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Archive for the ‘IT Outsourcing’ Category

Reverse Brain Drain..

Posted by Girish Krishnan on May 16, 2007

TIE had reported in 2003 that between 15,000 and 20,000 Indians have returned and Charter member of the organization Vish Mishra told San Jose Mercury News that the trend had continued and about 40,000 more had gone back in the last four years.

Why the trend?
– India is at the epicentre of a booming IT industry. The movement of people in many cases is not really disruptive i.e. they get to move to the India centre of the same company they work with

– One-quarter of immigrant-founded engineering and scientific companies set up in the United States during the past decade were by Indians. These companies rang up $52 billion in sales and created 450,000 jobs. The “can do it” confidence has become part of the Indian Gene.

– Companies are more (if not entirely) interested to move high value jobs to India – The R&D centers of various companies set up in India (Google,Microsoft, Yahoo!, Intel) are testimonial to the belief on the engineering talent in India.

– India is a also consumption market for IT. A lot of future growth will come from these emerging markets – Half of India’s 1.2 billion people are younger than 25. That’s 600 million people coming into their peak consuming years in an economy fueled primarily by exploding retail growth.Just imagine the spending potential of all these people combined – Its a huge market out here!

– For Indians who have seen wretched infrastructure and poverty in their home country, there has been marked improvements in the facilities over here in the last few years. Speaking in economist terminology, the utility function of living in India returns better results these days for all those Indians and this is a strong motivating factor to come back.

– Concerns on the kids growing up in alien land and the worthlessness of being away from their native land (when it has become a decent place to stay).

Hopefully the reverse brain drain will create a stubbornness in the Indian population  and help to get over the “chalta hain” attitude which has become part of our genes. The demand for proper returns on the tax payers money in terms of good services and a request for better accountability from all the government bodies will hopefully take shape.

Posted in General, IT Outsourcing, Strategy, Work Life | Leave a Comment »

Learnings from the DHL story

Posted by Girish Krishnan on September 3, 2006

Check out a McKinsey Quartery Article on how Deutsche Post World Net, the corporate parent of Deutsche Post and DHL, consolidated its IT operations and developed a unique model for Offshoring and outsourcing.

In a rare practical talk getting published,Stephen McGuckin (SM) who is DPWN’s Managing Director for IT services elicits some real world nuggets – I am just summarizing some points that impressed me, mainly because of my current job focus, and would highly recommend reading the original article to get the full picture..

On the importance of IT in the logistics industry and esp in the case of DHL and Deutsche post –
SM – The Information system should never fail even though the physical distribution system does – Very important to keep the customers informed!

On the skepticism of internal folks on IT outsourcing
SM – Was just general resistance to change

On Choosing the destination for consolidated IT center DHL could centralize much of the application development – They chose Malaysia
SM – There was a business-friendly government, there were incentives, and the labor was skilled and affordable + Government guarantees to the business set up there (as part of “Multimedia Super Corridor”) including these two important clauses
– One was that telecommunications costs would be benchmarked and prices kept competitive with Western rates.
– Second, there was a guaranteed five-day turnaround to obtain a work permit for a qualified person from anywhere in the world.

On Choosing the outsourcing Partner – “Infosys”
SM – Detailed, documented process for KM, which other company’s seemingly lacked

Low attrition rates – DHL thought that ESOPs also helped, and this was a differentiator as none of the other companies were giving stocks to employees!

Wanted DHL to contribute significant part of company’s revenue, so that they would get due importance; But didnt want to be dependant on only DHL – hence arrived at a figure between 5-10% of the company revenue

Flexibility in terms of business model requirements
Infosys agreed to do part FP and part T&M, and agreed to bid for every new project to ensure competitiveness as long as DHL gave a minimum guarantee for it to keep a team in place

From the customer’s stand point, Infy would take the trouble of optimizing its team (DHL doesnt micro manage) and bid for all new projects against the minimum guarantee DHL offered.

On how initial internal IT conflicts got resolved
SM – DHL employees slowly learnt to manage a vendor relationship and not to micro manage as they would do in a typical inhouse set up.

As there was fear of them losing control, DHL got the HLDs and architecture back into their purview. Thereafter, the team felt it could control things and could really understand whether the outsourced partner was overbidding or underbidding.

My Take : Its worthwhile to put yourselves into the shoes of the customer and look at some aspects he wants highlighted from an outsourcing partner.Many a time, as an outsourcing service provider we are engulfed in the tough competitive reality around us and this justifies the way we portray ourselves in a sales pitch. The flip side of this is that, we fail to give importance to some aspects the customer treats as important (say stock options!). There is no magic mantra that we could adopt at the last minute to tailor our face for the liking of the customer – Fundamental to all is good corporate governance and that, according to me, is the only real differentiator in this industry. At a higher level, the government should have a mechanism to check out the competitive forces playing at a national level and it should keep tuning the “Outsource to India” macro advantage list to keep the comparative advantage!

Posted in IT Outsourcing, Strategy | Leave a Comment »

Offshore Product Development – Insights from an Idea that didnt take off!

Posted by Girish Krishnan on August 5, 2006

Here’s a great idea to make money. I can point you to an untapped market opportunity staring at the face of everyone in the Indian IT industry.

  • According to Business World, Global Software Product market is about $180bn.India has been able to capture only a meagre 0.2 per cent of this market
  • According to Nasscom estimates, Offshore Product Development is expected to grow to around $7bn business by 2008-10 from existing $1bn business.Export of software products, including development services, accounted for $710 million FY 2004, up from $560 million in FY 2003

What’s happening to the rest of the OPD market?  Can’t they also be offshored?

If they can be, why is no one talking about that?

So much for generating enthusiasm, but let me try to bring in some more perspective to the space we are looking to play at.

OPD is divided into three parts— the start-up, mature and sunset segments.

  • The start-up market is the entry-level phase where the company plans and develops the product.
  • A mature market is one where a product is already in existence; Developers just need to add features or services to it.
  • A sunset market is where an older version needs to be upgraded and new versions need to be added.

Even within the miniscule part of the business outsourced, most of the work comes in the sunset/mature markets. The numbers indicate that startups rarely outsource!

Any trend gets modified or re-defined with the dynamics in the demand and/or supply sides of it. How did India become a successful outsourcing destination? – In simple terms that was the result of the unique services we offered, the “process” benefits we figured out and the prevalent cost arbitrage.

Given all these advantages along with the maturity and confidence that the IT industry has achieved over the years, India can certainly look to play a major role in the OPD market. Some purists argue that these are different ball games altogether, but Professionals in the IT services industry go through a lot of projects that demand similar traits as those required in the creation of a product. Implementations of business solutions for big enterprises require a great deal of planning, deep technical knowledge and execution competence.

Indian IT companies are very strong in all the aforementioned areas and much of the experience is transferable to the product development space also. I can concur with the notion that may be the absence of a good enough outsourcing model is the main reason why OPD has not taken off, but to ignore this area as not being a potential source of business value creation would be a big mistake.

The marketing teams of these IT companies could easily target the VCs and members of startups with a solid value proposition affecting the NPV of the project. Possible questions from the startup ISVs could be on these grounds.

  • Isn’t the risk associated with offshore development higher?
  • Aren’t the skills in packaged software lesser out there in India?
  • Doesn’t Silicon valley still provide the best software designers and ideas people?
  • Aren’t the overhead costs for managing a global team considerable for a small startup?

I am sure that satisfactory answers can be given to all these questions and the role that the Indian IT companies should play needs to be that of a trusted outsourcing advisor/partner evaluating the project.

The key to doing effective sales pitch would depend on the material collected on the points mentioned below

  • Demonstration of how we can positively affect the NPV
    The Idea of streamlining development using processes is a definite value add in haphazard product dev environments
  • Lots of reports in Public Domain which says outsourcing helps ISVs
  • Show metrics – like risk reduction, Higher ROI, faster Time to market, Cost savings, Higher model sustainability
  • Full guarantee towards code protection – project the software ecosystem, BOT models

Help the guy whom you are making the proposal to justify himself in front of the higher levels of management by providing him with quantifiable metrics!

When I thought through the implementation part of this story, I figured out that there are some serious challenges for this Idea to succeed. These assignments indicate a higher degree of risk implying more fire fighting periods in the project life cycle than what is seen in other kinds of projects. This is obviously the main reason why the Indian big five are not jumping into the OPD bandwagon – there are already a lot of comparatively risk free projects to be taken up but OPD may very well prove to be the differentiator in the long run. Other reasons why companies are not too keen in taking up OPD work are

  • They would need to survive in a very high pressure environment
  • should be prepared to work in situations of tight cost control
  • They need to be clear about the methodologies themselves and should be able to clearly demonstrate the benefit to the clients.
  • Growth of the account is directly linked to the success of the products which increases the project risk
  • Limited visibility on the future of these companies.
  • Talent Hunt – Lack of product experienced people who can fit into Middle management
  • Legal norms/environment in India

In the near future, the most effective way to gather business in the OPD space would be through new (/modified) business models like BOT which gives companies the flexibility in exerting different levels of control over the off-shored pieces of the project.

Ping me if you are interested and I can give you more gyaan 🙂

Posted in IT Outsourcing, Strategy | 4 Comments »

Analysis: Failing Captive Centers

Posted by Girish Krishnan on August 1, 2006

Recent news on Apple closing its development centre in India due to cost pressures prompted me to think about the reasons that cause captives to fail in our country. If at all this is a trend staring at us, we should be aware of the opportunities for External Service Providers (ESPs) to leverage the same. I am sharing a summary of my research and analysis below.

While the Indian IT and ITES industry is still under the boom phase, there is a significant trend indicating that the Captive centers are increasingly facing pressure due to a variety of reasons. Some of them (like Genpact) are growing bigger and even becoming service providers by diversifying into other areas, while others (like Apple) are forced to close shop. This opens up a big opportunity for the External Service Providers (ESPs) to cash out by adapting themselves to suit the drivers of this trend.

I shall quickly try to establish that captive offshoring can lead to a negative ROI for companies in quite a lot of cases and also assess if outsourcing to partners instead of starting a captive center can be made a more viable option to companies.

If we track back the history of captives in India, we could observe that majority of captives started as subsidiaries. Infosys research reveals that this number could be as high as 56% while joint ventures help fuel around 13% of the captive centers. The early captive centers (like Oracle, SAP AG etc set up in the 90’s) were more IT (technology) focused than the recent ones which handle low end work like BPO. If you look at the split across industries, its an obvious fact that financial services dominate this market contributing around 50% of captive offshoring.

The primary motivation behind outsourcing or offshoring are Cost savings, Improvement in Quality or strategic imperatives (where the vision is to leverage the capacity to fuel the organization’s growth in different directions). Once this thought barrier is crossed with a positive binary result, the motive is to choose either a captive way or to outsource work to ESPs.

The two main reasons to go the captive way would be to safeguard the company’s competence and/or of course a vision to transitioning the imperative from tactical to strategic. The plan to go captive demands that you have sufficient size and scale that is sustainable in the long term, and in a way have the ability to compete with the outsourcing providers (by the comparative advantage theory). Also, essential are the capability to integrate with the new outsourcing location in terms of setting up infrastructure, hiring staff, managing remotely etc.

On observing many of the captive centers that have failed recently, one can observe three reasons that cover the entire gamut of failure cases; Cost Overruns, “Time” frame issues and quality issues..

Cost Overruns: This can be attributed to high fixed costs, bad planning that ignored the industry dynamics and miscalculated the sustainability in terms of size and scale, and most importantly undermined the Captive Critical Mass (CCM). The CCM is an interesting phenomenon which decides the ramping up speed and also the steady state load of the captive center. Gartner says that for a captive center in India to reach its desired CCM steady state within 18 months, it needs:
• 500 people for a general IT operation focusing on generic application development and
• 250 to 300 people for a business process outsourcing (BPO) operation, not including call-center-related activity.

It is probably obvious that the CCM varies with the type of the job performed and companies should try to minimize the impact of CCM if they want to maintain profitable captive centers. There are many factors that affect the CCM from being at the optimum – including the work complexity, retention issues, resource availability, Hiring/Firing HR costs, job perceptions, brand value, compensation etc.

Time Frame Reasons: These issues are connected to CCM- Inexperienced managers and cross cultural issues could be major reasons for captive center to fail.

Quality Issues: Pertain to customer dissatisfaction caused due to security breaches, bad service etc

In the recent past, the Indian outsourcing industry has become extra efficient and their brand value sucks most good resources available in the market. Infrastructure cost is shooting up like anything in India and it appears quite unlikely that these rapid market dynamics featured in the original business plans which paved the way for captive centers in India.To give you a sense, the cost of commercial office space in Bangalore has quadrupled within the last 4 years (2002-2006)!! Lack of experience handling these situations in India is proving fatal to most of the existing captive centers.

Given the trend where in captive centers are failing, outsourcing partners need to think on how they can leverage this situation to their advantage. This is a big opportunity for them to get work which could have gone to a captive center if not for the stumbling blocks we discussed a while ago.

Broadly, I believe that there are two major areas which would give maximum marginal utility towards this goal. One could leverage the flexibility possible with the current delivery models and also consider improving the safeguards offered to the client. Hybrid models like BOT (Build-Operate-Transfer) give more flexibility to the client in terms of deciding the extent of his control and at the same time bring in the advantages of having an established partner to setup the center.

ESPs need to have stricter security norms in place – internationally recognized practices like BS7799 really help boosting the customer’s confidence. (It may be noted that Europeans have higher risk appetite in starting captives than the US companies that show more outsourcing willingness. BS7799 comes from UK reaffirming that part of the world’s extra sensitiveness in security issues)

ESPs in India should send out right signals to the clients by ensuring secure transactions, investing on a continuous effort to safeguard IP and provide data protection through the enforcement of appropriate policies, procedures and work culture.Security breaches should not be taken lightly and immediate action need to be taken to rectify the damage and also to mitigate the root causes.

Tech Tags: Captives, Outsourcing,ESP, Offshoring, BOT, Critical Mass

Posted in IT Outsourcing, Strategy | 6 Comments »