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Table of Contents

Key Offshoring Trends for 2005

Archstone Consulting/Duke University Offshoring Study

Nearshore? Farshore? Which Shore for CRM?

Why Indian Suppliers Are Moving Moving to Tier 2 Cities

Belarus Attempts to Become the Eastern European Bangalore

VoIP Solves Technology, Labor Challenges for Growing US Call Center

The CFO - Moving from back-office to frontline strategy

A Fresh Look at the Logic of HR Outsourcing

How to Succeed in Outsourcing Application Development

Moving to ASP.NET: Part 1

The European Directive and Global Data Transfers

The Impact of the Recent L-1 Visa Law Changes on Outsourcing

Offshore outsourcing is here to stay, despite the US domestic outcry that went mainstream during the presidential election campaign. It has become clear that that outcry is as flawed as the protectionist measures that Adam Smith discredited more that 200 years ago. (In The Wealth of Nations Smith maintained companies and nations that overcame the barriers to trade would reap tremendous economic and social rewards.) At the same time Americans were decrying lost jobs, offshoring provided buyers considerable savings while retaining their competitive advantage. These benefits guarantee offshoring will continue to change the global outsourcing landscape this year.

Clearly, as offshoring gains momentum globally, the debate on whether to offshore or not is now truly over. The savings are just too hard to ignore. In 2003-2004, according to the National Association of Software and Services Companies (NASSCOM) estimates, offshoring to India provided cost savings between 40-50 percent. This year offshore will generate savings of 25-30 percent and in some cases even in the 30-40 percent range.

I believe buyers will continue to experience increasing actual cost savings and not just the promise of benefits that was evident just a couple of years ago. For example, in a 2004 Everest survey of 24 suppliers, 21 achieved savings of 30 percent and more than half indicated savings of over 40 percent. It comes as no surprise to me that buyers today are moving much faster from pilot to actual adoption. In today's global marketplace, those savings provide a coveted competitive edge.

India Will Continue to Dominate Despite Current Challenges

I remain positive about India's predominance despite the challenges that have arisen recently:

1. The growing appreciation of the rupee against the dollar
2. Increasing labor costs which threaten India's comparative cost advantage
3. New challenges like quality control while staying cost competitive
4. Pockets of competition from new geographies, including China
5. The shortage of quality labor

In my opinion, no other country at the moment has India's supply pool. Adding to the excitement in 2005, Indian suppliers will resort to more out-of-the box solutions to tap talent. I predict a move to Tier Two cities like Pune, Kochi, Kolkata, and Ahmedabad to look for talent. Indian suppliers will recruit the latent talent from a vast, well-educated, middle-class labor pool residing in these smaller cities, meeting the quality labor demand. If that means that entrenched hubs like Gurgaon, Delhi, Bangalore, Mumbai, and Hyderabad will lose out, so be it. India will have to look at the larger picture and a long-term strategy to address these labor issues.

There is no dearth of talent in India, only a lack of exposure to global working conditions and training. Indian companies will increasingly work with industry and governments to revamp the country's educational infrastructure to meet the rising demand for new skill sets.

The Supplier Landscape

Overall, I am optimistic about India. This optimism doesn't seem unfounded, if the financial earnings of India's leading troika of outsourcing companies are any indication. Infosys Technologies, Tata Consultancy Services, and Wipro Technologies all reported better than average sales growth last year, beating market predictions and riding high due to higher demand for offshore services.

Offshore suppliers fit into three broad groups. The first group has traditional ADM (applications, maintenance, and development) suppliers (Accenture, CSC, EDS, and IBM). They have ADM revenues in excess of $1 billion primarily derived from US and European-based employees. These outfits also have deep vertical expertise and aggressive expansion plans.

The second group includes Tier One offshore suppliers like India's Tata, Wipro, and Infosys, who also have revenues in excess of $1 billion and are almost exclusively in ADM services. These suppliers have highly-evolved quality and productivity programs, supporting tools, and methodologies. Their net profit margins hover in the 15-30 percent range with growth rates of over 20 percent.

The third group is the Tier Two offshore suppliers, which include companies like Patni, Cognizant, HCL, and Satyam. These are generally similar to the Tier One suppliers but smaller. However, their size does have some negative implications. They are often handicapped by less vertical knowledge, limited BPO capabilities, and higher employee turnover. For these reasons, they are usually not the first choice for potential employees.

Finding the Right Model

Offshore is in a state of flux. Suppliers will increasingly experiment with various offshore models to find the right mix. For example, captives are going the third-party way, with GECIS in India (2004) and with British Airways spinning off WNS (2002). There will be more experimentation with models--captive, BOT (build-operate-transfer), third-party, or even hybrids. I believe that companies may look for a judicious mix of captive and third-party arrangements, and there could be more BOT kind of deals.

To add to industry's flux, there will also be a higher likelihood other suppliers will acquire these Tier Two suppliers. They now have to look at sustainability strategies or die a quick death. Tier One ITO suppliers and multinational corporations (MNC) will derive a significant advantage over Tier Two and Tier Three suppliers. Everest research has shown that Tier Two suppliers do not offer a substantial advantage in pricing over traditional ADM providers and Tier One offshore providers.

Besides, both traditional ADMs and Tier One companies will also revamp their own business strategies. For instance, Tata and Infosys have dabbled with various strategies to court clients and attract bigger deals. Tata has successfully extended its global footprint and ramped up its global service delivery capability to attract megadeals, while Infosys has been developing its consulting arm for over four years as a strategy to use the company's strength in execution to move up the value chain. I believe that these strategies would increase the value proposition these Tier One companies provide to clients.

2005 will be a year where MNCs will increase their offshore presence in India. This increase will test their managements to find the right mix of management structures, corporate ethics, and business models. Buyers will look at more holistic deals in 2005. Indian suppliers will have to address larger and more complex contracts with the scope becoming larger and transactions becoming more complex.

I expect BPO to gather momentum. Though offshore BPO is still very young, the industry will start to walk. Specialization is already occuring. An Everest 2003 survey of six Tier One suppliers for a life insurance client indicated that the relative size of ITES (IT enabled services) deals in the insurance vertical is still very small, but the market is growing rapidly.

Beyond Labor Arbitrage

As processes become more complex, quality improvement in services will become a key driver for growth. There will be a move from low-end and back-office work to high value-added services, following the examples of Microsoft and GE. As the size of contracts become larger and complex, the challenges and opportunities for a talented labor pool, like India's, will be there for the taking.

Buyers will increasingly look for a one-stop solution, whereby they can retain the cost advantage while adding value in terms of service and quality. Cost arbitrage will stay, but suppliers will have to scale up to extend benefits beyond just cost.

Higher Stakes, New Agendas

Firms like Everest and McKinsey have always believed in the power of offshore. I would like to look beyond the usual suspects--costs, quality, savings--and predict that offshoring will have a sweeping social impact on economies like India. By 2010, the offshore industry will have changed India's geopolitical and economic vista. With 25 percent of India's vast and talented middle-class already working in the offshore outsourcing industry by then, government and politicians will suddenly wake up to leverage the opportunity in a large vote bank that is increasingly mobile, educated, and employed--a golden goose shall we say. For developing economies like India, the pay off from offshoring is going to be just too phenomenal to ignore!

Publish Date: March 2005

Copyright © 2005 - Everest Partners, L.P.

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