Speedy Outsourcing: From Order Taker to Business Enabler in 10 Months

Ron Kifer is a renaissance CIO. At a time when most CIOs are talking about going beyond keeping the day-to-day IT ops running to align IT with business goals, Kifer is one of the few who has actually done so — and that too in not one, but in multiple organizations. His most recent win has been at Applied Materials, a $9.2 billion nanomanufacturing technology company.

Kifer has been at Applied Materials for less than a year, and his achievements list runs long and his "before and after" transformation list looks impressive.

Before: 17 independent IT groups, 90% of IT spend on "running" day-to-day ops, wrong mix of core and contextual competencies, contractor staff-augmentation model, U.S. centric geographical footprint, order-taking perception of IT.

After: Governance and budget consolidated under CIO, 30% shift in spend from "run" to "build," core and contextual competencies redefined, managed services for context IT, consolidation of IT infrastructure, IT strategic leadership of business transformation.

And the end result? IT at Applied Materials is no longer just an "order taker;" it is a "business enabler." And the success of the IT group has put the CIO and his team in the driver's seat for modeling change for other functional groups of the company.

"We started out as nothing but order takers and then set up an enterprise managed services model. That gave us dramatic cost reductions to be able to fund other transformation activities that the company was doing," says Kifer.

IT and BPO Work IS commoditized, and you don't have to go out and look for a best in class service provider to get appropriate support service.
Ron Kifer, CIO, Applied Materials

How did Kifer manage such a transformation in just ten months? Leveraging global resources and outsourcing through a managed-services model was only one way. Other strategic pieces leading up to it were equally important.

We spoke to Kifer at length to find out what he did right and analyzed key takeaways for aspiring renaissance CIOs.

Before and After: Governance, Budget, Outsourcing Kifer arrived at Applied Materials as the transformational guru who would turn the company's IT around from an order taker to a business enabler. But, first he had to "fix" a few problems.

Problem 1: Dispersed IT
He had inherited an organization that had 17 independent IT units, each empowered to make unilateral decisions on service providers, technology and IT spend. The decentralization (which was a result of the company having grown through a series of mergers and acquisitions, and the acquired companies not integrating with the corporate systems) also meant that the company had disparate legacy environments that did not talk to the newer systems.

Kifer consolidated these into one central IT, giving him a single-window visibility into IT spend and governance. His reasoning was simple: You can have budget control over a unit only if it reports to you.

He also worked toward building a strong governance team. He brought in IT leadership from companies such as Kraft, Dell, Logcalis and DHL — their collective experience contributing to the speed with which transformation was achieved at Applied Materials.

Problem 2: IT an Order Taker
The IT center that was bequeathed to him was a also cost center, not expected to add value beyond sustenance and maintenance — 90% of the central IT budget was focused on keeping the day-to-day machinery running.

Kifer reduced this to 60%, freeing up 40% of the company's IT spend to invest in business-enabling changes. This required identifying context or commodity IT activities, such as helpdesk, system administration and data-center operations, and moving them to two service providers in a managed-services model.

IT at Applied Materials is no longer a commodity. Its IT staff is engaged in doing work that adds value to the company's core business.

Success in isolating context IT functions was replicated in other functional areas of the company — HR and finance BPO. And the single-point of contact for all provider negotiations and contract-relationship management was consolidated under the CIO's office. This can be seen as true reward for renaissance work.

Kifer achieved what American CIOs are actively grappling with. Fifty-three percent of CIOs surveyed ranked the business alignment of IT as their top priority in a recent study conducted by Harvey Nash and KPMG. Everyday activities of managing project deadlines (42%), security (40%), managing staff turnover (35%) and effective system integration (33%) too featured as top priorities, implying that CIOs now consider "transforming IT" as equally important as delivering stable production services.

Problem 3: Over 20 External IT Providers
Another of his inheritances that Kifer "fixed" was the staff-augmentation model of outsourcing that the company's IT units were using. Between themselves the IT groups had 1,200 people, 700 of which came in from over 20 external providers on a staff-augmentation model. This meant that resources from third-party service providers were brought into Applied Materials — they worked on a lower rate, but were directed by the company's legacy IT processes.

The staff-augmentation outsourcing model, CIOs are beginning to realize, is not the most effective one. Its touted advantage of having the service provider's qualified, and less expensive, staff work in the customer's organization, and not from a remote location, is now being found to be a disadvantage. This is because once the staff comes in, they are put to work along the customer's existing processes, and don't get the value of the service provider's more mature processes that they would have honed by doing repeated work in that area.

Kifer shifted Applied Materials' IT staffing to the managed-services model with two offshore service providers — Wipro and Satyam (both are Global Services 100 companies). Satyam has been given the applications and engineering side of the work, while Wipro the infrastructure side. BPO work, too, is divided between the two.

And as Applied Materials was able to take advantage of the more mature processes, tools and metrics of its service providers, it was able to get significantly higher service

levels at 30%"35% lower cost than in its previous staff-augmentation staffing model. Equally important, it freed up internal resources to work on the company's core competencies.

Typically, an organization takes six to eight months time to outsource from start to finish. Kifer managed to squeeze this time into just over eight weeks. He did this by bypassing the Request For Proposal process.

"In staff augmentation you take competent resources from an outsourced service provider, treat them as internal employees and place them in your own dysfunctional processes. You don't get the value of the maturity of the outsourced provider — their metrics, their tools, and the fact that they have honed their ability to deliver processes," says Kifer. "All that you get is an individual laborer that works within your own organization as an internal employee —you just get that person at a lower rate."

CIOs are increasingly looking to managed services — the demand for managed services has increased 33% between 2001 and 2006, according to neoIT. Managed services is a competitive option because it allows the customer company to benefit from the provider's relationship with other customers: The costs are lower because of shared infrastructure with other customers, and there is access to the provider's mature processes achieved by working with other customers.

Also, giving full responsibility for service-level agreements to the service providers frees up the customer company to focus on its core competencies.

Speedy Selection: Bypassing the RFP
The typical time that an organization takes to outsource from start to finish is anywhere between six to 18 months — this includes due diligence at the customer company's end to strategize on what services to outsource and what to keep in-house, finding the right service provider and transitioning the work.

Kifer managed to squeeze this time into just over eight weeks. He did this by bypassing the Request for Proposal (RFP) process. Guided by the belief that basic IT services have become a commodity, Kifer believes that an RFP process is redundant when sourcing such services. The skill set and capabilities of the top tier providers are well established, so spending time on RFPs and extended provider evaluations, he believes, is a waste of time.

"We did not do an RFP. We prioritized five vendors according to our strategic fit, and chose two," he says.

Kifer and his team engaged in intensive discussions with each of the five short-listed providers, and at any point where they lost confidence in one of the providers, they moved on to the next one on their priority list. "We completed the exercise in eight weeks. And we didn't have to go any deep into prioritization beyond the top three," he adds.

Prep Work
Kifer's prep work toward an IT transformation began even before he joined the organization in May 2006. It involved actively negotiating with the CEO during the interview stage for a consolidation of global IT budgets and governance under the CIO and forming a new IT leadership team. It also involved getting a commitment to a strong CEO sponsorship of the transformation and elevating the CIO position to peer level.

Kifer kept salary and benefits discussions secondary, believing that management will gladly pay more once you demonstrate delivery.

That could not be the only reason to keep salary discussions secondary. CIOs, in general, have little reason to quibble about salary. "CIOs are satisfied with compensation," reveal the findings of a recent Harvey Nash CIO survey. Seventy percent of CIOs surveyed reported a salary in excess of $125,000, and more than 85% reported receiving performance bonuses.

Yet, these upfront negotiations meant that Kifer did not have to spend huge amounts of time dealing with gaining management buy-in, and could dive into work as soon as he got in. This, however, is not a luxury that existing CIOs enjoy — they have to negotiate, fight, plead for change.

Dual versus Multisourcing

Applied Materials consolidated its 20 service providers into two. It sends all its outsourced services — IT or BPO to either Wipro and Satyam. At a time when companies are consciously opting for the multisourcing model (the best examples being the 2006 deal by General Motors and the 2005 one by ABN Amro Bank), this is an anomaly. The company's strategy is to drive for lower prices by maximizing the volume of work that it gives to its two providers. "Outsourcing in IT and BPO has evolved to the point that there are now four to five organizations that have commensurate ability to do this work. Work is more commoditized, and you don't have to go out and look for a best in class service provider to get appropriate support service," says Kifer. In a story on commoditization of services that Global Services did in April last year, we spoke to several CIOs, sourcing managers and analysts and arrived at the same conclusion: IT and BPO services are getting commoditized. Some candidates for commoditization that we had identified were: Data entry, IT helpdesk support, desktop support, infrastructure management, application maintenance, employee-data management, benefits and payroll management, general accounting, accounts receivables and payables, purchasing, customer service, telemarketing and medical transcription. (The story on commoditization is titled Driving Down Prices, and you can read it at globalservicesmedia.com) Multisourcing also brings with it a practical problem — that of managing multiple relationships (in the case of Applied Materials, this was with 20 providers!), and contending with finger pointing if things go amiss. This is a costly and complex task, requiring writing complex service-level and operating-level agreements, and putting in place a dedicated team to managing these relationships. The governance cost of a single-sourcing deal is typically between three percent to11% of the total cost of the deal, it varies between 15%"50%, depending on complexity, in the case of multisourcing.

Opinion: Get more from outsourcing

Most of us fear outsourcing, and with reason: Our jobs are on the line
By Bruce A. Stewart
Computerworld Malaysia

Most of us fear outsourcing, and with reason: Our jobs are on the line. Still, most of us work for organizations that will engage in one or more outsourcing deals. Learning how to deal with the changes outsourcing brings can actually work in our favor. Here are some tips.

Work on the outsourcing relationship. Most companies put little time or effort into these relationships, which soon become little more than a battle over invoices, due dates and other contract-related issues.

It’s critical to treat the relationship formally, assigning specific point personnel to handle it (even if at this point you have only a small internal office of the CIO). This is especially critical when most of the people on the “other side” are your own ex- colleagues. You might like the “feel good” factor of seeing your former colleagues continue to identify themselves as members of your team, but beware. I’ve seen some who still did that 18 years into an outsourcing relationship. The problem is that those people never made the transition to representing their new employer and thus were unable to bring its best thinking to bear on the client’s interests.

Focus on the future. Most long-term sourcing transactions go through at least one major contract renegotiation midstream. There’s nothing wrong with this —few of us are brilliant enough to anticipate 10 or more years of changing needs. But if you’re going to go through a year’s worth of renegotiation, why settle for a few minor tweaks in the pricing algorithm and not much more?

It’s not enough to enter into renegotiations focused on what has changed about your company’s IT needs since you engaged the sourcing firm. Focus on change itself, the inevitable byproduct of passing time. You’ll see, for instance, that tying the sourcing partner’s resources to the configuration just makes it difficult for the partner to make changes that could save power, servers and other underlying costs. You might also decide to build staff redeployment and retraining into the contract. You could pay a defined sum toward them each year while putting in safeguards that would protect you from paying for severance if the outsourcer must lay off some staffers because of a lack of work. Another idea for renegotiation: Pay the sourcer a bonus for cutting costs more than expected or consistently delivering quality results.

Commit yourself. When you outsource a business process, do it cleanly. I’ve seen outsourcing relationships in which a single transaction passed back and forth over the sourcing boundary five or six times. Commitment can only come with trust, but it’s important to make up your mind that your objectives are indeed trust and commitment. And, make no mistake, a failure to commit shows up as a lack of success—on both sides of the table. Once you have established trust, you will be less concerned that you might be able to get something done a little cheaper through someone else, and you will become comfortable with not spelling out precisely how the partner should do everything. In other words, you will learn to treat the partner like the next department over.

By the end of 2008, more than US$120 billion in outsourcing deals will be up for renewal. Many clients are in deeply unhappy relationships, yet most will end up outsourcing again. Now is the time to hone your ability to form partnerships. You’ll be mastering an in-demand skill.

Industry Parks in China Aim at a Better Future Through Innovation

    BEIJING, May 11 /Xinhua-PRNewswire/ -- CCID Consulting, China's leading
research, consulting and IT outsourcing service provider, and the first
Chinese consulting firm listed in Hong Kong, recently pointed out that
industry parks of today should become more internationally-focused, and
transformed from places of industrial clustering to ones of service
industry clustering. "Industry parks" in China refer to regions of industry
concentration, such as economic and technological development zones,
cutting- edge technology industry development zones, export processing
zones and bonded areas. These parks mainly consist of operating entities
like economic and technological development zones, and cutting-edge
technology industry development zones.
   From industrial clustering to service industry clustering
   CCID Consulting comments that industry parks should speed up
transformation from a place of industrial clustering to one of service
industry clustering to push forward their role in driving and supporting
the changing industrial development in cities and even surrounding regions.
There are two reasons for this. Firstly, industry clustering in certain
areas takes up a large portion of agricultural land, which puts it in
opposition to the State's land policy. Secondly, the positioning towards
service industry clustering allows industry parks to attain more room for
growth, which enables them to develop naturally, and even give greater play
to their own role in driving forward economic growth in surrounding
regions.
   Industry parks' focus on industrial clustering is an important reason
for their continuous land expansion. As they once adopted a development
route of industrial clustering, these industry parks were bound to suffer
from a lack of land space. Continuous land expansion has been a necessity
for them as they have failed to upgrade their strategic thinking to become
more service industry-oriented. CCID Consulting believes that industry
parks have tried to become the powerhouse and radiator for overall
industrial growth through providing a more suitable investment environment
and attracting key institutions in the industrial clustering process. They
do not complete industrial clustering on their own.
   The breakthrough for improving the role of industry parks lies in a
change from an industrial clustering-oriented transformation towards a
service industry clustering-oriented transformation. Once they become a
gathering place of R&D, incubation, technology exchange, logistics transfer
and professional outsourcing, which are peripheral to the service industry,
industry parks will not only greatly improve their own economic
performances but also play a considerable role in promoting social and
economic development in the peripheral industries. Industry parks' leverage
role in cities is thus an important indicator for measuring their strategic
role.
   From a domestic view to a world view
   One important direction for industry parks to make strategic
transformations in the future is to adopt a global mindset when adjusting
their industrial structure and positioning their development. In their
future development, industry parks should change from a focus on expansion
of scale to pooling their advantageous forces to develop leading industries
and improve their industrial competitiveness. They should step up efforts
to integrate the "industry park" into the international industrial
specialization system. They should keep pace with international
technological developments. For example, Yiwu in Zhejiang Province has
brought its small commodity wholesale to the world market through a
specialized regional market. This is the growth benefit which has been
brought about by the city's international positioning.
   Firstly, based on a better understanding of the global development
trend, industry parks need to focus on developing industries with
competitive advantages, make full use of their comparative advantages in
the international division of work, combine their industrial structural
planning with the world industrial development trend, and formulate new
industrial strategies plans and business promotion schemes. Eventually,
such plans could help to improve their overall regional competitiveness. A
global orientation does not exclude positioning towards local services. On
the contrary, it can speed up local social and economic development and
contribute to the improvement of national competitiveness.
   Secondly, CCID Consulting suggests that industry parks should achieve a
chain layout of ''international core enterprise-international supplementary
enterprise-international clustering effect''. They should formulate
business promotion plans with an international vision, take up those
hi-tech and high value-added production links in an industry and claim
certain higher industrial and technological high ground based on their
overall strength and comparative advantages. The formative mechanisms of
international industrial specialization are changing from self-promoted
specialization in the market to the operational specialization by
enterprises (mainly multinational companies) and organizational
specialization by members of regional industrial groups. Industry parks
therefore need to implement a number of supplementary projects for key
international industries and key enterprises, and improve their ability to
offer supplementary services to attract specific international industries.
   Change from extensive management to the refined services model
   The administrative committees of industry parks should hand over
operational responsibilities of more intermediary services incubation
investment and financing to market institutions. This will allow them to
achieve a more ''refined'' management and overall service. Portal website-
based services platforms will become the main development direction for IT
applications in industry parks. Due to the lack of smooth and effective
channels of information communication between industry parks and their
residential enterprises, there is information asymmetry between them. The
management and services which industry parks provide cannot meet
enterprises' needs. Industry parks cannot get first-hand information about
enterprises either. Through refined management and shared services
platforms, industry parks and their residential enterprises can maintain
real time information communication, engage in full information exchanges
and sharing, and optimize the management of the information chain. Through
receiving the latest enterprise information, industry parks can offer
enterprises services specially tailored to them.
   For more, please refer to
http://www.ccidconsulting.com/upload_fr/07050902.jpg .
   To sum up, China needs to give up many of the outdated and unsuitable
ideas that still exist in its development strategies and plans for industry
parks. These include static situational judgment, narrow regional interests
and coarse division of industries. Such factors fundamentally prevent
industry parks from playing their due role. CCID Consulting comments that
industry parks' strategic breakthroughs and transformation have been
growingly concentrated on three major aspects, namely transformation of
industry clustering to services industry clustering, transformation of
extensive management to refined services, and transformation of domestic
positioning to international positioning. Industry parks need to draw
implications from these for their future development road and take more
effective actions.
   About CCID Consulting
   CCID Consulting Co., Ltd. (also known as CCID Consulting), the first
Chinese consulting firm listed in the Growth Enterprise Market of the Stock
Exchange (GEM) of Hong Kong (stock code: HK08235), is a direct affiliate of
the China Center for Information Industry Development (hereinafter known as
CCID Group). Headquartered in Beijing, CCID Consulting has so far set up
branch offices in Shanghai, Guangzhou, Shenzhen and Harbin, with over 300
professional consultants and industry experts. The Company's business scope
has covered over 200 large- and medium-sized cities in China. Apart from
home market development, CCID Consulting is establishing international
cooperation links across the United States, the Asia-Pacific region and
Europe, by setting up agents in the U.S., Japan, South Korea, Australia,
Singapore, Italy and Russia, with the aim of going global.
   Based on four major competitive areas of powerful data channels,
industrial resources, intense knowledge and deep understanding of
information technology, CCID Consulting provides customers with consulting,
research and IT outsourcing services covering strategy planning, IT
application, marketing strategy, human resources and information technology
outsourcing. Our customers range from industrial users in IT,
telecommunications, energy, finance, automobile, to government departments
at all levels and diversified industrial parks.

Revenue from China's offshore software outsourcing market to grow five fold over next five years

Shanghai. May 11. INTERFAX-CHINA - Total revenue from China's offshore software outsourcing market will grow five fold over the next five years and the compound annual growth rate of the market will reach 37.9 percent, according to a recent report on the market by a market research firm.

The report found that China's offshore software outsourcing market continued to grow rapidly in 2006, with total revenue from the market reaching $1.38 billion, up 48.4 percent from 2005, according to the report by IDC China.

Japan and Korea remained the principal markets for China's offshore software outsourcing industry in 2006, with the two countries accounting for 56 percent of the industry's total revenue. European and American customers accounted for almost 36 percent of the industry's total revenue, up 8.4 percent from 2005.

The report predicted that in the future, demand from the Japanese and Korean markets will continue to grow steadily while demand from European and American markets will grow at a much more rapid pace. Over the next five years, it is expected that the European and American markets will have an annual compound growth rate of 48.6 percent. At this rate, revenue from European and American markets will surpass that from the Japanese and Korean markets by 2009.

According to Han Guohua, an official from IDC China's software and service research department, the industry was marked by acquisitions and integration in 2006. Five of the 10 leading companies in China's offshore software outsourcing industry completed large-scale acquisitions during the year, greatly enhancing their scale and revenue. As long as the acquisitions have been executed smoothly, it is believed that these companies will begin to reap great benefits from their acquisitions within the next two to three years.

According to IDC statistics, the market share of China's 10 leading companies in the industry rose by 6.5 percent during the year, illustrating a surprising level of growth. IDC believes that in the future, the market will be subject to a Matthew Effect, where larger outsourcing service providers will use their brands, sizes, services, local sales networks and supporting capabilities to continuously increase their market share while smaller companies will decline.

IDC also found, in contrast to India's market, China features considerable domestic demand. In 2006, over 40 percent of offshore software outsourcing revenue came from multinational companies that were located in China. IDC predicts that domestic demand will continue to grow rapidly over the next three to five years. This growth provides an excellent opportunity for service providers, allowing them to expand while avoiding direct competition with Indian companies in the European and American markets.

However, at the same time, competition within the domestic market will increase in ferocity, with the market only reaching a stable saturation point three to five years from now. For this reason, it is necessary for Chinese offshore outsourcing service providers to begin developing their sales and support abilities in European and American markets soon.

IDC suggested that in order to expand their businesses in Europe and America, Chinese offshore software service providers should choose medium and small-sized software businesses in Europe or America as customers. Through this approach, companies can begin to research and develop outsourcing services for their software products as well as application development, testing and other R & D services.

The outsourcing of software product R & D is seen as the high-end sector of the industry. The sector holds many potential rewards for the Chinese offshore software outsourcing industry and Chinese service providers through the added value of the services, competitive environment and improvements to human resources.

Medium or small software businesses in Europe and America are also unable to afford global service providers or services from the Indian software outsourcing giants for the most part, which provides Chinese service providers with a great many opportunities to enter into the market.

However, the price of global offshore software outsourcing is decreasing at the same time. The average price of China's outsourcing services utilized by Japanese entities has dropped by approximately 30 percent over the past ten years. While China currently has a price advantage over India through its cheaper services, this advantage will disappear in the future.

In order to maintain their competitive strengths a reasonable profit rate, Chinese service providers should consider lowering their costs by enhancing efficiency or by increasing their attractiveness to users through improved software quality and value-added services.

Outsourcing the Future?

Two Duke scholars say U.S. could be outpaced in graduating higher-degree engineers.

May 11, 2007

By Marisa Taylor

It’s the favorite gloomy warning of politicians and educators: the United States is falling behind China and India in math, science, and, thus, high-tech jobs. Should we be forcing kids to do their math homework? One U.S. scholar said it might be too late for that.

Entrepreneur and scholar Vivek Wadhwa argued that, instead, the U.S. must focus on graduate-level engineering programs to stay competitive and avoid losing high-skill jobs.

As an executive-in-residence at the Master in Engineering Management program at Duke University, Mr. Wadhwa has conducted a series of studies on engineering graduates and outsourcing.

He concluded that the biggest problem facing America is that policy makers are focused on K-12 education when they should be working on graduating more Master’s- and PhD-level engineers. “The fact is that even if we fix our K-12 system, it will be 15 years before we see any benefit,” he explained. “And that is 15 years too late.”

Mr. Wadhwa predicted that cutting-edge R&D projects will start to move to India, much in the way that manufacturing in China has undercut ever-larger chunks of U.S. industry. To keep those jobs in the U.S., higher-skilled engineers are needed. During a recent trip to India, he said, he was blown away by the innovation he saw at companies like Hindustan Computers Limited (HCL). “Give it five years, and you will see a wave of outsourcing of critical research and design jobs going to India,” he said.

With Gary Gereffi, director of Duke’s Center on Globalization, Governance and Competitiveness, Mr. Wadhwa analyzed data on graduation rates of engineers in the U.S., India, and China and published the results in a recent study titled “Where the Engineers Are.”

Their research did dispel one common fear: that the U.S. isn’t graduating enough engineers compared to China and India. Commonly-cited statistics show that the U.S. is producing 70,000 engineers versus 350,000 from India and 600,000 from China. In fact, because the word “engineer” translates differently in China and India and could signify anything from a software engineer to an auto mechanic, the actual numbers of undergraduate-level engineers in the U.S. is very competitive.

Yet the authors did conclude that the graduate level is where the U.S. needs to worry. Add to that the strengthening economies in China and India, and the U.S. could see a trend in engineers with graduate degrees—of whom 40 to 50 percent are foreign-born—going home. More Americans need to get into those programs, he said.

Mr. Wadhwa himself was among the first to turn to outsourcing to cut costs. After coming to the United States from India for an MBA, he formed two software companies and started to outsource the programming in the early 1990s, first to Russia and then to India. Later, as an engineering professor, he heard his undergraduate students voice fears about losing their jobs to the trend he helped pioneer.

Some education experts are more sanguine. James Plummer, dean of Stanford’s School of Engineering, said U.S. universities offer a top-notch education and attract the best and brightest from around the world.

"It's certainly clear that the outsourcing that we've seen over the last decade or so will continue,” he said. “[But] I don't think that necessarily bodes horror for us in terms of engineering manpower supply."

In the meantime, parents may have to twist their usual dinner-table argument . In his 2006 book The World is Flat, journalist Thomas Friedman recounts chiding his daughters: “Girls, finish your homework—people in China and India are starving for your jobs.”

Chinese offshore software market to grow

Total revenue from China's offshore software outsourcing market will grow fivefold over the next five years and the compound annual growth rate of the market will reach 37.9%, according to a recent report by market research firm IDC.

The report found that China's offshore software outsourcing market continued to grow rapidly in 2006, with total revenue from the market reaching £700m up 48.4% from 2005.

Total revenue from China's offshore software outsourcing market will grow fivefold over the next five years and the compound annual growth rate of the market will reach 37.9%, according to a recent report by market research firm IDC.

The report found that China's offshore software outsourcing market continued to grow rapidly in 2006, with total revenue from the market reaching £700m up 48.4% from 2005.

The China-based offshore software development market remained a high-growth market in 2006, expanding by nearly half in a year, and is on course to register similar year on year growth over the next five years.

The market experienced a lot of consolidation in 2006, said Judy Ou, senior analyst, software and services research, for IDC China.

BPO not a cost-cutting ploy: Survey

Outsourcing to markets like India is not a cost-cutting ploy any longer. Company bosses are focusing on winning new customers in emerging markets like Brazil, Russia, India and China, a survey by consulting firm PricewaterhouseCoopers suggests.

India comes second to China, which is seen as the most promising market, with nearly four fifths of all companies planning to sell their products there. And nearly two-thirds of chief executives believe that globalisation is not just unstoppable, but also good for their company. "Globalisation is widely viewed as an (attempt) to take advantage of low costs, but chief executives tells us that now it is more about accessing markets and getting new customers," said Samuel DiPiazza, the chief executive of PricewaterhouseCoopers International.

Just 12% of the executives interviewed believe that globalisation will have a 'somewhat negative' or 'very negative' impact on their organisation. Executives in developing countries are also upbeat about globalisation. "They are unanimous that it's not a threat but an opportunity; they worry less about multinationals coming into their market, but look forward to getting better access to new markets," DiPiazza said.

It is the burden on business where the bosses in the developed and developing nations differ. In industrialised nations, too much regulation and trade barriers top the list of complaints. Corruption and poor education and health systems are the biggest worries of chief executives in developing countries.

Much of global investment has been focused on the so-called BRIC countries - Brazil, Russia, India and China - a term first coined by investment bank Goldman Sachs. But the survey contradicts the reasons behind it. Almost half of all firms say that lower costs is one of the factors driving their decision to do business in these countries, about three quarters hope to get access to new customers. Among the BRIC countries, most corporate attention is on China. Nearly four fifths of companies have a strategy to enter the Chinese market, while 55% hope to sell there within the next three years.

India came second, with 64% of companies seeing "significant market opportunities", while less than half identify such opportunities in Brazil and Russia. "Until recently, when people thought about China it was about making things cheaply and sell them to the West," says Kieran Poynter, the chairman of PwC UK. "Today they see a billion people that are getting richer and who represent a consumer market."

India, meanwhile, is rated highly for its highly skilled workforce. PricewaterhouseCoopers interviewed for the survey 1,410 chief executives in 45 countries during the last three months of 2005. Of the chief executives surveyed, 25% worked for companies with a turnover of $1bn a year and more, while half were leading firms that had a turnover of less than $500m.

India's largest BPO plans $600 mn IPO in US

ndia's largest business process outsourcing (BPO) firm, Genpact, plans to raise $600 million (around Rs 2,500 crore) in an initial public offering (IPO) of its shares on the New York Stock Exchange (NYSE). The face value of the offered shares is 1 cent.

It will thus become the largest Indian IPO in the US and follows two other Indian BPOs - WNS (NYSE) and EXL Services (Nasdaq). The proceeds from the share sale will be used to repay debt and for general corporate purposes, including potential acquisitions, according to a filing with the U S Securities and Exchange Commission which has not yet become effective.

Genpact will apply to have its common shares listed on the NYSE under the symbol "G". The joint bookrunning managers are Morgan Stanley, Citi and JPMorgan.

General Atlantic and Oak Hill Capital Partners hold 60 per cent of the company's equity, while GE owns the remaining 40 per cent. All the three shareholders are diluting their stake throught the proposed IPO,
according to the SEC filing.

Genpact ceased to be a wholly-owned subsidiary of GE in December 2004. GE accounted for almost 74 per cent of the company's $613 million (around Rs 2,600 crore) in 2006 sales. The remaining 26 per cent came from clients that Genpact refers to as 'global clients'.

Genpact employs a little over 28,000 people across its centres in India, China, Hungary, Romania, the Philippines, Mexico and the US. The company's net income more than doubled last year to $39.8 million (around Rs 170 crore) as sales to customers other than GE almost quadrupled. The IPO will be managed by Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co.

Genpact recently received an in-principle clearance to set-up three Special Economic Zones (SEZs) from the Ministry of Commerce in Bhopal, Bhubaneswar and Jaipur. Discussions are in an advanced stage with the three state governments.

Genpact President & CEO Pramod Bhasin had then said: "Our growth, which has been in excess of 20 per cent per annum over the last several years, is encouraging us to plan ahead and partner with state governments to identify expansion sites that will serve the larger Indian BPO/ ITES sector. These new facilities will offer exciting career and growth opportunities to the youth in these states."

Genpact is hiring in excess of 800 new employees a month in India. While hiring for the new facilities has already begun through Genpact's employment offices, the company will offer existing employees from its other centers the option to take a transfer to these facilities.

Report: Outsourcing threatens innovation

By: BRADLEY J. FIKES - Staff Writer

SAN DIEGO -- Outsourcing manufacturing to other countries is undermining the innovation that's supposed to keep our technology-based economy growing, states a new report from a San Diego-based entrepreneur and industry observer.

The physical process of manufacturing is closely linked to innovation, said Michele Nash-Hoff, president of ElectroFab Sales, which represents "job-shop" companies that perform custom manufacturing and are affected by outsourcing. When inventors operate at a distance from their inventions, they lose the hands-on experience that fuels innovation, Nash-Hoff wrote.

Innovation is how many American companies hope to compete as workers in other countries acquire manufacturing skills. The idea is that American companies will produce ever-more sophisticated products as lower-tech products become commodities. That won't happen by divorcing manufacturing from research because vital skills will atrophy, Nash-Hoff said in a Friday interview.

Nash-Hoff's May report is the latest in her series tracking the health of San Diego County manufacturing. She also maintains a frequently updated list of local manufacturing companies that have closed down or relocated.

Chuck Rabel, vice president of Vista cable manufacturer DDH Enterprise, called the report "recommended reading for us all." The company makes custom products in China as well as in Vista.

Rabel said manufacturing in Vista gives DDH needed experience to make the process efficient. When the process is streamlined, work is then sent to China.

"If we don't, there's no guarantee the transition to manufacturing there is going to occur smoothly," Rabel said. "To simplify the timeline for production, it's best that we do it here."

For example, he said, manufacturing may require color-coded wires to reduce assembly errors. That kind of observation is best made on the scene. A computer model is no substitute.

The hands-on knowledge also keeps costs down for clients, Rabel said.

"We oftentimes say, instead of this expensive custom cable, we've got this stuff off the shelf that will work," Rabel said. "The electrons don't know a damn bit of difference, and you're going to save a lot of money."

"Oftentimes, they'll call for a connector that could be molded," Rabel said. "We don't mold here, but if we bought an assembly out of a catalog that's twice as long as we need to have it, we can cut it in half and work just one end of it, saving everybody a lot of money."

However, some kinds of high-tech products appear to be less vulnerable to outsourcing, Nash-Hoff said.

San Diego wireless giant Qualcomm outsources almost all of its manufacturing, yet retains a commanding hold over its wireless standard for cell phones, called CDMA.

William Rastetter, former chief executive of Idec Pharmaceutical Corp., said outsourcing biotech work when it's cost-effective doesn't harm innovation in that industry.

Manufacturing activity rose slightly in April after a downturn in February and March. But the long-term outlook is grim unless the nation takes "drastic" action," Nash-Hoff said.

Nash-Hoff said that the county's manufacturing industry had entered a "danger zone" because of continued closures or relocations of local manufacturers. North County companies on her list of such companies include Design Enclosures Inc. of Escondido and Dothill of Carlsbad.

"I would say we have about a five-year window," or the U.S. will deteriorate into an economically polarized country of rich and poor, Nash-Hoff said. "Manufacturing is the foundation of the middle class in the United States."