New age of outsourcing

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.

Where to produce?

Joe Venkataraman, UK managing director of Mastek, says revenue and cost are being played out by how the industry is moving towards a lot of reuse and shared services, and how the same product can be produced sooner, faster, and cheaper.

‘If a technological innovation arrives, an organisation becomes like a Boeing, with so many suppliers all over the world and the product being assembled in one place. This works very well and is how the 777 is assembled,’ he says. ‘Software could become like that, but it’s a long way off.’

So the software factories of India are not a reality, just yet. But major transformation has already taken place. And one of the key areas of change is the concept of an industrialisation of IT services – certainly an area where India has led the world to date.

Deepak Khosla, senior vice president of marketing at Patni, says the key area is whether the country can industrialise the services being provided. ‘If you look at the PC or any piece of hardware, consider the earlier ratio of customisation or serviceability on that – it required far more before than it requires today,’ he says.

‘Today there are a lot of components you do not need to tweak or customise at all. Imagine the number of calls you would make to a hardware engineer 10 years ago just to get a PC set up. In the back room, among all the servers, you can now upgrade just by adding a couple of blades. When hardware fails you have auto-correction now, so what the hardware firms have done is to industrialise these components – they have cut the amount of servicing required to achieve the same level of efficiency.’

The concept of the software factory; a spotlight on hard-core technology; and a new focus on business services: change in IT is accelerating and though outsourcing does not directly influence such developments, working with domain experts is influencing and accelerating industry change.

Should you bet on Google or India Inc? It is still too early to call.

Best practice

• Outsourcing to India has grown to become a trusted and well-respected strategy for IT services; Indian companies lead the world for adherence to international quality standards and the industry has moved on from the earlier association with slash-and-burn cost reduction.
• Yet a number of clouds are on the horizon. The supply of good graduates is predicted to be outstripped by growing demand, attrition remains a perennial issue and attractive tax breaks in India are due to end in 2009.
• Traditionally most observers have viewed China as the main growing competitor to the Indian IT services industry, but what changes when we view the market in three dimensions: regions, individual companies and technical innovations?
• There might be a considerable change in the market, with some firms focused on IT-enabled services – using IT to deliver a business service remotely instead of an IT service itself. The consequences are obvious – a highly automated server farm offering storage might be better located in Manchester than Mumbai, thanks to better physical infrastructure. Services requiring intimate domain knowledge often require local knowledge, so the blend of offshore and onshore knowledge is likely to become more confused.

Mark Kobayashi-Hillary is a director of the National Outsourcing Association. He is the author of Outsourcing to India: The Offshore Advantage (Springer) and co-author of a new BCS book Global Services: Moving to a Level Playing Field. Visit www.markhillary.com