The global delivery sweepstakes

Take it from me: Regardless of protests, protectionist legislation, job losses, political rhetoric, patriotic fervour, and any other irate knee-jerk the West wishes to conjure up, it’s now clear that outsourcing and offshoring as integral parts of the corporate business paradigm of the 21st century are an immutable fact of life.

Backlash notwithstanding, the real battle that’s being fiercely fought in the corridors of industry is quite a different one than the mainstream media would have you believe. It’s between the global IT services majors—the likes of EDS, IBM Global Services, CSC, Accenture, HP—and the Indian Tier 1 players—Infosys, Wipro, TCS et al: a savage struggle for every single large IT outsourcing contract that’s up for grabs on the global stage.

And one of the main plots in the drama being played out is that of global delivery. What this entails is a spread across multiple global locations, enabling the service provider to leverage on geographical differences in cost, quality and skillsets, resulting ultimately in benefits to the client that would have otherwise been impossible to offer.

The impact of this is so significant that McKinsey’s Jayant Sinha, speaking at the Nasscom 2004 conference in Mumbai recently, characterised it as a major tectonic force that’s changing the business landscape dramatically. When it comes to outsourced IT services and BPO, global delivery has evolved into a three-tier model with a combination of an onshore/onsite component that’s close to the customer; a near-shore component that does quite a bit of the high-value-add work; and, an offshore arm that executes a bulk of the high-volume but lower-end part of the project. Everyone’s trying to maximise quality while leveraging resources from the lowest cost location, and experts like Forrester Research’s John McCarthy aver that this will soon result in the model evolving from ‘single-hop’ outsourcing to a ‘multi-hop’ world wherein even Indian companies farm out part of the work to sub-contractors or JVs in other countries, to optimise skillset availability and cost advantages.

The Tier 1 Indian software companies are tiny on a global scale, with the top three bringing home revenues of just about a billion dollars each (no doubt though that their market capitalisation is pretty high relative to their revenues). In comparison, the global IT majors are way over an order of magnitude higher in revenues, at the very least. So why are they fussing so? Well, if you’ve heard of Clayton Christensen’s theories of disruptive innovations and how they can make or break corporations, you’d know that global delivery is just such a disruptive model with huge game-changing potential.

And, as Sinha eloquently pointed out, some of the global IT majors have been there and done that before—with upstart Dell Computer Corp and the direct delivery model of the PC industry that in the early nineties upset the applecart of established incumbents like IBM, HP and Compaq. The biggies sure didn’t give in meekly, but Dell ultimately won and commands revenues of around $40 billion and a market cap of over $100 billion today. Tellingly, other challengers like AST, Microelectronics and several more, however, fell by the wayside.

If it was direct delivery then in the PC industry, it’s global delivery in the IT

services industry now. India, you’d be pleased and proud to know, commands something like 30 percent of the offshored services market, which itself is growing at a fast clip. So if you’re talking global delivery, you’ve got to include India in your model (even as Eastern Europe and China are fast developing as alternatives). And for the global IT majors, while they’re all present in India to varying degrees, ramping up is not as easy as it might seem at first glance. There’s the acquisition route, but it’s an expensive one, as valuations of Indian companies are high. Going it alone to set up large offshore development centres is not easy for them either, as the Indian players have a distinct advantage on home ground for now. So what the global majors will meanwhile do is attempt to use their marketing acumen and domain expertise to move clients’ outsourcing decisions up a few notches in the pecking order—converting them from mere application development and management (ADM) IT spends to decisions of farming out entire processes that are non-strategic to the client. This, they hope, will keep projects beyond the reach of the Indian players, and redirect some of the spends away from them.

Meanwhile, the Indian players aren’t just standing by twiddling their thumbs. They’re addressing the need to verticalise and develop the sales organisation, and pack in specific domain and process expertise across the board. There’s also a need to develop business lines that go beyond simple ADM factories and evolve into platform BPO providers as well, with IT consulting, smart systems integration, and even strategic consulting thrown in for good measure. And all the while, these companies need to work on the next generation global delivery model and think of continuous process improvement to stay ahead in the game.

In terms of potential value creation, the stakes are very very high indeed. Dollar revenues in tens of billions, market capitalisation of the order of $100 billion or more—do we have another Dell or two in the making right here? It’s going to be quite fascinating to watch and see who breaks ahead of the pack, who stumbles, who falls, and how it all pans out.

As for now though, I’m happily content in the knowledge that any which way it pans out, India as a country just cannot lose.

Val Souza, Editor

valsouza@expresscomputeronline.com