Posted by: qmaxim | November 24, 2010

Outsourcing and global delivery model what next?

In the US there has been unprecedented attention and attack on  the Indian software  and Business process outsourcing industry. Several senators, governors and President  Obama joined in kick outsourcing & outsourcing is the cause of high unemployment bandwagon. This did not seem to help them in the recently concluded Congressional elections. President Obama’s party the Democrats lost badly (worst loss in decades). Business friendly Republicans  took firm control of Capitol hill. This tirade as well as other bills passed recently like health care reform bill had no support of industry leaders anyway. Large businesses made significant campaign contributions to  GOP candidates  thus contributing to their win leading to heavy loss of democratic candidates backed by   Obama. From now onwards it is going to be tough going for President Obama to pass any legislation.

In the recently concluded trip to India Obama seemed to have learnt some hard  lessons from this setback and suitably amended his message. He emphasised  jobs created  already as well as jobs likely to be created in US by India (50,000 jobs likely to be created due to agreements signed during the trip). Indian political leadership and industry did a good job of projecting  the benefits of the outsourcing and India – US strategic partnership. Now what next for the  50 billion USD Indian outsourcing industry?

One thing is clear – outsourcing and globalization is here to stay and in my view is going to only increase in the coming days. There are many trends at play here.

  • Each device/ equipment / system – be it music system or car engine or handheld device or bank ATM will have  some level of intelligence and internet (cloud) connectivity. Somebody needs to write the code for these devices which is basically a labour intensive activity and requires army of educated, disciplined, & hardworking & intelligent youngsters. Countries  like India are uniquely positioned to meet this need.
  • Seeing the success of Indian industry many of the industry titans like have IBM , Accenture  have also outsourced heavily particularly to India. IBM India has over 100,000 employees in India alone according to information available. Headcount is second only to IBM US. Other large players like Capgemini are scrambling to ramp up operations in India. In other words, they are in India for keeps and have no intention to go back. In many cases, Indian units of multinationals are handling high end work independently and completely.
  •  Probably due to credibility of outsourcing industry and confidence in their capabilities, many of the large multiple year multimillion Dollar out sourcing contracts are  being split  between several players instead being given out to of one or two players. For instance, Infosys has won many multiyear contracts  worth  100s of million Dollars.
  • Developed economies like US, Germany, Japan do not graduate enough students to work in the technology fields. Many of these countries have close to zero population growth. Increasingly, youngsters in these countries do not like to study science or engineering as it involves long periods of study and spending long hours during work life.
  • Businesses in developed economies have started releasing work kept on hold as their economies recover from downturn. Orders have started pouring in with many software leaders like Infosys and TCS, which are  projecting  double digit growth in the coming quarters. They have gone on hiring spree. For example, TCS planning to add 50,000 people to 1.6 lakh headcount.

Now to answer the question what next for the next 5 -10 years for the industry. Industry faces several challenges and strategic issues.

  • Winning orders is one thing executing is  another thing. Attrition  has started skyrocketing particularly among junior & mid level employees in the recent past. Just giving multiple salary raise and share options are just not enough. Creative ways have to be found to keep troops motivated and on their desks. Boss and subordinate power equation has to increasingly  shift towards employed, companies have to become increasingly become democratic and open. This is happening in many cases such as use of Facebook like platforms  for better communication among employees. In these platforms people not only share information but  also vent  their anger against their bosses and company policies.
  • As mentioned above, due to many multinational  service providers shifting operations to low cost countries,  low cost advantage enjoyed by the Indian companies  for many years is reducing. Increased hiring of locals  in the  developed countries by the Indian companies is also contributing to this trend. They have to also grapple with cultural issues when handling several nationalities.
    Tough competition offered by low(er) cost English speaking countries like Philippines is also a concern. It is  reported that voice based outsourcing billing from Philippines almost equalled that of India last year.
  • As they operate in several countries, managing currency volatility is going to be more and more difficult. Strengthening of Indian Rupee (IR) against US$ particularly has added to the industry woes. Surprisingly Reserve Bank of India has not made any move to keep IR weak. Many other countries like China, Brazil and even Japan have made aggressive moves to keep their currency  weak against US$.
  • Another big challenge is  the development  of technologies particularly moves towards Cloud computing. Cloud is seen as increasingly viable delivery model due to state of technology at present. They have to develop new offerings and develop mechanism for project management, billing ,  processes management,  quality frameworks, etc.  They may have to  make alliances with large hardware players to make integrated offerings. In other words, they have to reinvent themselves and reconfigure innovative global delivery model based on the new technology. They have to also keep a wary eye on other technologies which may suddenly gain traction. Global delivery model version 2.0 anyone?
  • They have to increasingly target their offerings in large developing country markets  like India and China which generally offer lower margins. In many cases delivery of services will be through low cost mobile devices. Innovative solutions have to be found for monetising the offerings under these conditions. Many  of best practices developed elsewhere may not be applicable. They have to ramp up product development capabilities as well.
  • China is both huge competitor as well as a  very large market. Succeeding in China is a must for all players particularly large ones . Operating in China has its own  challenges  like language , competition from large existing players, peculiar way of doing business, Chinese govt.’s interference in working of companies, etc.
  • Finally, India (and Indian companies) has to think in terms of becoming world leaders in some fields from being merely  good followers. This has been the case with all countries like South Korea (and increasingly China) which have followed similar path. For instance, Samsung is now supplying flat panel TV displays to Sony from being technology recipient from Japan. Same goes for Chips, Steel and Ship building industries of South Korea. They got the technology initially from Japanese companies and are now world leaders in these industries.
    Japanese companies transferred famed Shinkansen Bullet train technology when they set up  manufacturing plants to win large orders from the Chinese. Now to the exasperation of Japanese, Chinese have developed Bullet train which can run slightly faster than the original  models and is most probably cheaper. State of California is seriously considering ordering these for their new Bullet train line.
    Google is not the search leader in China, local company Baidu is.
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