New age of outsourcing

Third-party products and services are undergoing an evolution as a result of fundamental changes to technology, says Mark Kobayashi-Hillary
Mark Kobayashi-Hillary, Computing Business 22 Mar 2007
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When you spend a lot of time in India it becomes apparent that most technology companies are not all that worried about the competition from China; but why not?

The reason is that the nature of competition is far more complex than the IT services industry of one nation pitted against another. The question of what will happen to the outsourcing industry in India is, in fact, a function of what happens in other regions, what individual companies do and what innovations take place, disrupting our present view of the marketplace.

New approaches to technology, such as software as a service, service orientation or utility computing should – in theory – disrupt the present bread-and-butter revenue streams of package implementation and systems integration.

But those changes might not be coming as fast as some commentators believe. V Sreenivasan, vice president of strategic relations and consulting at ITC Infotech, says companies would like us to believe that everything is moving to architectures, such as service-oriented architecture (SOA).

‘But the traditional banks and companies that form the pillar of any economy still would like to put their money on their mainframes,’ he says. ‘In my view, both models will co-exist. The fundamental principle is that large and enterprise-level computing remaining with these large systems will be there for some time yet.’

If upstarts such as Google are going to challenge industry stalwarts such as Microsoft in office automation, then it is no great leap of the imagination to consider that changes might take place in IT services, too.

Francisco D’Souza, chief executive of Cognizant, says there are really three dimensions changing the nature of outsourcing today – competing countries, competing firms and technological change.

‘These are all fundamental changes that are happening and will continue to do so,’ he says. ‘In my opinion, there are two themes to this.

‘First, there is a group of firms in the industry that are focusing on being very good at transactions. These are firms that are looking at particular business problems or looking at particular industries and being very good at the transactional level. So their value proposition is: “How do I do something most effectively?”

‘Second, is another group of firms that are focused on transformation and helping customers really understand how they build stronger businesses.’

D’Souza makes a strong point. The industry moving to a situation where some firms can reduce cost, increase volume and make a living from automation and high throughput of processes. They are the classic IT firms, providing technology as a utility to other businesses.

Local knowledge

Other companies need intimate knowledge and experience of an industry domain to be able to offer a highly skilled service. These services are supported by IT, but you could not define something such as equity research for an investment bank as a pure IT service. It would be best to call it the difference between application professionalism and technical professionalism – and this does fly in the face of the outsourcing suppliers who say they can do everything from accounting to code cutting.

D’Souza says you can, therefore, see a real bifurcation going on at the moment in the industry, between what he thinks of as the transaction-focused firms and the transformation-focused firms.

‘One focuses far more on the denominator side of the equation – how do I become more efficient and how do I help my customer become more efficient? And the other group of transformational firms drives the numerator side of the equation, asking how do I drive better revenue?

‘I think that’s how the rules of competition in this sector will play out over the coming years,’ he says.