Despite the current challenges, the best years of outsourcing are ahead of us, according to speakers at “IT Services & BPO Connect ‘08â€, a conference focused on the road ahead and investment opportunities in these sectors. The event was organized by my firm Venture Intelligence last month at Mumba. Here are a couple of extracts from the post event newsletter:
Srinath Batni, Executive Board Member at Infosys Technologies, was categorical in stating that the outsourcing industry had “a long way to go and there is still a lot of juice to be extractedâ€. The current challenges are not so much on the demand side, but on the supply side. “The fundamental drivers of outsourcing are not going to change overnight,†he averred. On the cost escalation front, Batni pointed how salary increases as a percentage of revenues for Indian companies have risen less than 5% over the last 10 years. Plus, wage costs in the client markets are also increasing and the number of students going in for technical education in those countries is decreasing. The differential is still attractive enough to drive outsourcing to destinations like India. On other parameters like quality and scalability too, the Indian outsourcing industry has built a strong foundation for itself. “Also, the requirement for customers to keep pace with technology – which is becoming more and more heterogeneous – for competitive advantage will continue. Customers will need technology-related support regardless of state of the economy.â€
…Abhay Havaldar, Managing Director of Private Equity firm General Atlantic, emphasized the need for striking the right balance between scale and innovation. His firm was more interested in investing into companies that attacked the operating expenses of businesses rather than the SG&A budgets. The challenge for such vendors is that it requires customers to re-engineer their processes – kind of like changing the wheels while you are still moving.
Other speakers at the conference included Aparup Sengupta, CEO, Aegis BPO; Nitin Shah, CMD, Allied Digital; Subbu Subramaniam, Partner, Baring Private Equity; Partha De Sarkar, CEO, HTMT Global; Shailesh Shah, Chief Strategy Officer, Satyam; Ranjan Bandyopadhayay, Global Head of HR & Strategic Initiatives, TCS; Dev Raman, Principal, Tricolor India; Sunil Kolangara, Director-Private Equity, UTI Ventures and Ashutosh Vaidya, CEO, Wipro BPO.
Any VW members who would like a copy of the full post event newsletter, can email info@ventureintelligence.in.
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While the best days may surely be ahead, there is no denying that some of the drivers for outsourcing have lost their drive over the years.
Many India based outsourcers some times forget that what worked for them ( in terms of approach, business model when they were in single digit billion dollar revenues) in the last five years will not necessarily work in future. I personally believe that those things will not longer work. So these companies need to constantly be cognizant of this fact and keep changing. This will surely bring out the men among the boys.
I’d say that this is also heavily correlated to currency rates … historically we’ve seen the effects it’s had on various listed companies whose core competencies lay in this space. What I believe may happen (probably already is) is seeing the growing outsourcing of outsourced work. Where larger more expensive companies start outsourcing to Bangladesh, Sri Lanka, Nepal..etc. Mexico/US analogy with respect to computer assembly (not manufacturing). I believe its also hard to innovate in a space where, if it were possible the task would not have been outsourced in the first place. What can be done though is using technology (AWS – mechanical turk for example), to increase margins for the outsourcing company. Getting into other innovative verticals … (personal assistants..etc), we here have been brainstorming over a virtual real estate concept … which I think could be interesting.
If the panel truly believed the space will innovate, I’ll warm up my popcorn; because it will be very interesting to watch.
I agree with RA here. The tag of “outsourcing” is primitive and is holding back new possibilities (and opportunities).
Stop think and evaluate, get rid of Outsourcing tag.
Why india just stuck with outsourcing
Yes. But we will continue to lag if we don’t recognize our weakest links like –
Failing by obscurity – Some projects are delivered on time and within budget, yet don’t deliver any real business value; although successful from a narrow IT perspective, they actually represent business failures.
Failing by investment – money spent on projects resting as shelfware for lack of progress on middleware (say, virtualization) applications clearly committed under SLA.
Failing by nomenclature – Claim to have global delivery capability even as 90% operations are in India; Claim vertical capabilities even as all that we do is manage some common horizontals in widely divergent industries – say managing vanilla apps like HR, Accounts, CRM in a heterogeneous Insurance sector that has separate vertical categories (Life, Fire, Health, Householder, Marine, Motor etc.) that operate with different set of regulations in different nations / states. The actual capability can be claimed only if Indian vendors help automate or at least gain complex claims processing, actuarial assessment and change management functionalities to the T.
Failing by ROI commitments – Tech spends gravitate towards process refinements that deliver significant outcome. Not just off-shoring to cheaper geographies. Business transformation should not mean driving businesses from prosperity to bankruptcy in a matter of weeks.
Failing by missing out on trends – There is a subtle shift that is taking place across IT sector. With the advent of SaaS and HaaS, IT a capital item, is increasingly bought as operating expense (Op-Ex) on a variable capacity basis. Capex by client is fast turning into Op-Ex on vendors reducing IT as a dial tone. Outsourcing vendors will discover the need to deliver to stringent SLAs and not just manage applications offshore.