New outsourcers change dynamics of Indian software industry

There is an interesting new breed of outsourcers to India Software Inc., who are only concerned about sheer cost and credibility of the vendor. Moreover, the story is no longer about the large Indian offshore suppliers, but rather the focus has shifted to India-based suppliers, which includes MNCs. Pankaj Mishra analyses the challenges faced by large Indian vendors in terms of reaching out to these new outsourcers

Stephen lane of Aberdeen says that it’s time that India Software Inc. does more local hiring in foreign markets, not only in sales and marketing, but also hiring project managers and other onsite staff

The early adopters of offshore outsourcing included GE, Citibank, American Express, Nortel, Nike, and the like. Their decision to offshore was primarily based on their own need for bringing down costs. “Being multinationals, the early adopters were also relatively comfortable with the idea of managing offshore relationships and projects. Having already invested in IT, they also tended to have previous experience with outsourcing,” says Stephen Lane, director, IT Services Research, Aberdeen. In addition, many of these companies adopted offshore outsourcing during the late 1990s and into 2000 when there was a shortage of IT workers.

Things are changing today—the dynamics of software outsourcing, especially offshore development, has entered a new phase. The late adopters of offshore outsourcing, or the new outsourcers as one might term them, are contributing almost 50 percent to the overall growth rate of offshore outsourcing to India today. Going forward, industry players believe they will contribute over 60 percent in terms of growth and around 15-20 percent in sheer revenue terms. Dean Davison, vice president and director, Meta Group, told Express Computer that offshoring constitutes about 10-20 percent of the IT budget for leading enterprises in the US. The good news is that within five to seven years, these enterprises will devote 40 percent of their IT budget to offshore outsourcing.

“First time outsourcers go to the Gigas and Gartners of the world for advice on offshore outsourcing. Mostly, they start with trial projects, which are low-end maintenance jobs,” says Anand Sudarshan, CEO, NetKraft.

These outsourcers include companies like Johnson & Johnson, P&G, etc. Apart from Fortune 500 companies, many small to mid-sized US firms are also exploring offshore outsourcing in a big way. “These players don’t want commoditised skills, they are concerned more about vendor’s domain expertise and customer orientation,” Sudarshan says.

The new outsourcers
According to some experts, the new outsourcers roughly contribute around 15 percent of India Software Inc.’s revenues. While many players don’t want to disclose the identity of these new outsourcers, a close look at the recent deals provides a comprehensive picture. Volvo is perhaps a good example of how the new wave of customers/outsourcers are going about selecting offshore vendors. One of the recent large outsourcers to offshore to India is the world’s second largest retailer—Carrefour, a $75 billion conglomerate. The company has partnered with a mid-sized India vendor.

“By definition, these new companies tend to be risk-averse, unfamiliar with other cultures and foreign business practices, and have less experience with outsourcing. This last point is particularly important, not only in terms of evaluating and selecting vendors but, more importantly, in terms of internal readiness, e.g., assessing their application portfolios to discover the best candidates for outsourcing, planning for internal human resources impact, internal benchmarking and determining true applications costs, etc.,” says Lane.

There is also immense pricing pressure from the new clients; this pressure is further intensified with MNCs offering lower offshore rates than their Indian counterparts. Officially, most of the new projects/businesses are being billed at $20-$25 per man hour. But industry sources peg the prevailing rates in the range of $15-$20.

Newer challenges
Offshore vendors face several challenges when selling to the new outsourcers. First, there is considerable fear, uncertainty, and doubt with regard to geopolitical, economic, intellectual property, and other risks. Vendors can no longer sell on the basis of technical expertise and low cost alone. They have to sell comfort in the form of risk mitigation, security, and familiarity. They also need to apply the expertise that they have developed over many engagements to help customers overcome their internal challenges and avoid common mistakes.

“In addition, there is increased competition from multinational IT services suppliers as well as local companies that have developed and/or acquired offshore delivery capabilities. Then there are what I call the ‘hybrid’ vendors, i.e., US or European companies in name but who perform the majority of their client work offshore,” says Lane. These service providers offer prospects the comfort of working with people from the same culture and who are familiar with local business practices, regulations, etc. At the same time, they make the offshore part transparent to their customers, reducing the fear, uncertainty, and doubt issues.

Increased competition, especially from multinational and smaller local vendors may be the biggest challenge facing the India-based suppliers. Remember, if your chief differentiator is low cost, you are only as competitive as the next cheapest company.

“The biggest challenge faced by Indian companies in terms of reaching out to the new outsourcers is their scepticism about the credibility of Indian firms and apprehensions about business models,” says Rohit Kumar, vice president, Energy & Utilities Practice, Wipro Technologies. One strategy that Wipro has used to meet these daunting challenges is acquisitions, a strategy that is now paying off. Kumar admits that Wipro’s recent acquisition of AMS is helping Wipro in wooing CIOs from utilities.

The emergence of an ‘anti-offshoring’ lobby in the US is also affecting business from new outsourcers. “The odds are definitely against the large Indian firms, moreover, the MNCs are also giving lower Indian rates to first time outsourcers,” Kumar admits. According to a CLSA research report, IBM, Accenture, EDS and Cap Gemini will more than double their offshore presence to 25,000 by March 2005.

So, what’s the answer?
To overcome these and other challenges, large India-based vendors must ‘engage locally’ while ‘delivering globally.’ For India-based vendors to be seen as global companies and compete with the likes of IBM and Accenture as well as mid-tier firms, they must act like global companies. “This means doing more local hiring, not only in sales and marketing, but also of project managers and other onsite staff. They must also invest in cultural training and account management,” Lane says.

Social issues like the anti-offshoring sentiment in the US are not going to have any long-term impact on the industry. However, these sentiments will lead to longer sales cycles, as the new outsourcers will have to be convinced fully about the benefits of offshoring, beyond just cost.

The bottom line
There are no Jack Welchs around today to advocate the great ‘70-70-70’ rule of software outsourcing, but today’s outsourcers are a complex mix of mature and inexperienced outsourcers. Moreover, most offshoring decisions are now taken solely by CIOs, who are under tremendous pressure to show RoI to their management. Another dogging issue is that many of these new outsourcers are still doubtful about whether some of the large Indian vendors will continue to be around for another decade or so.

In order to compete effectively with other offshore destinations and India-based MNCs, pure Indian vendors will have to become ‘global’ in the truest possible sense. The high attrition rate amongst executives of foreign origin employed by the leading Indian players is certainly not a good sign. Most of the new outsourcers select a vendor based on organisational culture and business characteristics. Therefore, there is a compelling need for better ‘go-to-market’ strategies, apart from inculcating truly global attributes within Indian companies.