Outsourcing is here to stay

With a large number of mid-sized companies seeking outsourcing support from mid-sized companies or smaller outfits, it is the right moment for Indian firms to hawk their specialised skills, says Sudhir Gera,

The ability to bring in world-class expertise in finance, engineering and processes, clubbed with a large intelligent resource base explain why Indian companies are moving ahead of most countries in this field

What is outsourcing? Simply put, outsourcing is the strategic use of external resources to perform activities traditionally handled by internal staff and resources. The Gartner Group defines it as a contractual relationship with an external vendor to assume responsibility of one or more IT functions, usually characterised by the transfer of assets (facilities, staff, hardware.)

Globally, customers are shaping the dynamics of the continuously evolving business environment. Traditionally, cost reduction was the overwhelming motivation for contracting functions. However, today outsourcing is no longer viewed as just a cost-cutting measure or the refuge of a technically deficient enterprise. It has been embraced today by most as a flexible and versatile option to enhance their businesses.

Competition has forced many organisations to take a close look at their resource deployment. Outsourcing helps the company in freeing existing resources so that the company can concentrate on core competencies. Even today, cost reduction still tops many priority lists, but the ideas of ‘strategic value’ and ‘total cost of ownership’ (TCO) have also grown to rival it.

The Indian advantage

Several Indian companies, many of them start-ups, are involved in the development of cutting-edge technologies and are well on their way to becoming global information technology leaders. The success has however, been witnessed only by those small and mid-sized companies who are sticking to a ‘niche’. The focus for such players should be on timely delivery of quality products and services. The stress can also be on customised services and the inherent strength in the core technology of a particular field.

At present India is in the thick of things as far as software outsourcing is concerned. Looking at the Indian outsourcing success so far, various reasons can be attributed to this success.

• Cost - There is a distinct cost advantage
• Resources - The availability of a large pool of highly skilled and motivated English-speaking professionals is another important factor. Consider this: There are over 400,000 Indian IT professionals employed in software exports, with 60,000 new professionals entering the workforce each year. Most of these are engineers.
• Quality processes: There is a meticulous adherence to quality processes. It is heartening to know that as of March 2000, there were 29 organisations in India at SEI-CMM Levels 4 & 5 compared to 28 in the US. Today, we have 55 companies with SEI-CMM Levels 4 & 5 and over 200 software development organisations with ISO 9000 under their belt. These certifications definitely demonstrate a commitment to quality and software process discipline.
• Time advantage: Another key advantage is the 24/7 concept. India is ahead of the American and European time zones. This time difference has been leveraged by many organisations to achieve a 24-hour development operation by providing flexible working hours.

The skills available in India are not restricted to just software coders, but go beyond that. The ability to bring in world-class expertise/skills in finance, engineering, processes, etc., clubbed with a large intelligent resource base explain why Indian companies are moving ahead of most of the countries in this field.

Companies with an edge

Given today’s scenario, mid-sized BPO companies are at present uniquely positioned in the Indian outsourcing market. They are in a position to deliver what customers demand to the minutest detail with a resource of very high-grade professionals (both engineering and software) working with them. The infrastructure is state-of-the-art and of a reasonable size, and the kind that will infuse confidence in a prospective customer to outsource some functions.

The mid-sized companies also have the flexibility of a small BPO that allows them to make minor amendments, with the shift in the business focus of clients, as most of the contracts signed do have room for changes and are not watertight. This gives them some advantage over companies that have standard corporate guidance across all customers as can be expected in most large companies.

So, the mid-sized BPO companies of India surely have the edge as they combine the flexibility of a small enterprise with the resources, processes and discipline of a large enterprise

Another key point that cannot be overlooked while discussing the growing BPO market opportunity for the mid-sized companies is that globally it’s the mid-tier companies that are increasingly looking at outsourcing. Big consulting firms are largely focused on the biggest firms. They usually can’t justify bidding on outsourcing contracts of companies with just a few hundred employees, given the cost of selling the services, high set-up expenses and the shorter contract lengths on which many mid-sized firms insist. Hence, these mid-tier companies find it easy now to outsource to a partner with the right scalability.

How to deliver on the promise?

Today, the issue is no longer whether a company needs outsourcing, but how to leverage the outsourcing advantage and maximise the benefits therein. In the last few years, customers have become more and more demanding. They are asking for more flexible contracts, performance penalties, and performance audits.

There are a couple of key areas that need to be kept in mind by both the sides, especially by the small and mid-sized outsourcing organisations.

First, it is important to outline the business requirements and deliverables by the customer. Constant monitoring of these deliverables is important. The biggest disappointment is often the perceived cost savings. Most corporates expect that costs would go down by 40-50 percent, which rarely happens. The variable costs of resources often goes down over a period of time and since this is not reflected in the contract, the buyer often ends up feeling cheated. An issue like key projects being subcontracted by the vendor also is a point of contention. All these points need to be built into the contract.

The second point that needs to be kept in mind is that business objectives of some organisations keep changing and it is very difficult to factor these at the time of signing the contract. Building flexible amendments into the contract is perhaps the most logical solution. For an outsourcing project to be successful, it is important that performance is evaluated regularly and timelines adhered to. Often, a contractual delivery model based on risks and rewards is beneficial to both.

The future is bright

The number of outsourced business functions has grown at a rapid rate. Companies now demand that outsourcing firms be held responsible for the outcome of the project given to them. This means enforcing performance and value-linked pricing contracts with flexible negotiation points. More and more mid-sized companies, especially in the US are getting into outsourcing and looking out for suitable partners who are not too large for them. This means that the future of outsourcing is promising for the medium-sized Indian companies who can take advantage of this trend due to their capabilities and flexibility to match the client’s needs.

BPO will continue to drive the outsourcing market for the next few years and will see domination by medium-sized companies doing work for clients in sectors like the telecom, manufacturing, banking, healthcare etc. Clients will continue to look beyond the mere percentages derived from outsourcing to value-creation and holistic business performance.

The author is vice president, marketing at Blue Star Infotech. He can be contacted at sudhirg@bsil.com