Trend #7: New Process Growth Areas in Offshore Outsourcing
Recent trends highlight three primary areas where outsourcing will quickly grow in offshored processes in 2007 and 2008.
Infrastructure Management. Beyond monitoring Web servers and networks remotely for customers over the last five or six years, there has been little traction in outsourcing infrastructure management to Indian providers in the past (those deals went to US-based providers). But that is changing. Because buyers' trust level of Indian expertise has increased, they now see advantages to moving remote management of infrastructure--including entire data centers--to Indian providers.
To date, though, few Indian companies have jumped on board for this work without a partner. "Buying the facilities, re-badging employees, and running the whole operation is a capital-intensive play that not many Indian companies have ventured into yet," reports Chitale. "But it is happening. An Indian provider may not be able to acquire a customer's data center on its own, but it can accomplish the value proposition jointly with a US partner."
We're in the early phase of this trend of buyers asking the Indian providers to take on infrastructure management, Chitale says, although there were a couple of mega-deals of this sort during the past year.
Back-office IT Platforms. A second area of growth is outsourcing the platforms that run back-office processes. "This is a completely different scenario from just business process outsourcing," explains Chitale. "Customers are saying, 'We want out of IT. We want you to take our business process application and infrastructure and manage it and the licenses, etc. and let us pay for your service per use' ("by the drink"). So we as the provider wouldn't just have people doing the process; we would also own the platform that runs the process."
There are some examples of these types of deals recently, and Chitale believes this trend will continue and produce some mega-deals within the next two years.
Product Engineering. "This is happening out of India and China, and it's an area that is really growing rapidly," states Chitale. What's driving this growth? Companies in today's highly competitive arena know that arriving first at market with new innovative products is a huge competitive advantage. Consequently, companies are looking to shorten their product-development cycle. Chitale explains the value proposition of the offshore strategy: "Clients can introduce products faster because there is more talent working on an idea at the same cost."
"Smaller companies in a variety of offshore locations are exploring ways to speed up the development process, gaining an IP edge and building a knowledge base in their respective offshore locations," says Allinson at HP. "Not weighed down with legacy infrastructure, these companies are delivering products faster with as high or higher quality than the bigger companies and for less cost, which is creating a very aggressive market."
Thus, low-cost labor is a driver for growth in this area, but Chitale comments that "many customers have no problem paying top dollars for top-notch work. This work is very different in that it requires highly skilled people who are focused on innovation and new-product development."
Buyers view this outsourcing strategy as expanding their innovation capability globally. Innovation that used to be sitting in only one place now comes from collaboration of teams that are spread all over the globe developing the same product.
Some providers also reap bounty from an offshoot of offshored product-engineering outsourcing. In this scenario, the provider also supports a client's products that will be introduced in a couple of years. "When their field engineer visits their customer and has a problem, or when the customer calls, we service those calls and solve the problem," explains Chitale.
Viola at Patni says there are three other significant areas of growth in offshore ITO. "High on the list for meeting our customers' demands are investments in Service-Oriented Architecture (SOA), Web services, and business service management," he says.
Business service management is something clients add to the scope to a relationship over time. The provider not only maintains applications but also provides information to the client's business managers about the business transactions enabled by the applications. "Clients need the ability to see and understand their business flow trends that a particular application set represents," explains Viola. "Given their knowledge of the underlying application architecture, providers are in an ideal position to deliver this type of information as well."
According to Viola, this activity has been occurring in the past year and is growing. The fact that buyers are turning over their business service management functions to an Indian provider demonstrates a growing level of trust in offshore providers' capabilities. As Viola says, these types of services indicate a business-oriented relationship beyond a body shop. "Once clients see a clear track record of meeting and exceeding business requirements, they look at us as more of a strategic partner and open up more sophisticated business opportunities for partnering," he says.
Joe Hogan, Vice President of Strategic Outsourcing Programs, Unisys, says the only real issue remaining in offshore outsourcing is "how to do innovation more effectively in that environment." He believes the key will be real-time communications. "As soon as somebody figures out how to economically put in place networks that enable real-time communications in multiple countries at the same time, it will create a real advantage for clients," says Hogan. "Service providers will be able to apply the best intellectual capital real time at multiple locations worldwide to a client problem around application, process, or infrastructure."
Lessons from Outsourcing Journal:
- Because offshoring is now an integral component of most outsourcing deals, the big US-based players like Accenture, HP, Unisys, and BT are scaling up their people resources dramatically in locations such as China and India. This means that companies looking to offshore service providers can now consider the US companies along with providers native to a particular country..
- Because of a huge volume of employment opportunities emerging, attrition rates are high among provider resources in India, creating pressure on the supply of talent. All providers need to better differentiate their companies in order to get more employees and retain them.
- Providers in India are moving to establish operations in Tier-Two and Tier-Three cities as well as Southeast Asian countries. This strategy has risks due to poor infrastructure and lower quality of talent, which will necessitate investments in training and management.
- In the hyper-growth mode India now enjoys, clients are taking on a commoditization mind-set. Providers are facing the challenge of differentiating their services from each other and demonstrating value that is not viewed as a commodity.
- Low-cost labor locations shift as new markets emerge, and chasing low-cost locations can be a cost-intensive way of doing business. Alternatively, value can be achieved by driving optimization through process efficiency and leveraging new technologies
- Buyers face a risk of losing control over their process knowledge when the process resides thousands of miles away. Sarbanes-Oxley highlights the need for companies to fully understand which part of their knowledge resides in the home country and which resides with outsourcers based elsewhere.
- The trend of globalization is changing the service provider workforce composition, and providers need to hire more local teams to meet their clients' expectations.
- Currently, companies are rapidly seeing the competitive advantages of shifting three processes to offshore providers: product engineering, ownership of IT platforms supporting back-office processes, and remote management of US or UK data centers from India.