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Technology Outsourcing's Next Level

Info-tech firms in India are being hammered by lower-priced rivals. To land more profitable work from U.S. customers, they're reinventing themselves, going from data bucket shops to full-service technology providers.

September 26, 2008
On a dusty, tree-lined road in a suburb of Kolkata (formerly Calcutta), you'll find Tata Consultancy Services.

    It's easy to miss this West Bengal outpost of Tata, which houses one of many IT services units belonging to one of India's largest conglomerates. The company's facilities—two inconspicuous, dark brown towers shoehorned between what look like residential buildings—go almost unnoticed amid the clatter of food hawkers and rickshaws.

    But to many U.S. business executives, Tata Consultancy Services is anything but anonymous.

    The company is one of India's best-known vendors to technology outsourcers, along with Infosys Technologies, Cognizant and Satyam Computer Service. Tata's client roster reads like a who's who of U.S. corporations, including Alcoa, Chrysler, Motorola and Prudential.

    And the list continues to grow.

    Despite the demonization of offshoring by politicians and labor leaders, there appears to be little chance of U.S. corporations weaning themselves off of Indian outsourcing anytime soon. This year alone, American companies will send some $24 billion worth of IT business to cities such as Kolkata, Chennai, Hyderabad and Bangalore.

    Although American companies initially made the passage to India to tap into the country's vast reservoir of low-wage workers, that's hardly the big attraction now. Seeking out the lowest-price outsourcers comes with a full set of pitfalls and trapdoors.

    "One, you may only see very short-lived savings, because as technology changes, all the stuff you're doing needs to be reinvented," says Shaun Coyne, who served as chief information officer for Toyota Financial Services and works now as a private consultant. "Two, your IT operations will constantly be moving to the lowest-cost country, for the simple reason [that] that place is going to be changing over time."

    What's more, other locations—including Eastern Europe and Latin America—often offer better value for simple tasks such as data processing.

    Even those in the India outsourcing sector concede it's hard for them to compete on price alone these days. Part of the problem stems from the remarkable success of these companies. Buoyed by its technology sector, India's gross domestic product, pegged at $1 trillion last year, is soaring, up 9 percent a year.

    With that robust growth, however, the rupee has strengthened mightily versus the U.S. dollar, making India more expensive for American firms. At the same time, local wages have risen sharply—up 15 percent annually over the past three years.

    The result? India's IT workers come cheap, but they no longer come dirt cheap.

    "If it's just about costs," says Coyne, "India is not the place to go."

    To fend off lower-priced rivals, India's outsourcers have reinvented themselves. No longer low-margin, data bucket shops, they now bill themselves as full-service technology providers—"moving up the value chain," as India's National Association of Software and Services Companies put it.

    Assignments from clients can include writing software code that builds core business applications, as well as hardware diagnostics and managing entire business functions.

Looking for ideas
   Outsourcing to India is about acquiring brain power rather than cutting costs, says Allstate's Anthony Abbattista.

    Tata Consulting's 10-year contract with AC Nielsen is typical of the full-service model that India's outsourcers are now touting. The company handles a variety of technology tasks for the ratings specialist, enabling the company to centralize multiple systems and technologies.

    Says Sridhar Bakshi, who oversees one of Tata Consulting's delivery centers: "[Our] whole strategy is centered around a fully integrated services play that looks at a combination of IT services, BPO, infrastructure services and consulting as the key focus area."

    BPO, short for "business process outsourcing," is fast gaining in popularity with corporate clients. BPO now accounts for nearly 30 percent of India's IT outsourcing revenue—with U.S. companies among the biggest customers.

    In some cases, American businesses are outsourcing business processes work after shutting down their own company-owned operations in India (known as captives). In others, they're simply expanding the amount of work they farm out to their outsourcers.

    Either way, research firm Gartner believes India's outsourcing market is growing by as much as 40 percent annually among the U.S. companies it services.

    It's hard to say how the current economic downturn might ultimately affect that projection. But managers at India's top outsourcing vendors see real possibilities in the current problems in the U.S.

    Ashutosh Vaidya, head of Wipro's global practice for business process outsourcing, says business executives typically do two things during a downturn. "They will look for opportunities to help them take out costs, and areas where they can add value. If we can take out one-third of their BPO costs, that's a big deal. If I [demonstrate] areas where Wipro can add business value, that is icing on the cake."

    Existing customers will no doubt zero in on the value-add proposition. Take Allstate.

    The insurance company began outsourcing 10 years ago, setting up a captive operation in Ireland to deal with "Y2K" issues. It began sending IT work to India in 2003.

    "Cost was not what made us look at India seriously," says Anthony Abbattista, vice president of enterprise technology, strategy and planning for Allstate Insurance. "The real reason we looked at India was ... getting other people's ideas and brain force."

    The carrier, which sold $37 billion worth of insurance policies last year, now uses three outsourcing vendors on the subcontinent: Syntel, Wipro and Infosys. Although the Indian outsourcers do handle some simpler tasks for Allstate, such as IT maintenance, they also work on higher-value—and more crucial—functions.

    One example: the processing of premium payments.

    Allstate receives millions of these checks each month. Once that flood of cash is applied to groups within the company, Allstate must reconcile accounts—no small task. Outsourcers in India handle much of the work flow.

    Equally important, Abbattista says, the company's Indian vendors have figured out ways of making the monthly reconciliation chore run more smoothly. "We use them for process innovations, things making us stronger and better at IT procedures."

    Nevertheless, Allstate "co-sources" some of the work to U.S.-based vendors such as IBM. "We've not handed over the whole responsibility to anyone," Abbattista says.

    Indeed, outsourcing veterans say that projects with global applications—a billing and communication system for a multinational bank, for example—may be better suited to a U.S. outsourcer such as IBM, Hewlett-Packard or others that have a strong global presence.

    "They can set up a center for you in South America or Africa," says Coyne. "The Indian companies are just now learning to do that."

    Co-sourcing also lessens the risk of sending sensitive company data or projects out of house. That should be important to finance managers.

    "Any CFO should be concerned with outsourcing. Fiscally, there are savings opportunities, [but] the CFO is in the spot of making sure you don't mortgage the future of the company by making the wrong decision," says Abbattista. "[My] job is to maintain the right amount of control over our IT. Co-sourcing rather than only outsourcing it all gives you a higher level of control and quality; that's why we do it."

    Certainly, getting locked in to an offshoring arrangement with a single vendor can be risky.

    "It depends on the culture of your company and how comfortable you are giving up various aspects of control," says Abbattista. "For Allstate, co-sourcing to make sure that we have high quality in these arrangements is a value that we feel very strongly about."

    It may not be the cheapest way to work, but he says that, for Allstate, outsourcing to India isn't about cost arbitrage.

    "What outsourcing lets us do is keep the strategic work with us."

    That seems to be the modus operandi for scores of U.S. companies—even as they ship increasingly complex work to the subcontinent. "Most companies have found over time that the best method is to "outsource your context and keep your core," says Coyne.

    The idea was likely first hatched at General Electric.

    In the mid-’90s, GE was keen to generate more of its income from outside the U.S. To do that, then-CEO Jack Welch decided that the company would need to acquire and integrate other businesses—and to do that, GE needed standards and sets of processes that could be applied to all the acquisitions.

    So the U.S. conglomerate established company-owned centers of excellence around the globe, placing them under the corporate banner of GE Capital International Services (GECIS).

    Eventually, General Electric spun off a 60 percent share of GECIS for $480 million, selling the stake to two private equity firms, Oak Hill Capital Partners and General Atlantic Partners. The outsourcing specialist, headquartered in India, was renamed Genpact and went public last year in an initial public offering on the New York Stock Exchange that raised nearly $500 million.

    Not all American businesses have been as successful with their Indian captives.

    Dell shut down its hardware R&D center in Bangalore last year. The computer maker relocated that high-end operation to its facilities in Taiwan and Austin, Texas. The year before, Apple shuttered its technical support center in Bangalore—a month after opening it. Citigroup is reportedly shopping all or part of its India-based captive, Citi Global Services.

    Expect others to follow suit. A recent Forrester Research study found that the cost of the average employee working at a captive center in India is $4,944 a month. That number dips to $4,231 for a worker at a third-party supplier. Forrester concluded that more than 60 percent of the current captive BPOs in India are in bad shape.

    Ken Brame, who until recently served as CIO for auto parts retailer AutoZone, believes captive operations make sense only under certain circumstances.

    The size of the operation tops the list. The greater the scale at the captive, the better the chance of reducing selling, general and administrative expenses and operating in the black. If an IT project requires several hundred people or more, setting up an offshore captive in India might be the way to go, says Brame.

Communication still difficult
   If a job can be done by fewer than 100 workers, however, an outsourced development team may well be a better choice. Even in the age of digital connections, Brame says, communicating with employees working halfway around the world can be frustrating. "You can't just jump on a plane."

    He speaks from experience.

    In 2004, AutoZone began outsourcing some of its software development to India—albeit on an extremely small scale.

    He kept his IT design team in-house in Memphis, but began sending some generic software application development to about 10 workers in India, through Infosys. That operation has grown to include some BPO functions, but it is still comparatively small, with just 50 programmers.

    For more sensitive projects, like developing inventory indexing and automation software, Brame set up a "captive near-shore" practice in Chihuahua, Mexico.

    "It was so easy for me to go down there to check on our guys, since we were in the same time zone."

    The time difference between Memphis, Tennessee, and Bangalore, on the other hand, is 10 ½ hours.

    This can complicate things mightily. To keep mix-ups to a minimum, an outsourcer will often assign staff to a client's facilities. Brame says Infosys "sent a few guys to Memphis who stayed at the office late every night to be the communication link between my employees and the outsourcers in India."

    But the joys of proximity cannot be overstated.

    "When we're doing application design [at home], we can hand a project spec to someone in the next cubicle and they'll ask questions," he says. "But if you're sending it off to India, you've got to do a much more thorough job of documenting what you want those vendors to do. That is something that a lot of companies struggle with."

    They're also struggling to find enough IT talent at home.

    There are more technology jobs in the U.S. now than there were at the height of the dotcom boom in 2000. Yet enrollment in IT courses is half what it was eight years ago. Despite a recent rise in the number of engineers graduating from American universities, Brame sees a 20 to 40 percent shortage for tech talent.

    Given the gap, U.S. firms will continue to throw more work to companies in India like Tata—no matter what the headaches.

    "We can't find enough people with the skills we need here, so we have to tap the world economy," says Abbattista. "This is a race for talent."

    Back in Kolkata, they're getting ready for that race. In the farmland beyond the outskirts of the city—in the complex that houses Tata's buildings—construction crews are working feverishly to keep up with the demand for space from technology outsourcers in India. Cranes dot the skyline, with builders putting up steel frames that will soon tower over the landscape.

    The days of blending in appear to be over.