India’s outsourcers battle for customers in a cloudy universe
Still on top but heeeere comes China ...
Analysis The rumblings started in the late 1990s. Indian services companies were getting into outsourcing. Almost before the news broke, deals followed. Before long, India was a destination for all manner of serious jobs and a byword for getting things done well and at a price western nations struggled to match.
Fast forward a decade or more and India is still a dominant source of outsourced IT work, but challengers are now emerging from nations like China. Buyer behaviour is also changing. And a little thing called the cloud is also shaking things up.
Is India therefore still on top of the heap? Or does the nation's IT industry and its IT leaders need to start planning for a new reality in IT outsourcing?
Unsurprisingly, Indian IT industry body NASSCOM is pretty confident of the future prospects for the likes of Infosys, Wipro and HCL. Its vision is for aggregate revenues to reach a staggering $US300 billion by 2020, while its prediction for fiscal year 2014 is growth in the non-domestic outsourcing market of between 12-14 per cent ($12-15bn).
An in-depth analysis of India as an offshoring destination published last November by Gartner agreed that things are pretty good at the moment, with the country expect to maintain a three-to-five-year lead over rival nations. However, Gartner also pointed out that the rate of infrastructure development is failing to keep pace with customer demand, while labour and other costs continue to rise.
The report's co-author, principal analyst Arup Roy, told The Reg that the cost benefit of choosing India as an offshore destination will continue to decline, thanks to rising GDP and wages, and annual inflation of up to 11 per cent. He added that the country’s providers were also being challenged by changes in buyer behaviour, with North American and European clients increasingly looking to bring jobs back onshore as economic stagnation continues. Added to this is increased competition from rival locations in Asia, Latin America and even Eastern Europe.
Rise of the Asian tigers
China and the Philippines are two of the key alternatives in Asia. With a large pool of skilled but cheap labour, Chinese outsourcing vendors like Gamutsoft, Pactera and iSoftStone are now aggressively targeting multi-national companies, especially in areas like software development, and infrastructure management, according to a recent Forrester report.
To do this, they’re expanding nationwide coverage to tier five cities, recruiting more senior managers, consolidating to build strong service teams and, of course, hiring more graduates. However the industry is still very young with noticeable weaknesses in higher-level skills such as project management, while factors such as language ability, time zone and cultural barriers continue to be an issue.
Can China catch up?
Although it could be a good fit for global firms looking to service their APAC operations from its shores, Gartner’s Roy argued that China is at least 6-7 years behind India, with no guarantee it will be able to close that gap as long as India can mature incrementally.
“It’s pretty clear India is top in terms of the attractiveness of offshoring there because it is a very mature location for IT services delivery. It’s not just about available IT skills but the whole ecosystem of support services,” he argued.
“For example, workers often need to work in shifts to cater to various time zones, which means workers need ferrying from home to the office at odd hours. This may sound like a low-level activity but in the overall scheme every small thing matters.”
The Philippines is another rival location getting a lot of attention, especially in areas like back office processing and contact centre work. The annual ranking of the top 100 global outsourcing destinations by outsourcing advisory firm Tholons, released in January, placed Manila and Cebu in the top ten, both improving on their position last year, with the capital in third spot.
Forrester principal analyst Frederic Giron told The Reg that the country had caught up strongly with India in terms of its call centre capabilities thanks to strong language skills (Philippinos' English accents are often easier on American ears) and cultural fit with Western clients, but it isn’t as strong in higher value services, which is where India can flourish.
“India has more equity research analysts than London and New York combined, which is an interesting proof point that skill levels in the country have improved quite a bit,” he said. “I see providers in India focusing on higher value add – consulting and architecture, that type of task. This gives those firms an edge over other destinations like China.”
It should also be noted, as pointed out by IDC research manager Mayur Sahni, that Indian providers are somewhat insulated from the growth in the Philippines because they themselves have “ sizable setups” there for business process outsourcing operations serving global and local clients.
Cloudy and dangerous
In focusing on the prospects of different nations, though, there is a danger of missing the wider picture of what’s happening to the IT outsourcing market. A Gartner report at the end of last year – Predicts 2013: Indian IT Industry Set to Embrace Uncertainty to Secure the Future – claimed that “globally, cloud-based offerings are estimated to cannibalise up to 15 per cent of top outsourcing players' revenue by 2015”.
Cloud computing represents both a threat and an opportunity for Indian outsourcers, which are trying to transform themselves by offering higher value services.
The Gartner report explains this process quite nicely:
Indian IT players are having to battle with their headcounts based on linear business models, which have worked so far but are unlikely to help them remain competitive as they grow. Linear head-count-based business models after a certain size do not support the need for being faster, better and cheaper. Indian IT providers have to explore non-linear techniques and creative destruction strategies to create value for their clients as well as to sustain themselves.
These "non-linear techniques" include cloud computing-related services, which Gartner’s Roy argued Indian providers are already adopting in order to protect and grow revenue. Rather than the nuts-and-bolts of hosting and running cloudy datacentre operations, their R&D is increasingly being focused on “integrating the activities buyers need when they move to a cloud delivery model”. This could be in helping to integrate and manage a customer’s multiple cloud platforms – what Gartner calls “cloud services brokerage”. According to Roy, Infosys is looking to grow its revenues in this area – part of what it loosely terms “products, platform and solutions” – from five per cent today to around a third of total revenues in the next five years.
From services to software
For Forrester’s Giron, India’s “complex journey” towards a non-linear growth strategy began two or three years ago and has involved “huge investments leveraging software frameworks and methodologies to do the same tasks with fewer people”. Aside from automating delivery, its big name providers have been looking to find new offerings like managed services with which they can build incremental revenue and continue the transition from that human capital intensive model to one based on utilising software assets.
“The next step in their non-linear strategy is for them to become more of an ISV - more of a software vendor than a pure people provider,” he told The Reg. “This will require a huge amount of change because you don’t run a services business like you run a software business. They’ll have to learn from the likes of Microsoft and SAP how to sell solutions rather than services.”
Just how difficult this change will be remains to be seen. Of course, a huge amount of revenue is still generated from traditional IT services, but there are growing signs that this new direction is gaining momentum. A new thinktank, the Indian Software Product Industry Roundtable (iSPIRT), was launched by a group of 30 local software firms in February, in a bid to promote India as a global software hub – a move Giron described as a “wake up call to NASSCOM to make sure software is part of its strategy”.
However, there’s still a lot of work to do. IDC’s Sahni argued that India’s outsourcers are still some way away from the transformation needed to meet CIO’s changing KPIs. “CIOs are looking for providers which can hit four key areas: organisation management; business strategy; leadership; innovation. But traditional outsourcers are only focused with keeping the lights on,” he told The Reg.
“Indian outsourcing vendors don’t like to invest in advance, you only have to take a look at their R&D budgets to see that. They’re also too compartmentalised in their approach. You have consulting, infrastructure, apps and BPO teams all separate. This [CIO KPI shift] requires all of these departments to fall in line.”
He singled out Wipro, Infosys and Cognizant for moving in the right direction but claimed too many providers are still focused on “monetising what they can off existing infrastructure first”.
“When you talk to Accenture they don't talk about outsourcing, even though it’s a sizeable part of the business, because it’s so ingrained into delivery,” he added. “However, the India-based firms still do talk a lot about outsourcing for outsourcing's sake.”
The bottom line
So what’s the bottom line for IT leaders? Well, whatever happens in India the smart money is on it remaining a major force in IT outsourcing, but rival nations' rapid maturation more choice than ever before is available. That means a chance to spread the geographic risk by taking a portfolio approach.
Forrester recommends identifying one or two other locations based on cultural similarity, similar time zone, and availability of skills, but as a complement to, not a replacement for, Indian offshore work. Ultimately though, customers should go with a provider not a country, so it’s all down to due diligence.
“More choice adds to complexity but I’m not sure that CIOs should be dealing with this complexity. My recommendation is usually to leave the complexity if at possible from a cultural and sourcing perspective to the experts,” said Girod.
“CIOs should be managing the governance of the project. Where the skills are located doesn’t matter – it’s driving the supplier to deliver on their SLAs that matters.” ®