Trend Radar 2008: Offshoring

Did you know, China now offshores manufacturing to Vietnam? If Pakistan behaved itself, may be India would start offshoring some call-centers over!

In 2008, outsourcing, offshoring and globalization are likely to continue as major trends.

Rising wages in the most popular offshore centers (especially Bangalore), are eroding the cost advantage that drove this business to India in the first place. When the practice began, there was a 1:10 cost advantage. Today, this has dropped to 1:3. Over the next 5 years, perhaps, it won’t make sense to send work to India anymore. At least, not to the major Indian cities. >>>

Featured Videos

Trend Radar 2008: SaaS in the Enterprise

A Gartner report from August 2007 predicted that SaaS adoption in the Enterprise will be rising at a 22% CAGR through 2011.

Worldwide total software revenue for software as a service (SaaS) within the enterprise software markets is projected to surpass $5.1 billion in 2007, a 21 percent increase from 2006 revenue ($4.2 billion), according to Gartner, Inc. The market is poised for strong growth through 2011, when worldwide revenue will reach $11.5 billion.

In the last few days, several analysts have voiced their reasoning on why SaaS will do very well in the enterprise this year. >>>

Accenture Has Survived the India Onslaught Well

Based out of Bermuda, one first wonders if Accenture is a fly-by-night. But this is hardly the case. The former Andersen Consulting, tainted by Enron, is now a $20 billion strong management consulting, technology services, and outsourcing company. For Accenture, consulting represented 60% of revenue ($11.86 billion) and outsourcing 40% ($7.84 billion). Despite the current market jitters, CEO Bill Green posits that Accenture can endure economic headwinds by focusing on solving long-term strategic issues that clients face.

The approach has continued to work. Accenture has grown despite economic uncertainty due to diversification across verticals including technology, government, financial services, and others. The Americas and Europe/Middle East/Africa currently represent 45% of revenue each, while Asia-Pacific makes up 10%. Q4 revenue jumped 29% to $5.11 billion along with annual revenue, which climbed 18% to $19.7 billion (a new record). Part of this was based on new 2007 bookings totaling $4.9 billion for the year, slightly lower than 2006. Net income in Q4 dropped to $316.8 million versus $346.4 million YoY, adjusting for a past hefty tax benefit. Financial services represent 22% of revenue in Q4 and the Communications and High tech sector accounted for 24% of revenue, the remainder being made up by other verticals. >>>

Cognizant’s Growth Will Come From Europe

Cognizant’s (CTSH) 45,500 employees provide global IT and business process outsourcing services, including in financial services (up 49% YoY), healthcare (up 62% YoY), and retail/manufacturing/logistics (48% YoY). With a 62% YoY growth, the question is will Cognizant maintain its speed into Q4, especially with the current market jitters?

Q2 revenue posted at $516.5 million, up 53% YoY to Q2 in 2006, and up 12.2% quarterly ($460.3 million in Q1). Top 10 client revenue grew 11%, and total clients reached 430 (97 strategic). US revenue equals 84%, Europe is 15%, and 1% from Asia. Based on the above, Q3 guidance is $550 million (45% YoY). Cognizant will hit the $2 Billion annual revenue mark this year.

The Indian IT outsourcer reported third quarter revenue of $558.8 million, and with EPS of 32 cents GAAP, 34 cents non-GAAP. The Street had expected $556.4 million, 29 cents and 34 cents. But for the fourth quarter, the company sees revenue of $590 million to $595 million, which is below the consensus of $597.6 million. Cognizant sees EPS for the quarter of 31 cents GAAP, 34 cents non-GAAP, in line with expectations. The softer Q4 guidance has sent the stock tumbling down almost 20%, offering an excellent buying opportunity.

Company cash is approximately $750 million. And Cognizant has already authorized a $100 million buyback of shares. At the same time, the company is sinking another $100 million into its domestic infrastructure. >>>

TCS’s Acquisitions

India’s information technology exports will rise by 2.5 times to $80 billion by 2011 declares India’s communications and IT minister. A company that has been one of the single largest beneficiaries of this trend is Tata Consultancy Services (TCS.NS).

TCS has rapidly set up centers in nearly every continent. With more than 90% of revenue from repeat customers, the TCS strength is its Global Network Delivery Model that delivers based on the same standards, methodologies, excellence and expectations globally. The recent 10-year, $1.2 billion contract with Nielson Company reflects this approach. The geographical coverage strategy is no different from competitors Infosys or Satyam.

To support growth TCS is also taking costs offshore to limit expenses, similar to competitors. The TCS expense mix is currently 43% offshore versus 53.3% onshore and 3.7% other, a 2% increase from Q1 and YoY. And like its competitors, TCS seems also to be stuck with the body-shopping business model. >>>

Satyam’s Growth Prospects Look Solid

Among the outsourcers, Satyam (Nasdaq: SAY) today stands out as a safe global bet because it continues to consistently perform on its goals. Satyam provides information technology services and business process outsourcing (BPO) services in the U.S., Europe, the Middle East, and Asia-Pacific. The company’s approach and “Satyam Way” is in 4 key points of strategy:

* Increase the proportion of offshore services, to increase the profitability of contracts.

* Reduce staff attrition to hold onto key staff experience, today a very big problem in India.

* Increase new client revenue and maintain relationships with existing customers, so that there is adequate predictability in the ongoing revenues, as well as human resource planning and allocation, a tough job at this level of scale.

* Increase value to customers via integrated business solutions across functional areas and improved support for relationships.

How has this strategy worked for the company? Extremely well. In fact, it would be interesting for the smaller Indian outsourcers to learn from Satyam (and Infosys, which we covered yesterday), how to modulate the business as they scale. >>>

Infosys Needs to Diversify Out of Body-Shopping

The rupee value may rise making Indian services more expensive, but companies like Infosys adapt. In this piece, we look at what is going on inside the outsourcing giant, and whether their strategy is enough to sustain continued growth.

Infosys (INFY) delivers information technology (IT) enabled outsourced business solutions and provides business process outsourcing (BPO) services. In Q2, Infosys achieved $1 billion dollars in quarterly revenue for the first time, growing 37% versus Q1 (annual revenue was $3.1 billion and net income $850 million ended March 2007). Only 3-4% of this revenue comes from the Indian domestic market (63% comes from the US, Infosys’ largest market, 27% from Europe, UK primarily, and the remainder is generated in Asia). >>>

Offshoring Secrets:Offshoring versus Outsourcing

By Utkarsh Rai, Guest Author, Author of “Offshoring Secrets”.

Offshoring and Outsourcing are two words that are often used interchangeably. For the purpose of this article let us define the terms in a simple manner: “offshoring”, where the organizations decide to open their own captive center in another country; “outsourcing”, where the company decides to contract the work in another country. In this article we focus on India, but the basic principles are the same with other geographies.

Let us cover the circumstances under which a company should outsource:

Headcount increase: The organization does not want to add headcount to its payroll because the project would be of short duration or that there is only need for a certain number of people at various phases of the execution.

Non-Core functions: The organization wants to engage its own people in the core functions alone and outsources the non-core activities, such as supporting a product line that is going to be obsolete in the near future.

Kick starting a project: Sometimes, in order to kick-start a new project, a company requires some of the resources immediately with a specific background.

Setup & execution overhead: When the company wants to avoid the overhead related to setup, hiring and managing teams, project management.

Cost: Though there is no industry data to prove whether offshore centers are cost effective to outsource or do in-house as captive centers, based on unofficial data neither has any significant cost advantage over the other. >>>

India is Outsourcing Outsourcing

Have a look at this article from NY Times: Outsourcing Works, So India is Exporting Jobs.

::

MYSORE, India — Thousands of Indians report to Infosys Technologies’ campus here to learn the finer points of programming. Lately, though, packs of foreigners have been roaming the manicured lawns, too.

Many of them are recent American college graduates, and some have even turned down job offers from coveted employers like Google. Instead, they accepted a novel assignment from Infosys, the Indian technology giant: fly here for six months of training, then return home to work in the company’s American back offices.

India is outsourcing outsourcing.

::
>>>

Why I Hate the Term Outsourcing

By Abhijit Nadgouda, Guest Author

What do you think of when you hear the word outsourcing? I think of something that it is not. Traditional outsourcing is defined as contracting with another company or person to do a particular function. Many of us do this for two primary reasons:

* We give it to the corresponding experts if we do not have the expertise with us.
* We have the expertise, but we do not have enough time to do the task.

This happens across industries and across departments. It helps you focus on your task, achieve the bigger vision better and build a relationship in the industry. It also helps you keep your entity lean and fit without the need to use ad-hoc expansion plans. Overall outsourcing has a value proposition which can help you build your business in an easier and better way. However, recently outsourcing has been flagging another aspect quite vigorously which has overshadowed all its benefits; and all credit to the software industry for this. >>>

IBM: “India Is More Than Good”

At the heels of Apple pulling out of India comes IBM’s announcement that they will triple their investment in India to $6 Billion over the next 3 years.

In the past three years, the company has invested more than $2 billion in India and increased staff from 9,000 to 43,000, becoming the largest foreign employer in the country. India is IBM’s second-largest base of operations, trailing only the U.S., which has 125,000 of IBM’s 330,000 people.

Earlier, Cisco and Microsoft have already announced Billions of dollars of investment commitment into growing their India presence.

IBM has followed the strategy of building mutliple operations in different parts of India, and has large offices in Bangalore, Pune, Gaugaon, Delhi, Mumbai and Calcutta. In the next round of investment, I am sure they will also tap into Hyderabad and Chennai, as well as other second tier cities. The sheer volume of their hiring needs offer them the opportunity to follow
The Team Of Twenty One philosophy.

Recently, a friend of mine came by to brainstorm about his career strategy. With a Bachelors from IIT Bombay, a PhD from Stanford, and several years of work experience in the US, his is a classic profile that feels velocity constrained in the US, but his career could absolutely fly in India, given the country’s hunger for Grade A engineering talent and leadership.

Of late, I have been advising all my Indian friends who are doing engineering careers in the US to go back to India. Interestingly enough, most of them have been in the US for a dozen plus years, and want to only return to a city where they have friends and / or family, and do not have to rebuild a social network from scratch.

I wonder to what extent employers understand and leverage this socio-cultural dynamic!

Apple: “India Is Not Good Enough”

Long time ago, at a supremely formative juncture of his life, Steve Jobs had visited India. It was an experience that had touched him deeply, moved him unexpectedly, and changed him fundamentally.

In light of that, Apple’s recent departure after 2 months of experimentation with an India operation seems rather callous.

No one knows the WHY. I don’t know either. I knew that Sina Tamaddon and Jean Marie Hulot were exploring the option of setting up a development center in India. This scrapped unit is not a development unit, but a call center. Also to be noted is that Jean Marie has since left Apple, one of the several high level departures (along with Jon Rubenstein, Avi Tevanian, Nancy Heinen).

I do have some thoughts on why Bangalore is (was) about the worst location choice that Apple could have possibly made.

Apple is a cult. Employees drink the water that trickles down from the fountain, after washing Steve Jobs’ feet. In Indian religious terminology, this is called Charanamrita (literal translation: the ambrosia that flows from the feet of the Lord). This presupposes the fact that Apple enjoys tremendous employee loyalty. Jobs expects ultimate loyalty from everyone (he offers loyalty to no one, but that’s a different topic).

This culture would NEVER fit with Bangalore’s mercenary Information Technology / BPO workers. They don’t even know how to spell loyalty. They couldn’t care less about cults. Show me the money is the mantra that prevails at the end of the day, and the best Apple could have hoped for, is a 600 person call center with 40%-60% churn.

Against that backdrop, Apple, I suspect, felt lost.

The mistake Apple made, I think, is Bangalore.

Not India.

There are other places in India where people’s emotions run high, loyalty IS valued and offered to those who deserve it. Passion comes before Price. It is there, that Apple could have found its soul connection.

Not in the cultural desert of Bangalore.