CXO America Article: What goes around, comes around

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What goes around, comes around

Raj Asava, Senior Vice President of the Strategic Deals Group at Satyam Computer Services Ltd, examines the rise of global outsourcing. Advances in technology and transportation have unified the world and created a level playing field for businesses worldwide. In this flat world, businesses can compete with anyone, regardless of location and business longevity, as long as they prove to be worthy of delivering the value sought by the customer. In todays 24/7 work environment, even before the earth can complete a rotation, practices and innovation from one part of the world are quickly replicated and even enhanced by businesses in other parts. Sustaining competitive advantage is becoming increasingly difficult, if not impossible. Today, businesses ruthlessly pursue each others markets and resources, make competitors business models obsolete and overall be a disruptive force. Long-established multinational companies (MNCs) in information technology and IT-related sectors have declared war on what were known as offshore companies by moving into the latters backyard, scaling up their own captive operations. Flush with large multi-year contracts, MNCs with established bases in India are on a major hiring spree. They are tapping into the large pool of talented resources India has to offer talent that can quickly add value to their operations. As if in response, the top India-based offshore global companies (OGCs) in the IT and IT-related sectors have proclaimed that winning large deals (multi-million, multi-year contracts) is one of their top three priorities for the year 2006 and beyond. To that end, OGCs are benefiting from the shift in the large outsourcing market, where customers are more comfortable breaking down multi-billion, multi-year mega deals. Deals that were previously awarded to a single system integrator are now sliced into several competency-specific large deals offered to several vendors. The OGCs, in essence, are moving into the front yard of the MNCs and aggressively competing for large outsourcing contracts. Leveraging their experience in global delivery they are able to pass on the significant cost advantage to the end customer without sacrificing quality. The rise of global markets and the maturity of global delivery models coupled with the level playing field has created a new competitive environment: an environment where businesses in one part of the globe can readily assimilate the value propositions offered by businesses in another part. While several European, Latin American and Asian locations have emerged as offshore destinations for IT and business process outsourcing (BPO) type work, India ranks as the worlds leading destination for offshore outsourcing. This is due to the experience and maturity the Indian IT companies have built over the last decade and the abundance of English speaking, technically competent resources India has to offer. This article, therefore, focuses on the Indian OGCs and highlights the next inflection point in their growth. Indian cities like Bangalore, Chennai, Hyderabad, Gurgaon and Mumbai have become easily

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recognizable names on the global map as preferred destinations for IT-related work. In fact, India not only commands a lions share of the global offshore spend, but it is also well positioned to maintain its commanding lead in the global IT and BPO market. Bolstered by an increasing percentage of engineering graduates, along with low labor costs, India has become a major attraction for global companies, particularly those based in the United States (US) and Europe. Besides the obvious advantages of going offshore, India today boasts a workforce that has developed an in-depth understanding of most of the global industries. This domain level knowledge of various industries comes primarily from the hundreds-of-thousands of projects that are carried out in India for the various MNCs, and from the experience of senior individuals returning to India after stints in the US or Europe. All this indicates that India has arrived on the global IT scene. It has established itself as a major player in the multi-billion dollar IT services market. While the Indian IT companies have done an outstanding job in building their country as an IT haven, and have introduced to the world the power of the Indian talent, thats only half a battle won. With the countrys industry friendly government policies, MNCs are finding it fairly easy to establish their operations in India and attract some of its best talent to come and work for them; talent, which in many instances has been nurtured and honed by the Indian IT companies. The Indian IT and BPO industry employs about a million professionals, most of whom work on MNC projects. About 20-25 percent of these professionals are employed directly by the MNCs in their captive centers in India. Their projected employee growth for 2006 is 70-80 percent, as compared to 30-35 percent for OGCs (based on publicly available information of the top MNCs and OGCs). The Indian Universities add approximately 250,000 engineering graduates and diploma holders, per a Nasscom 2005 report, to the existing workforce each year. While a majority of them enter the IT industry, only 25 percent (according to a McKinsey report) are suitable and industry ready, which roughly represents an addition of 62,500 to the workforce. It is clear that even if the MNCs deploy 100 percent of these qualified resources, they will fall short of their projected hiring in India. This goes to present a case that the MNCs will hire away trained and experienced professionals from the Indian IT companies, to keep pace with their declared and future resource requirements. The waking giants MNCs, who for the most part ignored the trend towards offshoring, are now moving aggressively and providing the offshore advantage to their customers by establishing and significantly growing their captive operations in India. The unique value they offer is their presence in the customer market coupled with the in-depth understanding of customers business due to the long-term relationship through multi-year contracts. The globalization of the IT industry is also helping MNCs create a competitive environment within their network of operations as they assign work to their global locations based on their technology proficiency and the ability to carry out projects in a cost-effective manner. While Indian IT companies invest heavily in hiring and training fresh engineering graduates from campuses each year, the MNCs are finding it easier to buy talent by recruiting experienced resources away from them by offering significantly higher compensation packages. The premium

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they place on experienced and trained resources is rightfully justified by their need to deploy large number of employees on their readily billable projects. Besides, with the cost pressure they are facing on their multi-billion dollar project portfolios, the MNCs have no option but to hire away the talent from their Indian IT counterparts. MNCs are discovering that by shifting some of their work offshore in places like India, they are essentially able to improve their margins while offering higher salaries to their employees. This is primarily because of the established fixed-term contracts that were in most part negotiated using the prevailing high rates in countries such as the US. The real threat shift versus sell Doing business over several years, MNCs have endeared themselves to their clients as trusted brands. Perhaps the biggest threat faced by the Indian IT companies is the shift versus sell advantage MNCs have over them. MNCs today, for the most part, have to shift their sold business to offshore destinations while Indian IT companies have to sell and build the needed capacity. Although popular, the sales cycle for offshore work is long and the road highly congested and competitive. A recent Morgan Stanley study points out that the MNCs line up their high-end, complex offshore engagements for the captive units of their subsidiaries in India, rather than sourcing it to a third party. Industry sources have admitted that companies such as Accenture are able to match the rates charged by OGCs in offshore project bids. About 25 percent of CIOs, who use offshore services, now patronize MNCs while 25 percent use their own captive operations. The reason they state is that OGCs are not ready to take on mega deals or be a one stop-shop for their complex IT needs. While the MNCs have declared war on the OGCs in their geographical regions, one wonders what is the next move for an OGC? To succeed in the global IT marketplace, the OGCs need to prove their readiness to take on large, possibly mega deals. Fortunately for the OGCs, businesses are moving away from single vendor mega deals to several large size multi-vendor competency-specific deals. Over the last decade, OGCs have won a fair share of business and grown impressively, yet they have fallen behind on their share of the global IT pie. Primarily because the scope of the services they provide is limited mostly to applications that are typically short term in nature, the size of the deals is usually small and revenue in most cases is non-recurring. OGCs need to scale-up in what they do well from application management to process and domain consulting services and scope-out from resourcing and project oriented work to complete IT-based outsourcing, including infrastructure, technology and business process outsourcing. To win in this changing global landscape, the OGCs will have to undergo a major transformation. Datamonitor tracked a total of 432 deals during Q3 2005. It was notable that the value of deals fell by 32 percent from US$41.9 billion in Q3 2004 to $28.5 billion in Q3 2005, with the average contract size declining from US$95.7 million in Q3 2004 to US$66 million Q3 2005. Nick Mayes, Principal Analyst for Global Computing Services at Datamonitor, observes: Overall, this has been a major quarter for offshore sourcing. Large corporations such as ABN AMRO are dealing directly with offshore services vendors, and are signing deals worth hundreds of millions of dollars with them. Global IT sourcing models are gaining mainstream acceptance. While some of the top OGCs have surpassed the top MNCs in terms of market capitalization, before

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the end of the current decade, one can even expect two to three OGCs to transform into one of the top 10 global IT services provider in terms of revenue along with the associated scale of operations and resources. For the OGCs to achieve this level of unprecedented growth, transformation would mean that they need to think, do and communicate differently. Think large deals As a result of unsatisfactory outcomes from long term, all encompassing, multi year contracts from a single captive vendor, businesses are breaking down the mega deals into competency-specific large deals/modules. The tendency is to invite organizations with leadership and track record in delivering high quality services within those competencies. For OGCs, this shift has opened a floodgate of opportunities in the Applications and Business processing areas, creating a win-win scenario for them and the businesses engaging them. Businesses benefit from the undisputed leadership that OGCs have developed over the years in these key areas alongside the low-cost advantage they naturally bring to the table. The OGCs benefit by continuing their unprecedented growth through large deals while adding stability to their operations through long term contracts with steady, recurring streams of revenue. Over the last decade, OGCs have invested heavily in quality-on-demand to gain the confidence of the marketplace and won customers who let them do their mundane and routine work from a remote location, several thousand miles away, in an emerging country. Today, the same OGCs are executing mission critical work for their customers and doing it better, cheaper, faster, and steadier. The next logical milestone for the OGCs to achieve is to take on and successfully carry out larger deals. To effectively compete, win and service large deals, OGCs, like the MNCs, are making investments in large outsourcing deals with RoI coming in after the first few years of the contract. They are moving up the value chain and have started engaging in domain, process and consulting level initiatives, leading to large deals. Large deals, however, remain a major challenge for many OGCs, since very few have engaged in prospecting, pursuing and eventually winning multi-million dollar and multi-year contracts, for which they require a multi-location and multi-faceted team to deliver value. Do IT globally Delivering high quality, cost effective business solutions through a network of globally dispersed centers (GDC) is fast becoming a necessity for all businesses in every industry. Especially for businesses with operations in multiple geographies who are demanding from their IT vendors, services that address their corporate needs and geography-specific requirements. The GDC is an extension of the currently popular dual location (onsite/offshore) delivery model pioneered by the OGCs. This delivery structure would have multiple delivery centers from various geographies that would work in tandem to deliver time and economic value to its customers worldwide. By establishing their operations in emerging IT sourcing destinations, OGCs and MNCs are actively tapping into the current and emerging talent pools across the globe and positioning themselves to address the resourcing challenges. They have developed a comprehensive framework addressing

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people, processes and technologies that effectively integrate the GDC structure into in a seamless delivery engine. For OGCs to effectively leverage the value of the GDC structure, they must become experts in breaking down work products in such a way that portions of the work product can be carried out in different centers around the world, concurrently, in a significantly shorter time frame, and in the most cost effective manner. They also need to effectively carry out the important task of assembling and reintegrating the work product into a highest possible, quality deliverable. OGCs are projecting themselves as organizations ready to take on large deals. Customers, based on their past experience and the value they received through the onsite / offshore model, have started to place their faith in them and engaging them on large deals. They have heard loud and clear about the maturity, cost effectiveness and access to global talent pool offered by OGCs. Now they are watching the OGCs closely to see how they carry out the large deals and deliver the value promised to them. Communicate boldly OGCs pioneered the onsite/offshore model and MNCs took it mainstream. The OGCs in the past operated under the shadow of the MNCs and for most part acted as a subcontractor to them. Businesses, however, have realized the value OGCs bring in and are approaching them directly for their IT and BPO requirements. They have discovered that their heterogeneous IT environment can be best supported by vendors who specialize in the sub-segment of IT (i.e. infrastructure, network, storage, applications, transaction management, etc.) Coupled with risk mitigation, this is one of the key reasons for the unbundling of the single mega deal into competency-based large deals. This shift, however, is creating a perception that the OGCs are negatively impacting the economies and usurping jobs from nations that are awarding large deals. It is crucial that OGCs boldly communicate the business value they bring to the organizations that engage them and through them to their end customers. To that end, OGCs have started to communicate with leading industry analysts and independent research firms about the competencies, experience and the large pool of qualified resources they have developed over the years. They are investing the needed time, energy and resources in building their brand and providing thought-leadership by actively participating in external conferences, publishing papers, filing patents, winning various awards/recognitions for topics ranging from corporate governance, security, quality standards, and specialized recognitions from top product vendors. Analyst accolades (such as the Gartner Magic Quadrant and Forrester Wave) are a vote of confidence for prospective and current customers of the Indian IT companies. The world is flat and round Todays business world is characterized by a multitude of conflicting demands: high degree of customization, increased product/service flexibility, higher quality, reduced cost and decreasing delivery times. To operate successfully in such a demanding and highly competitive global market, businesses must radically rethink their operational philosophy and embrace methods such as agility. The agile paradigm requires the ability to quickly respond to continuous and unanticipated market demands. An agile business recognizes the importance of its two critical resources people and

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information and optimally manages them to success. In the existing scenario, with the barriers to entries being minimal, it is important for companies to be agile and highly responsive to the rapidly changing environment. They must be ready to operate in any part of the world and should be able to handle deals of varied sizes and models. As we compete in a level playing field (flat world), businesses from one part of the world will continue to challenge businesses in other part of the world (the world is round), by disrupting each others business model (what goes around comes around). Even the current global uncertainties caused by terrorism and natural calamities have failed to dampen or slow down this shift. What goes around... IBM's staff count in India ballooning from 6000 in 2002 to 38,000 in 2005 IDG News, June 2005 IBM Corp. will add about 14,000 positions in India this year The Journal News Service, June 2005 CSC India has charted a high-growth path that includes nearly quadrupling its headcount to 10,000 by 2007-08 The Economic Times, November 2004 EDS to double its India headcount to 4400 CIOL Network, May 2005 Capgemini to hire 10,000 in India Reuters, May 2005 Accenture ups India staff to 11,000... Has increased its headcount in India from 4300 in November 2003 Google News, February 2005 ...Comes Around! TCS, Infy (Patni) win ($ 2.22 Billion) order from ABN Amro CIOL Network, September 2005 Tata in $847M Outsourcing Deal (with Pearl Group) Red Herring, January 2006 Satyam bags (multi-million dollar) GSM deal from WHO The Hindu Business Line, September 2005 HCL Tech in services ($100 Million) deal with Japan's EXA Yahoo News, December 2005 HCL lands $100 Million deal with Autodesk AECNews.com, November 2005 Wipro, TCS in ($70 Million) deal with Lehman Bros CIOL Network, November 2002

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