What’s all the fuss about?

While the information technology (IT) industry is seemingly recovering from a depressive hangover after the 90s, India-centered software firms are quietly posting record evenues, new contracts and strong profits. The phenomenon of IT outsourcing, which began with low-cost offshore sourcing of programming talent and Y2K remediation in the late eighties is showing remarkable resilience in very difficult conditions. What started off as a short-term solution for an increasing gap between demand and supply for skills in obsolete technologies (“legacy maintenance”) in the nineties has become a strategic sourcing need that has the power to put progressive Fortune 500 companies ahead of their competition in the 21st century.

Over the last couple of years, a new breed of challengers has been biting at the heels of long-established consulting powerhouses that have provided these services on a long-term basis to large American companies. India-centered software solution companies such as TCS, Wipro, Infosys, Satyam, and Cognizant are giving industry giants like IBM, EDS and Computer Sciences, and even the “big 5” management consulting giants, a run for their money.

At the same time, a new phenomenon has been quietly gaining ground. Business Process Outsourcing, or BPO, has been around for many years, but only recently has this gained traction as potentially “offshorable” for significant cost benefits without compromising – and in most cases, actually improving – productivity and quality. Led by the pioneering captive sourcing models of GE Capital and American Express, the field is now full of small and large companies alike. Even the heavyweights of India-based IT offshore services have jumped in, not wanting to be left out of the action.

As we learnt while researching for the conference, there are several models at work in the offshore sourcing space, ranging from the most mundane operational tasks to complex high-end scientific problem-solving. Terms like outsourcing, staff augmentation, and IT-enabled services are being replaced with newer and trendier industry-speak such as Brain Arbitrage, Information Goods, and Innomediation ©. As the issues of service levels, intellectual property, acquisitions and bankruptcies become complex variables in cross-border contracts, the lawyers aren’t far behind; they have figured out the required pre-nups, divorce decrees, and custody/alimony settlements to bring order and structure to the ways of the Wild West nineties.

The past five years has seen the seeds of the offshore services phenomena grow. While only a relatively small group of user companies have embraced it, it is increasingly a topic of discussion in many board rooms. This fact is evident in the revenue growths seen in all the offshore services firms (CAGR 25-30%), while at the same time onshore service providers are seeing flat or shrinking revenue growths. A variety of factors has contributed to this growth, and contrary to belief, offshoring decisions have not been driven by costs alone. One thing is clear, though. India continues to be the undisputed destination of choice for business processes looking for a home abroad.

The Conference

The IIT Midwest Alumni Organization organized this conference at the Kellogg School of Management on February 22nd to explore offshore services from many different points of view: users, vendors, consultants, entrepreneurs, lawyers and academia.

The speakers included Phiroz P. “Daru” Darukhanavala, VP & CTO of BP, and Don Bullock, CIO of Eaton Corporation, representing the IT user community with in-depth experience and understanding of the offshore model. The IT vendor community represented Rich Garnick, CEO-Americas, Wipro Technologies, Deb Mukherjee, CTO of Cognizant, and Bharat Desai, CEO of Syntel Corporation, There were other highly accomplished speakers, such as Raj Mashruwala, COO of middleware leader TIBCO, Darren Carroll, CEO of Innocentive, a company that uses auction-based models for outsourced scientific problem-solving, and Neil Hirshman, Partner of Kirkland & Ellis, a Chicago law firm that specializes in cross-border outsourcing contracts.

Very often terms like “Outsourcing” and “Offshoring” go hand-in-hand, however, we chose to focus on the wide range of creative usage of the offshore model in its many forms today. What was of interest to us was the offshore services sourcing decision as it closely relates to the need to build a model of a virtual corporation that is flexible and productive, a decision driven as much by strategic as by economic and geographical considerations.

For an entire day, here is what happened. Speakers made provocative statements. Panelists challenged each other and were challenged in turn by the audience. Questions were direct, so were the responses. Startling predictions were made. Amazing stories were told.

So who’s winning, and who’s losing?

We can’t tell yet, we don’t have all the answers.

However, consider some of these statements made by the speakers at the conference; hopefully these will provide you with some insights as to who will succeed in the long run:

1. Incumbent service providers have to carefully re-assess the value they are providing without the leverage of global delivery models.
2. There is room for all kinds of players in the marketplace; there are a thousand different entry points in large accounts.
3. The process of “internal selling” and “evangelizing” for offshore outsourcing is a longer sales process than you think.
4. Nobody has > 1% of global R & D capacity.
5. Venture capital is toxic.
6. Don’t worry about the size of the market; think of how you will land your first client.
7. Indian service providers have to learn not to ask how high they should jump; they should learn to ask why they should jump at all.
8. Indians shouldn’t try to lose their Indian-ness.
9. Avoid spin.
10. Think of contracting as a marriage; choose your partners carefully.

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