle or the 80/20 rule: buyers could send 80 percent of their work offshore and retain just 20 percent. We have found that equation is too aggressive for offshore equilibrium.

Industry Implications

This equilibrium has an important implication for the future of the outsourcing industry. It suggests that offshoring will hit a wall. We predict its growth will start to slow in the next 12-18 months.

Once again, offshoring will have to look for transformational opportunities, just like it did in the IT infrastructure management space. The nature of work will focus more around transformational opportunities rather than just lift and shift.

Labor used to be the transformation. Now it is becoming the transformer.

Outsourcing in China, Only for the Strong!

Implications: Now that “everyone” is outsourcing to India, the next big thing is outsourcing to China. The first rule is China is not the same as India. Chinese outsourcing can be necessary for survival, or it can be a money-pit for the unwary.

Analysis: Many companies have already successfully outsourced to India. Virtually every large company, and many that are not so large, have now figured out how to make Indian outsourcing work. True, wage inflation and employee turnover are an ongoing problem, but overall it is working for most companies. With that behind them, the next frontier is China. Many see China as the solution to the turnover and wage issues in India. Ironically, even many of the large Indian firms (Wipro, Infosys, Tata) already have a presence in China. Many large US technology firms, such as Cisco and Oracle, have large installations in China.

China is most definitely not the same as India. The most obvious issue is the language barrier. It is relatively easy to find skilled Indian personnel who speak English. Because India has so many dialects, many Indians use English as a common language even among themselves. This is not true in China, which has far fewer English speakers. Finding skilled technical personnel who speak English is not easy in China.

The culture and history of China are more alien to Europeans and Americans. India was a part of the British Empire for a long time, and during that time many elements of the two cultures commingled. India is a democracy, which is a familiar model to Westerners. China is not a democracy and does not have the close relationship with the West that India has experienced. Consequently, cultural issues are much greater than in India.

Economic issues abound in China for prospective outsourcers. The Chinese economy is growing rapidly and enjoys a huge trade surplus with the US. The local companies, such as Huawei, are becoming multi-nationals competitive with US or European companies. Jobs are plentiful for Chinese technical workers, both with foreign and local firms. Many large US companies have had a major presence in China for many years. Such large companies are ideally positioned to hire the best and brightest.

Costs are escalating. While it is true that salaries are much lower in China than in the US, salaries are only one piece (admittedly usually the biggest piece) of the cost pie. Real estate costs in the more desirable areas are more than in many locations in the US. For example, desirable tech park locations near Beijing command lease rates significantly higher than in the best areas of Silicon Valley. Communications costs to anywhere in China are quite high. It is common to pay 2-3x as much as for data lines in China than for comparable lines in the US.

Overall, outsourcing to China is something that everyone should probably consider, but the decision is not a simple one based solely on lower salaries. Overall costs must be taken into account, along with whether or not the amount of money to be committed to China is enough to gain critical mass. China is not a virgin territory waiting to be plundered! On the contrary, it is more like the Wild West, where entrenched powers are already in place and the unwary get fleeced.

11/03/2007

India plus China in ICT


By D. Murali and G. Padmanaban

Is it ‘India and China’ or ‘India vs China’? It is the former, says Mr James M. Popkin, co-author of ‘IT and the East’ (www.tatamcgrawhill.com).

There is an increasing recognition, he observes, that India and China possess significantly complimentary skills in most areas of the ICT (information and communication technology) ecosystem.

“For example, China’s overall success in the hardware segment and India’s overall success on the software front, China’s success being driven by high levels of FDI (foreign direct investment) even in the ICT sector, and India’s primarily home-grown investment environment etc.”

Pooling best practices and learnings on what has contributed to the success in each of these areas will provide an order of magnitude greater benefit to both countries, foresees Mr Popkin, interacting with Business Line, over the e-mail.

“The important issue is that this is NOT a ‘zero sum game’. In other words, given the size of the potential global opportunity, India’s gain need not be China’s loss and vice-versa!”

‘IT and the East,’ the Harvard business School Press book, which Mr Popkin co-authored with Partha Iyengar, is about ‘how China and India are altering the future of technology and innovation’.

Excerpts from the interview.

How can India and China work together and move the technology innovation engine to the East?

In ‘IT and the East’, we lay out a Chindia framework which enables the measurement of progress China and India can make in driving innovation. It has two dimensions: geopolitical alignment and depth of relationship.

There are five categories of alignment: People, Politics, Policy, Patterns of trade, Patents and Policing. China and India can use this framework to identify and drive closer levels of relationship across these dimensions.

Do the two countries have to promote mutual trade in services too?

Yes I believe both countries would benefit from promoting each other’s IT services in their own country.

For India, doing business in China brings: 1) access to a large pool of well educated engineers; 2) access to China’s large domestic market; 3) access to North and East Asian markets; and 4) geographical diversity of supply.

India is suffering from a skilled IT labour shortage in its domestic market since many skilled Indian IT workers prefer to work in the export industry. I think this creates an opportunity for Chinese companies to sell IT services and outsourcing to domestic Indian companies.

Here too the skills are VERY complimentary. In China the focus is more on services to the ISV (independent software vendor) community – that is considered ‘sexier’ by the companies as well as individual employees, whereas in India the bigger focus is on delivering services to the end-user enterprises.

There are significant differences in both of these constituencies that need very differing kinds of investments in people, process, and infrastructure that each country can ‘teach’ the other.

In the current scenario what are the strategies that the firms in the West should adopt in doing business with India and China?

We believe there are eight priorities that Western companies need to focus on now. For each of those priorities we have identified a set of actions and competencies that they need to develop. The eight priorities are:

1. Government policy formulation by industry

2. Rural development investment programs

3. Research, design and development

4. Market development

5. Chindia opportunity

6. Resource development

7. Local expertise

8. Cultural understanding

What are the daunting internal and external challenges India and China are facing in their quest to become global IT super powers? And what can be the strategies to overcome these challenges?

We have identified two critical uncertainties for each country in terms of the future of their ICT industries; and in some sense their economies overall. For India the state of the physical infrastructure is a major drain on economic activity and progress.

More specifically for the IT industry is the question of whether India can educate and train enough people to propel IT into being a far larger contributor to overall economic activity.

In China we believe a key issue for its future role in the IT industry is whether it can show itself to be a source of significant technological innovation. The current level of government involvement in the economy creates a dampening effect on innovation.

Have India and China been able to bridge the cultural gap even as the two countries race ahead in IT? Can joint ventures between companies from the West and the East help in this regard?

Many cultural gaps between the people of the two countries still exist, caused perhaps by relatively low levels of tourism. Food remains an issue of course, e.g., it is hard for Indians to find veggie meals in China and the Chinese tire quickly of curry for every meal in India. Joint ventures at the company level have and will continue to show the power of the Chindia model as we demonstrate with case studies in ‘IT and the East’.

India and China have had differing success levels in bridging different ‘cultural gaps’. India has been phenomenally successful in bridging the culture and language gap with the English speaking countries of the world, most notably the US and the UK, and to some extent Australia.

China on the other hand has had notable success in dealing with Japan, Korea and Taiwan (where India, especially in Japan, has had NO success or very limited success!). Again, these are areas where both countries can learn from each other.

Chinese companies are increasingly hiring Indians at senior levels to help them ‘crack’ the English speaking market, while Indian companies are trying to leverage their China presence and Chinese resources to try and better address the Japanese market.

Are alternative locations coming up to threaten the momentum of fresh business to India and China?

Certainly labour arbitrage is not unique to China and India and you see significant development of offshore/nearshore locations in Southeast Asia, South America and Eastern Europe.

There are 53 distinct countries that Gartner is tracking that are all trying to take some piece of the global sourcing pie away from India (primarily) who is the undisputed leader at this point in time.

However, the biggest challenge that most of these countries face is the issue of population and the size of the graduate pool entering the work force. India and China are the only two countries that have this basic ingredient to address large-scale resource requirements.

Ireland, which was an offshore ‘star’ earlier is a classic example, where its success as a low cost location dwindled because of population issues, and today it is no longer talked of as an ‘offshore’ destination.

Can the infringement of intellectual property right (IPR) crop up as a major roadblock?

Yes IPR is an issue in both countries. India still lags somewhat in the development of a legal structure for IPR protection. China has a more developed legal system of protection but enforcement remains spotty. This is a major concern of western companies doing business in both countries.

Do you find the cost arbitrage losing its edge as a trigger for offshoring, with costs rising in these two countries?

Outsourcing based on cost alone has not always paid off strategically for many companies. While cost is an important factor, other considerations come into the success equation for companies thinking properly about their multi-sourcing strategy. Rising costs in both countries will force buyers and sellers to develop more sophisticated value propositions.

Those that cannot identify or articulate a long term value proposition beyond cost arbitrage should really re-think their global sourcing strategy or not view it as a strategic but more as a tactical time-bound initiative and make decisions accordingly.

Should India and China also focus on domestic IT business as a strategy?

Certainly each economy will begin to develop outsourcing demand if current rates of economic growth continue over the next 5-10 years. I think today’s Indian domestic economy is particularly ready for outsourcing because of the skilled IT labour shortage I mentioned earlier.

Further, to develop and propose higher end capabilities in the global market, it is imperative that these capabilities and skills be honed in the domestic market as the opportunities arise – and they definitely are today in India for sure, and will shortly appear in China as well – since it is more difficult to make a pitch for these services globally if a vendor has no track record in doing that kind of work.

Why would a global client trust that a vendor can do some really high competence work in a particular industry (e.g. telecom) if that vendor has lost to their competition (primarily global vendors) for exactly that kind of work in the domestic market. It will hurt the credibility of the local vendors in the global markets if they do not take up some of these domestic projects as well.

Is there anything that the developed countries should be doing, but they aren’t, to reverse the offshoring trend?

I refer again to the eight priorities we lay out for companies building their India, China and Chindian strategies. Developed countries should consider these priorities and develop policies and programs as appropriate to take advantage of these opportunities.

There is no ‘reversing’ the offshoring trend – it will only get refined (e.g. morph more to global sourcing) and fine tuned as time goes on. Eighteen months ago we said that ‘offshore sourcing has become mainstream’, which meant that for many enterprises – and an INCREASING number of enterprises – offshore / global sourcing was becoming the default way they addressed their sourcing needs.

It will be difficult to ‘turn the clock back’ on this trend. We’ll see some realignment in terms of where the work gets done, the ‘sweet spot’ of each of the countries on the supply side may evolve or change, some of the work may go back to the developed countries (work which should probably have never left there in the first place) etc., but there will be no mass scale reversal.

Bio:

Mr James (Jamie) M. Popkin is a group vice president and Research Fellow in Gartner Research responsible for the Business Intelligence and Information Management research group. Prior to this position, he was responsible for Gartner research content strategy in China, India and Korea. He has 15 years of experience at Gartner, and 18 years in the IT industry.

Prior to joining Gartner, Mr Popkin was with the Deloitte & Touche LLP IT practice, managing a variety of technology strategy and development engagements. Previously, he served as a board member of the Association for Image and Information Management (AIIM) International Board of Directors.

An economics graduate from Connecticut College, Mr Popkin holds an M.A. in Public Policy from Kennedy School of Government at Harvard University, and a Certificate of Management from Darden School of Business at the University of Virginia.

Named one of the ‘50 Most Influential People’ by ImagingWorld (IW) Magazine, Mr Popkin is Senior Advisor to the China Business Continuity Management Association.

In Offshore Outsourcing, China's A Different Ball Game

China is like no other country on the offshore outsourcing landscape.

It has a rapidly growing base of low-cost IT pros, but other dynamics dominate the picture. With economic growth of more than 11% a year, China's poised to become the world's third-largest economy, and many CIOs think they need a presence in the country. Call it the "just gotta be in China" syndrome. Yet the last decade of offshoring has taught them the risks--like not getting the right talent for projects--of jumping into a hot market.

British telecom provider BT Wholesale has established a small IT center in China and a relationship with an IT services provider there. "Our philosophy is not to study it to death, but to get in there with a relatively modest approach and see what results we can deliver," says CIO Clive Selley. "It's a massively important, vast population with a fast-growing economy, and we need to be able to understand the marketplace."

Tata Consultancy Services plans to hire slowly in China so it can focus on keeping those it recruits. "We would like to go from the 1,000 people we have in China now to 20,000 or 30,000, but in a way that the attrition rate is low," says N. Chandrasekaran, chief operating officer at TCS.

Companies specializing in China-based IT outsourcing include ChinaSoft, DarwinSuzsoft, NewSoft, Symbio, and WorkSoft. In August, private equity firm Francisco Partners invested $48 million in DarwinSuzsoft, a U.S. company that employs 800 Chinese engineers, and Sierra Atlantic, a U.S. company with 1,100 developers in Hyderabad, India, acquired ArrAy, which has 200 technologists in Guangzhou and Shanghai. Challenges include a much lower rate of English competency than India has and looming risks of inflation from an overheated economy.

Five years ago, would-be customers focused on the security of their data and intellectual property in China, says Dean Stevens, general manager at Symbio, which has offices in China and Maryland. He rarely hears that concern today; now the focus is on how China will avoid India's dilemma. "The No. 1 concern I hear is, 'Can you get the engineers and resources I need to get my job done, and what's your retention like?'" Stevens says. "They'll often say, 'The problem I ran into in India was availability of resources and attrition, and don't give me that same problem.'"

6/05/2007

The Father Of Indian Outsourcing

Mumbai, India -

In the days leading up to India's '90s outsourcing boom, one of its pioneers remembers starting presentations to prospective American clients by telling them, "You probably think I travel to the office on a bullock cart."

At a time when India is firmly established on the global map, that line seems outdated, slightly offensive even. But Raman Roy, CEO of outsourcing firm Quatrro, says he often had to pinpoint India on a world map to global clients, who'd heard little of its business potential before the outsourcing industry changed the country's global standing.

The numbers tell the story. The software and services sector employs 1.6 million people, is hungrily looking for more to join the ranks, saw growth rates of above 30% for the last five years and exported products worth about $24 billion last year, a fifth of India's total exports.

Roy, who set up outsourcing centers in India for both American Express (nyse: AXP - news - people ) and General Electric (nyse: GE - news - people ) in the late 1990s, says the robust growth of software and services firms has brought about tremendous changes since. "People now know about India; the industry has gained acceptability," says 49-year-old Roy, who also founded the outsourcing firm Spectramind Services that was acquired by Wipro (nyse: WIT - news - people ) in 2002.

In a conversation with Forbes.com, Roy, who's often called the "father of the Indian BPO [business process outsourcing industry]" talks about the growth of his business baby, the biggest challenge to software services firms and how an industry has changed the way Indians live.

Forbes.com: You've been in this industry since its inception. What's changed?

Roy: There's an acceptance of India globally now. In the late '90s my favorite line at the beginning of a presentation was, "You probably think I come to the office on a bullock cart." People now know about India. There was a time when I sold it by pointing out the country on a world map, showing prospective clients pictures of popular historical monuments.

In the U.S., we were considered dangerous when software and services was a 300,000-strong industry because people saw what a potential threat we could be. Some of those fears have materialized in terms of the growth of Indian firms. But with our companies rapidly expanding abroad, now there's also a realization that outsourcing doesn't hurt the economy.

Indian businesses are far more self-confident today, so there's the ability to experiment and move up the value chain. And they're willing to make large investments globally.

What's different on the domestic front?

When I was setting up the first call center for American Express and went to the government to take bandwidth for operating it, policymakers thought I was into espionage because no one had ever asked for that much bandwidth earlier.

When it came to call centers, we used dedicated lines we bought from service providers. And to route calls from abroad to India, we needed to put international links into public service phone numbers. That was illegal in India. Convincing the government that changing regulations like that one would not hurt its revenues took a lot of running around.

For the same call center, I went to meet bureaucrats after they sat on our application for months. A government official said he could approve a call center, but could not approve a center to handle "incoming and outgoing calls." So we had to print definitions of a call center from the Internet and take them to him to show him that's what a call center did.

There were laws that forbade employing women in jobs after 10 p.m. In each state that we planned on setting up call centers in, we had to persuade its government to change that law.

After the initial hiccups, the government seems to have left your sector alone, and the backlash abroad is a tale of the past. What are the industry's challenges now?

The biggest challenge is the lack of talented manpower. High attrition rates [an average of 12 % to 15%] are the first signs of what will become a big issue. The top five companies spend a combined $1 billion per annum just on new hire training. Unless we upgrade our educational and training systems, we won’t be able to meet the opportunities the industry is creating.

The lack of proper infrastructure is also a problem that we're facing across industries.

The U.S. still accounts for an overwhelming portion of the revenues of India's top outsourcers. How much is that likely to change in the next couple of years?

The U.S. accounts for 75% to 80% of revenues, but if you look at global statistics, about 56% of outsourcing comes from that country. So it is the largest market. Though Indian firms are now seeing plenty of opportunities in Europe as they shift toward services of a higher order.

The first phase was just arbitrage and substitution. But increasingly countries like China are turning to Indian outsourcers because they can't find people domestically. The impact beyond the U.S. is growing as firms move to meet different outsourcing needs--in industries like health care, law and education. Growth depends on our ability to scale up effectively.

Indian software firms are not really known for innovation. Has it suffered because of the focus on services? Is there a move to change that now?

We're still evolving, but as Indian firms move up the services ladder innovation is becoming a requirement. Few companies have a nascent culture of innovation. Is the industry realizing that? Yes. Has it become a trend? No yet, but we're in the early stages of it.

You've started outsourcing units from scratch four times already, and all of them have been successes. What did you do right?

We listened to customers, and that's easy to talk about, but tough to do. We kept changing our models based on exactly what our customers wanted. In the early stages, getting the government to give us a hearing and change laws so we could operate was a big challenge, but now the shoe is on the other foot. If we raise issues, policymakers listen.

We also focused on our employees. In the initial period of call centers, mothers, grandmothers, uncles, aunts would come to meet me looking for assurances that it was OK for their daughters to leave the house at night to come to work. They were worried about what the neighbors would think. I met all these people and talked their concerns through. Today, there are too many young women working to worry about neighbors any longer.

There was no spending power among the college graduates earlier [software firms hire about 70% of their employees straight out of college]. Now when you walk into malls these are the people spending all the money. Tech industry employees don't utilize their money for conspicuous consumption, BPO employees do. I'm not siding with either side, but we've made a fundamental change in spending habits, consumption, the way these people live.

On the global front, where is India's competition coming from?

A few years ago, countries like China, Philippines and Mexico were among the few on the outsourcing radar. Today, there are over a dozen attractive destinations--from Sri Lanka to Malaysia to a host of Eastern European nations. But I don't think there's a big threat, because the outsourcing pie is large and only growing.

Right now, more than half of what is outsourced comes to India. When outsourcing is spoken about, India is spoken about in the same breath. The big challenge is for us to continue to evolve as customers' needs change. We need to now focus on innovation. But the future's looking bright. It's an exciting time to be an Indian in India.