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Does SaaS Threaten Indian Outsourcing?

Posted on Wednesday, Mar 5th 2008

Here’s an issue for readers to weigh in on: Does SaaS Threaten Indian Outsourcing?

My thought: Outsourcers make a lot of money from installing, integrating and maintaining big, cumbersome software systems from SAP and Oracle. SaaS streamlines all this, and except for a few large companies, as the SaaS wave washes over the IT firmament of the world, this kind of complex integration and maintenance projects may disappear (at least that’s the promise of the SaaS proponents), taking with it large chunks of revenue sources from the Infosys, Wipro, Satyam, Accenture, IBM Global Services of the world.

Your thoughts?

[And for more Sramana-bashing, check this out: The death of Indian outsourcing? Don't make me laugh ...]

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The fundamental problem in the software industry is that clients want products modified to meet their specific needs. If clients wanted vanilla installs, Oracle and SAP could shrinkwrap their products and sell them at BestBuy.

Vendors who tackle SaaS soon understand that clients’ unique business challenges, as well as their insanely close-minded approach to process standardization, drives customization. Customized SaaS environments offer no economies of scale to the software manufacturer or the client.

Furthermore, if companies cannot effectively prioritize their own IT project portfolios containing maintenance, upgrades, customizations, and new features, what makes anyone think that SAP or Oracle could do this for a multitude of customers?

There is no doubt that SaaS helps reduce companies’ management of hardware and data centers, and that certainly will have an impact on those vendors who manage these environments. Except, that it’s unlikely SaaS providers will operate their own data centers. These will be outsourced to IBM, Accenture, etc., leaving SaaS providers to focus on software.

I also doubt that SaaS providers can employ enough people to handle all the implementations and conversations into a SaaS environment. This alone will create business for offshore vendors.

As to reducing interface complexities, that’s what SOAP, XML, EDI and a variety of other initiatives were supposed do over the last 10-20 years. The fact that companies are still spending excess amounts on interfacing systems suggests that interfaces are here to stay with all their wonderful complexity.

Finally, as to the arguments that SaaS providers can offer more robust functionality, I would invite readers to consider dining at a buffet sometime. The food quality simply isn’t good if the chef is cooking to much variety. Some dishes sit around for a long time before they are refreshed. Frankly, I order a la carte to avoid stale, uninteresting buffet dishes, but will take a salad buffet because I’m not looking for anything special from my salad. If SaaS providers can overcome this challenge and provide robust, current, and innovative features with short product cycles, they may succeed. Indian labor, which Microsoft, Oracle, and SAP use extensively, will be the ones churning out these products.

From a BPO perspective, SaaS will have almost no impact. If software companies can’t convince their clients to implement vanilla packages, they most certainly will never convince them to apply business rules, answer phones, or process transactions in a uniform manner. If that was the case, why don’t UPS and Fedex or Visa, MasterCard, and Amex get together and build one big customer service or BPO center. Even get cable, satellite, or phone companies don’t service their customers in a uniform manner.

Frankly, any one who has worked for a handful of these companies would see that there will never be process standardization. Fans of Michael Porter recognize the differentiating factors that services and products have, and would agree that it’s not in companies’ best interest to create similarities.

Tony
http://360vendormanagement.com

Tony Wednesday, March 5, 2008 at 6:58 PM PT

Tony,

I think with this recession economy, IT is going to be one place for US companies to shave headcount and standardize. This move will not come from the CIO, who will want to “keep” his budget, but from the CFO, who will demand a nice, big “shaving” of the fat.

If I were selling on behalf of a SaaS company, I would most certainly go sell this value proposition to the CFO.

What do you say?

As for BPO, I think the story is very different. BPO operations are inefficient, and can be made much more efficient by using technology.

I provided you with the TrueAdvantage example. Another one that Brian Jacobs pointed to is HireRight. [Read this]
It’s basically BPO done with efficiency, and without fat.

My thesis is that we would see more of this kind of dynamics developing as SaaS gains strides.

Sramana

Sramana Mitra Wednesday, March 5, 2008 at 8:53 PM PT

SaaS is being talked about as if it is a savior to all enterprise IT problems. As a CTO who has dealt with some internal systems and some SaaS systems, I can tell you about a hundred issues that need to be addressed before SaaS becomes a reality. It is nowhere close!

Companies needing customized versions of software is not a myth or the conspiracy of some software vendors. What is a myth is that a single enterprise product will capture all nuances of a company’s mix of businesses! In variably customization is needed simply because of the mix of each comapny’s businesses, legacy way of doing things etc.

With SaaS also you don’t get away from this problem. With small and medium sized businesses things are simpler and so SaaS accounting may work well. Once you grow beyond a certain size, neither the economics nor the practicality of SaaS work out.

In companies i worked, even SaaS sales force automation cost initially some money to set up and every month for each user you pay a subscription. Beyond 10 people getting an open source software like SmartSuite made sense, even if you go beyond the free crapware to buying an enterprise license.

This is not to talk about getting information in and out of these Saas systems into your other systems. Accounting, CRM, Order management all need to talk to each other and if some are Saas and others inhouse software, you are in trouble. Integration is only in theory. I know. I have tried doing it and became the guinea pig for debugging the company’s XML interface for the first time, ever! Not fun!

From a SaaS revenue point of view, getting $50 a user takes a LOT of users to make decent revenues even.

Now if SaaS technology improves to such an extent that data is stored locally and can be used offline or online and integration with other applications become easier, THEN it will become viable.

With VCs puring money into braindead stuff lile Social Networking and ignoring needed technology innovations, I am not holding my breath!

Nari Kannan Thursday, March 6, 2008 at 7:48 AM PT

The desire to customise is greatly exagerrated. The payoff in the long term from customisation is negative 99% of the time. Of course if I was in the business of selling implementation services I would never mention that fact. So integration is being commoditised and more and more its coming straight out of the box. Installation happens the day you log on to the SaaS site [I exaggerate (a little!) for effect].

Watch to see how Social Community behaviours wipe out the training revenues next! SIs are doomed I tell you doomed!

Capt. Mannering Thursday, March 6, 2008 at 7:53 AM PT

SaaS will never be pure SaaS. Every SaaS company out there has broken the true meaning of SaaS.

It will be hosted – dont ask where? It can either be at the company that creates the software or at a hosting company or as a managed service

Multi-instance? don’t count on it.

Companies need flexibility and CIOs will look at ROI even more closely with these variant SaaS models.

That said – it will go back to the model of Software + Service in a hosted model. This is where companies like Satyam, Infosys, TCS, IBM and Accenture will play.

They will have to re-invent from providing services on traditional enterprise software to the newer hosted (call it SaaS) provider interfaces based on Web Services and SOA.

my 2c.

anonymous Thursday, March 6, 2008 at 8:35 AM PT

Absolutely, with SaaS and more web2.0, you hardly need live support etc. For example, take complete online bank ING Direct (ingdirect.com); they have lower costs and streamlined ONLINE so much that I never have to call them up. On other hand, I have to call up etrade.com etc because they do not have good ONLINE processes for taking care of all things

Mohan Thursday, March 6, 2008 at 9:22 AM PT

No, SaaS does not threaten Indian outsourcing. It complements it. Saas is a tool.
India’s IT Enables Services sector leverages technology to perform various outsourced services i.e. insurance claims processing, healthcare revenue accounting, loan processing, etc.

In my view, this will be a US$ Trillion industry.

Raju
http://www.myindiabook.com

Raju Agarwal Thursday, March 6, 2008 at 4:57 PM PT

The author has referred to Jaipur as a small town. Jaipur has a population of over 2 million people, which is larger than Philadelphia.

Raju http://www.myindiabook.com

Raju Agarwal Friday, March 7, 2008 at 7:28 AM PT

I referred to Jodhpur as a small town, not Jaipur.

Sramana Mitra Friday, March 7, 2008 at 8:23 AM PT

SasS will both help build up and compete against IT outsourcing in India. Yes, it is true that Saas will become one of the services that can be provided from India.

What many are not getting is your point that as technology (ie SaaS) takes over low level busy work, those who do that work will lose out. Back office work is increasingly being outsourced to locals such as India. As technology automation does more of that work, those previously doing that work will have to move up the food chain.

Plus your point about wage inflation is also a big factor. As the cost of outsourcing to India increases, doing the work in Kansas or Vancouver becomes a much better option.

Getting all worked up about SaaS, and the perceived threat to the services industry and their lucrative work will get people excited. Many will feel a need to be defensive and not see the points that you make:

1) automation will replace work done by humans in India at the bottom end; and
2) high wage inflation at the top end will encourage many companies to move their outsourcing to closer locations; where culture, language, distance, time zone and other differences will be less problematic.

You get this one right. You are years ahead of your time on this call, but that does not make you any less right. I applaud your courage in including a link to fersht’s thrashing of your column. It takes guts and and confidence in your own position to make such a critical commentary by a respected voice so easily available to your readers.

Realtosh Friday, March 7, 2008 at 6:46 PM PT

Sramana,

The core of the problem is that:

SaaS is just a hosted instance of software that vendors want to force companies share (single instance, multi-customer).

Clients want customization. In the history of enterprise software, I’d like someone to argue that a vanilla install was used more than 1% of the time. No one is going to argue that that customization is costly to implement and support. However, clients don’t care. If CIOs can convince COOs that their software vendors know operations more than the COOs team does, it would change everything. However, CIOs don’t really understand operations and their software vendors talk java, xml, oracle, ETL, etc, not AHT, TAT, backlogs, and quality.

Surely, more SMBs will leverage SaaS, but I would argue that this will be in non-core areas. Where technology is necessary to differentiate or create a competitive position, SaaS is like handing your invention to your competitors and asking them to mimic you. The day WalMart allows competitors to use their inventory system, Amazon allows competitors to use the ecommerce/personalization suite, and Apple lets competitors use iTunes, is the same day their market capitalizations begin a long, slide to parity.

So, in the end, SaaS is vaporware. Behind the scenes, hosted, dedicated, customized instances will hum to the Indian labor market’s content.

:)

Tony
http://360vendormanagement.com

Tony Saturday, March 8, 2008 at 9:38 PM PT

I feel that SaaS can help Indian outsourcing companies move to the next step in the value chain. Indian companies have long been known for excellence in execution, and while they have made significant investments to build domain knowledge they still lag significantly to the Accenture’s, KPMG’s and the boutique consulting companies of the world, to provide business and process consulting. More often than not, the Indian IT majors still only execute projects that have been designed by a firm that has domain, business and process consulting expertise.

If they want to take a quantum leap and provide value across the spectrum, they would do well to embrace SaaS. What I propose is a ‘SaaS Apps Store’ that borrows from the iPhone App Store model. How will this work for everyone? There are three players in this ecosystem and let’s look at each one of them.

Customers –> Most organizations today outsource/offshore some component of their IT and/or Business Process (BPO). They use IT consulting organizations to implement and support their Enterprise Applications and technology initiatives. A lot of the projects involve off the shelf products like Oracle, SAP, Microsoft for ERP, CRM, EAI, BI/DW and other such initiatives. However a significant amount of dollars are spent to design and develop custom applications. Now if customers can work with their existing IT consulting partner and have the choice of selecting a SaaS based app from the consulting companies ‘SaaS Apps Store’ to meet their need, it would make a lot of sense for a company. Traditionally, these solutions were being built from the ground-up by their consulting parters or internal IT team. With this model, they can save on time/cost and leverage cutting edge technology and solutions to meet their needs. The clincher being that the Consulting companies provide EAI service offering (BEPL/PIPs/Open API’s etc) that offer pre-built integration packs that reduce the complexity of integrating new apps to existing apps.

Partners –> SaaS organizations today have a problem with visibility. Not many CIO’s are ready to accept SaaS as a mainstream strategy due to lack of knowledge and visibility. There is also the concern about integration and the ability to customize. Now, by aligning with large consulting companies, they can achieve multiple benefits. They can focus on product development and leverage the consulting organizations SI capabilities and sales capabilities. They can focus on training the consulting organization’s large workforce to achieve their objective of having a large consulting team.

Indian IT Outsourcing majors –> By establishing a ‘SaaS App Store’, Indian IT majors can provide its clients with a range of offerings that will be unparalleled in scale and ready-to-use solutions that require minimum customizations. They can provide EAI services and pre-built integration packs that complete the offering. While the Indian IT majors continue to offer consulting services for large ERP/CRM implementations, they can leverage SaaS based products to offer standardized solutions that can replace a portion of custom software development initiatives and provide more value to its clients.

Sai Kiran Kumar Thursday, May 14, 2009 at 11:58 PM PT

Sai, I am not sure your point about CIOs not ready to accept SaaS is correct. Can you do some research on this? I am hearing data to the contrary. CIOs are embracing SaaS very actively.

Sramana Mitra Friday, May 15, 2009 at 8:14 AM PT

I don’t see SaaS as a threat to Indian outsourcing industry.

shubhra Saturday, May 16, 2009 at 7:47 AM PT

Sai – also, something worth exploring in terms of your app store strategy as articulated above is what the EAI vendors are thinking / doing in this regard. There is a complexity around the operational and integration aspects of SaaS for sure, and it does open up an opportunity for the Indian IT majors.

You may want to look at my Deal Radar write-up on Sonoa Systems. You can also speak with the CEO about this.

Sramana Mitra Saturday, May 16, 2009 at 2:09 PM PT

Hi Sramana,

One of the main drivers behind the Apps store strategy is that consulting companies can monetize SaaS products by engaging in EAI work. The adoption of SaaS in my opinion by Consulting companies has not happened very well because they are not able to offer services where they can make money on implementing SaaS based products. So if they can offer a wide range of SaaS products through an Apps store and get consulting dollars for the EAI work, then they do not completely loose business to SaaS players and at least get part of the revenue of the new engagement. They also provide better value to their customers by providing visibility to the various SaaS based solutions and strengthen their credibility as a trusted advisor.

Sai Kiran Kumar Wednesday, May 20, 2009 at 12:04 AM PT

I understand that, Sai. But I am also suggesting that the Indian outsourcers look at alternative businesses models that SaaS brings – recurring revenues, predictable, operationally scalable without bodies.

Sramana Mitra Wednesday, May 20, 2009 at 12:19 PM PT

SaaS is another delivery model for software which requires efforts like any other model. Which means that it presents new opportunities to Indian IT companies. SaaS enablement is a big opportunity for India.

Punit Pandey Tuesday, June 22, 2010 at 6:45 AM PT
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