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HAS OFFSHORING BECOME MAINSTREAM?
Panelists:
Mr.Srinivas Uppaluri, Head, Global Marketing, Infosys.
Mr.Sudip Banerjee, President, Enterprise Solutions Group, Wipro Technologies
Mr. Sam Iyengar,
Senior Vice President, Strategy, Sonata Software
Sudha Kumar, CEO,
Prayag Consulting, Moderator

 

Sudha: I request the panelists to talk about their own experiences, for e.g., what do you believe has changed in the last couple of years in terms of market trends , changing buyer expectations, has there been a change in the nature of deals and what are the challenges your companies have faced in order to meet these changing expectations? Has your company benefited from this trend, and are they emerging new governance model and what is that your specific companies are doing in order to take advantage of the trend being talked about?

Srinivas: The key thing in the last two years is that buyers' expectations and perspectives have changed. Unlike earlier, where it used be much more IT level or a CIO level interactions, lot more business groups are now getting involved in offshoring decision. And they are looking at flexibility, as well as significant cost reduction. They are also taking a portfolio view of offshoring. They want to understand how this whole thing will evolve over a period of time, and they want to know how flexible people would be to meet their changing business requirements. In a sense, we are seeing a trend towards adaptive outsourcing .

Second thing is that buyers want to realize value as they go along, they do not want this value to be realized only in the long term. They would like to use the value realized to reinvest in the relationship.

Related to the growing involvement of business users is need for offshoring companies to strengthen business alignment or increase vertical orientation . Value provided in terms of specific verticals, and knowledge of the business practices and the role technology will play in adding value to the business is the key. This logically leads to the ability to offer BPO services. In other words , bundling of BPO and IT services will be something the market is seeking.

Sudip Banerjee : The first thing is that the pervasiveness of the Global Delivery model has got established. Earlier, whenever the word IT outsourcing was used, the logic was that there was someone else better equipped to do it across the street. The first wave of offshoring to India was more project based. While companies of India talked about the Global Delivery Model i.e., how do you do onsite- offshore and then how do you onsite offshore and nearshore, the concept was being challenged by the IBMs and the Accentures of the world. The change in the last two years or 18 months or so is that these companies have also embraced the Global Delivery Model and are building our back-ends in India or elsewhere in the world. So that is the first difference in terms of the pervasiveness of the Global Delivery Model.

The Second point is that, we have moved from tactical to strategic . And when I say that, sourcing is now global, and that includes sourcing for components which go into your manufacturing, sourcing for services, sourcing for technology collaborations, sourcing for R&D etc., So once sourcing has become global, and that has moved from outside your country to where you get the best from , IT outsourcing is just a part of the whole sourcing . Today we hear that Walmart have a plan to buy $10 billion worth of stuff out of India. They have outsourcing offices in India. There are a lot of technology companies with sourcing offices in India and there are many Pharma companies that have sourcing offices in India. That has given further legitimacy to the whole concept of sourcing offshore and when that happened, sourcing has moved from tactical to strategic. So, IT Outsourcing is part of the overall sourcing strategy of every single company now and every company has an outsourcing strategy. Because it is part of the overall strategy, it is moved from realm of the CIO's domain to the Management team's domain . So, if you see our Wipro experience, in the past the evaluating team would comprise the CIO and his direct reports, but in the past 12 to 15 months, it comprises the CFO, the Head of HR, the Strategy Officer and a host of other people who are part of the Management team and not necessarily from the CIO Organization.

The third point is about the Convergence of Service Lines. When people looked at outsourcing it was akin to two words - software and offshore. Today, IT Outsourcing encompasses a wider array of services. I may want to outsource Infrastructure, I may want to outsource business processes, I may want to outsource Call Centers or I may want to outsource Software Development, I may want to outsource System Integration or Package Implementation etc., What we find from the people who come to us is that they just don't ask us what they can get from us in terms of Software, but from a host of other IT Services. Our value proposition to them is that we can do the entire Service Line. This is making a big impact on the people and that is another change from what has happened in the past.

Another point is that the concept of ROI is gaining ground. Earlier, most of the projects which come into India were actually the extensions, while today most of the projects are critical projects. These are driven by business users in each organization who want to measure ROI for all the projects. So, every time there is an outsourcing trip to India and every time customers come to Wipro, we find that we have to justify in terms of the duration of the projects, not very long nor very short. Typically, the question asked is, “Can you show you show me an ROI within this financial year?”

One final point, I would like to comment upon is the reducing importance of strategic business partnership models like BOT and JV's. We have gone through 2-3 cycles of this. When technology companies came offshore, they initially set up their own subsidiaries. Then they said they would give overflow work to other IT Vendors. From that stage, people said that they wanted to form JVs with their partners and sometimes use the Build Operate Transfer Model. Most of us have found that when customers discuss BOT or JV Models, the discussions are from the point of view that I cannot trust this person on an ongoing basis. Therefore, I need control. The success of various outsourcing projects has proved that you do not necessarily need to take control. So, today not too many people discuss the concept of the BOT or JV Models as a necessary condition for giving you work. That is a big advantage for an outsourcing company like ours and to many of you. So these are the changes which are happened in the recent past.

Sam Iyengar: There is flood of business pouring into India and I think that TCS, Wipro and Infosys have been the main beneficiaries of that. Yet, when we step back and look at the flood of revenues and all the media coverage and analyst excitement does not necessarily point to a main streaming of offshore. So then, what do you mean by main stream? Are we seeing huge momentum and are we reading that as mainstream? Does an activity need to be a part of an organization's core business model to be construed as mainstream? Does it have to be an integral part of an enterprise's value chain? Or would an enterprise have a choice?

I am talking about a situation where CEOs only look at IS budgets that already have factored in Strategic Sourcing and a chunk of that is happening offshore. What I am getting at is that the IS budget has been recalibrated in the last 5 years. In the first 3 yrs, the IS budget was a billion dollars, now it is $500 M and offshore is just a part of that and not to be debated or discussed. People do not have to make trips to evaluate it and figure out how to make it work. That, to me, would be main stream. It is understood. It is there as part of what has to happen.

Now, shifting gears, from the stand point of a Tier 2 company, most or all of them looked up at TCS, Wipro and Infosys and aspired to grow up and emulate them. That was the mantra, philosophy and ambition of every single company. .But I think from the perspective of figuring out one's destiny, it is clear that you cannot grow like Infosys, Wipro and TCS as that opportunity is gone. Although outsourcing is happening in huge measure, you simply cannot have the business model of a broad based, generic, very well diversified service provider and expect to survive and thrive. So, to generalize the way Sonata looked at the marketplace, it can be called as the 3 S philosophy for smaller companies. The first ‘S' is Segmentation. While Infosys and Wipro talk about Industry Business Units and verticalization, the smaller companies must think about Segmentation at a more granular level. One very often hears companies say that they are focused on BFSI. This is in some ways a contradiction in terms. So the whole lesson that we learnt is that we need to think about segments at this level, where the customer is unique and the competition is distinct.

For example, when we look at BFSI, there is Banking, there is Financial Services, there is Insurance. And in Insurance, we have life, health and property and casualty. When you talk segmentation, you have to think at that P and C level i.e., Property and Casualty level. You cannot just think about being an Insurance player, unless you have already made substantial progress in the last 5 yrs. So you need to think at a detailed level, articulate a value proposition and know how to beat the competition in that segment. The segmentation in a detailed level is critical for those companies in India which have not already made it to the next level.

The second aspect is that of being a Specialist . Or, why would anyone want to buy from anyone other than a TCS, Wipro or an Infosys? They can offer everything that you can and perhaps even 10% more. When you are a Specialty player in that particular segment, then everyone is a specialist. The salesperson would ideally be someone who has at least ten years experience in that industry and speak the language of the buyer, be it the CEO or the CIO. The Account Management people also need to be specialized and should reflect thought leadership.

Because, the customers are looking at you to help them transition and transform their business. So, a key aspect is figuring out how to position yourself as a specialty player once you identify your segment.

So once you have figured that out, the third aspect is that how do you strategize? How do you go to market, how do you establish a position with respect to companies and how do you create a tangible value proposition?

It is nice and easy for TCS, Wipro and Infosys say that they have got domain expertise and we have got subject matter experts, but smaller companies cannot make the same claim credibly. You've got to say that you have solution frameworks, tools and components and assets that reflect that domain expertise that I am talking about. So then, the customers believe that you are cheap, not necessarily since you are leveraging offshore but because you are highly productive. A challenge across the industry is how do you deliver ROI within 1year. You can do this only by leveraging assets that have been invested in over several years; so that the third customer who is buying solutions from you is now benefited from the first-two customers and we are able to do it at 80% of the lapse time.

 
 
 

There is a huge profit gap you can enjoy by doing that. So strategize at the segment level, as specialists and create tangible value propositions. A company which is smaller needs say that I can deliver the solution to you and ensure that your business saves X dollars or makes Y dollars and here is how I will be able to do it. You have to be able to tangibalize your value proposition. It is a huge challenge for a services company to think about tangibalizing what is considered to be intangible, but that is a big step which has to be simply taken.

Another aspect about this specialized player strategy is that you can actually be an end to end player in that segment. As opposed to being a “scratch the surface player” in a larger segment, you can attempt to dominate a smaller segment. And that is where the context of BPO comes in, or being able to provide infrastructure management, Business Solutions, Technical Solutions, maintenance, development etc. Straddle the segment in its entirety, because that is when you have a future. If you cannot straddle the segment you do not have any future! It is as simple as that in the context of a smaller company.

It is also very important as part of the strategy for that segment as a specialty player to think about what sort of alliances you can form, think about indirect methods of growth including inorganic options. Look at alliances, look at an M&A strategy and so on. So that's from a stand point of the huge benefit that can derive if one follows a certain type of model and seek your own destiny.

Sudha: We have seen the trend of some companies coming and setting up their own units as they have the scale to operate on their own. So, wouldn't that in some sense eat into the market of the first tier companies?

Sudip: One thing which has happened in the last 2 or 3 yrs is many companies have down sized their own operations globally. As a part of this, the India operations also got downsized. And that includes their software development centers in India. When the business starts coming back, most of them are looking at adding head count very cautiously, they would be adding head count only where they are sure they can keep the people, as separation is a very difficult thing to do. It is not only costly, but it also has an impact what kind of people you can recruit into the organization in future. So, what we are seeing with a lot of our technology partners like Intel and Cisco, who have operations in India, is that they are adding high head count very selectively. They have a clear program which says that they will only add so much. Then the rest of it, we will get done through partners as a part of a buying strategy. I think that is the way most of these companies will operate in the future. So, I would think that it is not going to affect the business from them.

Sudha: I would like to ask one more question to the panelists. We heard about the significant changes that have happened and in terms of the profile of the projects as well as the very way buyers are looking at the outsourcing relationship. And two years is not such a long time. So how have you, the companies, actually geared up to the challenges you faced, and how did you actually manage to metamorphose to the next level? You are now competing more with international service providers. Can give some examples from your own experiences?

Srinivas: I think what is happening because of offshoring becoming mainstream is that there seems to be a convergence in the market. Indian players, who have been traditionally strong with this GDM capability or offshore based delivery, are forcing the other side of the market, which is the IBM, the Accentures to build a similar capability. The other side is that customers of Indian companies, with whom they have an excellent track record, are now expecting you to play a higher value game. So, most of the customers will come to you and say that you have done $10 million deal with us well, can you anticipate and scale up, and can you look at what kind of things you can do for me from the future perspective? Therefore, you need to have the big picture of the customer, need to proactively add value and proactively be able to come up with solutions which will address their needs.


So, this convergence is what is happening. Therefore, most of the Indian companies are investing in two ways – one, in terms of how do you make this GDM much more productive, can what I have done for the last 20 years in 12 months in 8 months now? So, in a way, you are increasing the value proposition to the market. At the same time, you say that I have not really played proactive value adding to the market, so can I start looking at solutions and offerings? Can I actually invest into customers in terms of understanding their needs from a long term perspective and build capabilities, build answers and solutions? What larger companies are doing is that across every segment they are trying to build the solutions capability and also trying to make this offshore capability more strong. The third thing which is also happening is that how you manage the account itself is changing. From managing from a task perspective, it is becoming a program management kind of a thing, shifting away from the way you deliver. So the skill sets are getting realigned to managing value to the customer from managing the delivery, and that is a fundamental change.

So I think the interesting part in the next 18-24 months would be see how capable most of the companies in the Indian industry would be able to go up the value chain – show the ability to address customer needs in a proactive way, ability to think ahead of their needs. The other side from the convergence is how quickly the other competition, the international competition actually start developing offshore capabilities.

Sudip: I have to make 2 comments. If you look at the competition that we are facing, you know the IBM and Accentures when you look at the history of them where they came from, they came from the Board Room. They were originally consulting companies who had relations with the Board. So, they entered from that relationship and built domain knowledge. So, they had Industry experts around them. And then they have program management capability. I think these were the three real strengths of companies of this nature. They came in from there and those were the places where most of the money spent. When they got into down stream projects, sometimes they bid for it, while at other times they gave it to other vendors. If you look at the companies like Wipro, Infosys and TCS and rest of the Indian IT companies, they have come from bottom- up. So we first built up skills and capabilities, then we built physical infrastructure - development centers, communication links - quality systems and then we built project management capability. The areas where we had to gain expertise were relationship and program management. Over the last year and half, at least in Wipro, we have consciously addressed that gap. We have done that through acquisitions- we bought consulting companies to get those profiles of people, strong relationship managers, partner –level people from the Big 4 consulting firms joined us as a part of the acquisitions. For adding domain experts, we took an industry wise approach. We did that for the Enegry industry, Utility industry, Financial Services Security industry etc. We acquired some program managers through acquisitions and some were from within. The second thing that we have done is building solution sets and there we have been very focused.

For example, RFID, it is a major area for both retail and manufacturing. So we made sure that we have a good point solution. CIS, or Customer Information Systems, is another for the Utility Industry, customer information system, because utility industry has got deregulated, which is a very major thing. So, you should have very specific capabilities for each industry and also build the front end. These two initiatives are jointly propelling us to the next level.

Sudha: Sam, you gave us a very good framework for how a Tier 2 company to approach the market in this changed context. While the framework is conceptually sound, I think that execution will be a problem as most Indian companies have evolved from technology expertise perspective while a lot of things you said were consultative in terms of approaching the market and fashioning the services. So, what kind of suggestions do you have for the audience here on creating a new category and learning to dominate it, which is the essence of marketing?

Sam Iyengar: The first thing that we did in Sonata when we tried to execute on this approach is to take a good, hard look at ourselves and figure out what we were really good at doing. We discovered that company was good at doing small projects. Sonata has three businesses. One is the reselling business in India, resell software products, there is an IT services business with generic software development, maintenance capability and there is very small consulting capability built on the products and reselling in India. Having looked at what the company was good at doing, it appeared that the segment that we could pick was not the Enterprise segment because we did have the capability to add any value to any enterprise customer or any particular industry. So that was a huge reality check.

What we can do, however, is to offer a software company a good broad-based set of services and solutions. Now, here is where the spin comes! When focusing on the Software segment, we need to tell them we are not only doing product engineering offshore, not only maintaining the product offshore, not only can we offer technical support, but we can actually open up a market for you. That is a very different story to take to a customer who has not heard that coming from a vendor. So, this opportunity that we saw - looked inside and saw ourselves as people good at doing certain types of work and so we thought of breaking the walls between the domestic business and the export business and put it together into a 360• partnership. Suddenly, we were able touch all the value points of a software company and impact the cost and the revenue both and this is very tangible example that what we followed the 3S model and arrived at what could be a very good for the future for the organization. Another interesting thing about ISV market is that it is under the radar of most analysts and the media. Everything that we hear about the backlash is happening in the high profile enterprise segment. Many companies are talking about addressing the SMB segment – but these are still large. But when you are talking about the ISV market place, you can do offshore development business with $15 million company. Also, the fundamental difference between the Software company and an enterprise customer is that their priorities are dramatically different - they are worried about meeting their business plan, or getting the next round of funding? These are different types of issues from saving 30% of the IT budget. It is about existing six months from now. When you are confronted with such a reality, the time you take the decision to move work offshore is much less. So, we are seeing a huge momentum and from our stand point, this positioning is working for us.