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Outsourcing: a new landscape

Outsourcing: a new landscape
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First Published: Wed, Mar 26 2008. 12 51 AM IST

Illustration: Stockxpert
Illustration: Stockxpert
Updated: Wed, Mar 26 2008. 08 08 AM IST
For the past few years, Indian outsourcing providers have been flying high. With massive growth in sales and number of employees, some providers have ballooned to the extent that they’re competing directly with global suppliers such as IBM and EDS. Recent rumour even had it that Infosys or Wipro might acquire leading European provider Capgemini.
But the outsourcing landscape has changed in recent months, and, some people say India’s high-flying outsourcing industry is heading for a nosedive. It’s as if the rising rupee, competitive pressure, the emergence of other low-cost locations and the threat of a recession in the US are the would-be four horsemen of the Indian apocalypse.
Illustration: Stockxpert
Well, doomsayers begone. To be sure, the Indian outsourcing industry faces some challenges, but they are surmountable ones. Put simply, India has long offered a compelling value proposition as an offshore location for quality manpower at a low price. But the appreciating rupee has significantly devalued this proposition, as has the availability of other offshore locations—such as Vietnam, China and eastern Europe— that promise similar cost advantages. In response, as Indian providers seek new ways of providing value, some have acquired smaller companies in the US and Europe. These acquisitions—including, for example, Wipro’s 2007 acquisition of the US-based Infocrossing—may expand providers’ reach or improve their infrastructure, but they will also impact providers’ margins.
Meanwhile, the downturn in the US market is prompting Indian service providers to look elsewhere for new business, lest they put all their eggs in one fraying basket. This overdependence on the US is a threat for providers such as Cognizant Technology Solutions, which derives more than 80% of its revenue from North American customers. Though Cognizant is based in New Jersey, most of its software development centres and employees are in India.
These challenges rightfully beg some questions about the future growth of India’s outsourcing industry. Can Indian providers compete on factors beyond cost? Can they overcome the slowing US market? Can they successfully integrate the companies they’re acquiring? Are they equipped to expand to other markets such as Europe or the Asia-Pacific? The answer to all of the above is yes, as long as they make some significant adjustments to adapt to the changing landscape.
Instead of immediately pushing the it-must-go-to-India card, providers should explore setting up delivery centres in locations such as China, eastern Europe and Latin America. To date, TCS, Infosys, Wipro, Satyam, Cognizant and HCL are among the few Indian providers that have ventured into this kind of “global sourcing”, showing how their expert practices honed in the highly competitive Indian markets can be exported to other locations. The stronger their presence in various locales, the better these providers can respond to customers’ demand for new destinations.
At the same time, Indian outsourcing providers must reduce their dependence on the US by seeking new customers in new markets—namely, the Europe and Asia-Pacific. Many providers have begun this task by opening offices in various countries, but they’re often attempting to replicate the same vertical-based approach they used in the US— which is to treat Europe as one large, integrated, region— and this may not work. While the US is essentially one big market, Europe is a mixture of many, each with different cultures, languages, currencies, industrial relations and regulatory environments.
Therefore, successful market entry requires more than industry expertise—it requires an understanding of the local business environment. To develop a local presence in European markets, while competing effectively with the global providers already established there, Indian providers should explore a country-by-country strategy for business development, as TCS has done successfully in some regions.
It all boils down to changing the value proposition offered by Indian outsourcing providers. Going forward, the proposition has to be about more than cost. It must include an understanding of customers’ business and regional environment. Additionally, and regardless of market, the Indian outsourcing industry may improve value by providing services that are higher on the totem pole. These services, which require specialized knowledge beyond process expertise, could include consulting, research and development, intellectual property services, or even creative concept development for marketing and advertising.
Looking ahead, competition for Indian outsourcers will only intensify as outsourcing service providers become more global. To succeed in markets new and old, Indian providers will need to look beyond what has worked for them in the past and embrace new ways of getting business and providing value.
So, when it comes to the Indian outsourcing industry, the sky isn’t falling. But it may start to look different.
Sridhar Vedala is managing director, global sourcing at EquaTerra. Comments are welcome at theirview@livemint.com
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First Published: Wed, Mar 26 2008. 12 51 AM IST