Sramana: When the three of you came together to found Systems In Motion, you had a set of analysis about the dysfunctions and gaps in the outsourcing industry. I have a piece that addresses this titled The Coming Death Of Indian Outsourcing.
Neeraj Gupta: That was a great piece that you wrote, and we echo the same sentiment. I had been on the sales side of selling offshoring for the previous four years. The challenge that does not get talked about enough is the fundamental managerial and cultural challenge that the Indian industry faces. How do you integrate consulting skills with delivery skills? The challenges of attrition, wage inflation, agile development and new business models that are cloud based are all issues that are not addressed properly.
A lot of IT is at a level of maturity where customers know the input costs. Customers assume that if the input costs in India are a fourth of the costs in Silicon Valley, and they are happy to use those firms even if productivity is 30% lower. You are essentially comparing a $30 price point to a $100 price point. Customers will continue to go down that path for that reason alone.
We looked at this and realized that we can gain significant advantage on all of the parameters I just listed. The only challenge for us is to get the economics right. We went back to the fundamental operating leverage of building an offshore company. The economics are defined as the onsite/offsite offshore ratio. We looked at TCS and saw that 72% of their staff was offshore and 38% of their staff was on-site. Their price point was $78 on-site and $27 offshore.
We studied the critical operating levers. Across the organization, we are delivering a service with certain ratios which, if applied to application development and areas where you cannot get high offshore leverage, we can change the economics of that model. Instead of having 30% onsite in Manhattan and 70% in Bangalore, we can have 10% in Manhattan and 90% much closer in Michigan. The total cost of the blended model is then competitive.
We left testing and support as commoditized items meant to occur offshore. We can now approach customers who do agile development and tell them how we change the metrics. They have to support more than 30% of their current work onsite, and we think a target price of $500 a day would allow us to deliver the same with a nearshore model. The question is if we could get enough margin with our economics. After we have looked at the pyramid of our resource pool, we have figured that we can indeed deliver at that rate and make money.
Sramana: Are you still selling to CIOs?
Neeraj Gupta: We are selling to the head of engineering or R&D departments as well as to the CIO.
Sramana: Are you selling to technology companies?
Neeraj Gupta: We are talking to a large R&D organization that has half of its team in India. That company has decided that having 50% of their R&D organization in a captive center in India is risky, so they are looking for other vendor models. They are now comparing Ukraine, Argentina, and low-cost domestic models. We are right in the middle of that discussion. That has allowed them to not only evaluate us against Argentina, but perhaps even offer additional options for their high cost U.S.-based work.