Sunil Chitale, Senior Vice President, Patni Computer Systems, a global IT consulting and services provider headquartered in India, sums up what's happening with offshore outsourcing--"It's changing dramatically."
Here are seven trends among the dramatic changes that every large enterprise and mid-size business needs to understand when considering offshore outsourcing in 2007.
Trend #1: Service Providers Face Game-Changer Challenges
Challenge: New Competition. "For seasoned companies and new players, the shrinking barriers of the globe are proving to simultaneously be an opportunity and a challenge," states Bret Allinson, Senior Vice President, Global Delivery, HP Services.
Mark Fulgham, Vice President, IT Outsourcing, HP, says "we'll probably soon see the Big 8 or Big 10 of instead of the current Big 5 or Big 6 outsourcers." This change is due to the fact that some pure-plays coming out of India are becoming hybrid players, complementing and competing with some of the traditional players. Fulgham believes the current trend of alliances and acquisitions will continue to grow. "There is a need to bring forward a larger playing field that not only has a services orientation but also upstream application acumen as well," he explains.
But that's not the only competitive play happening in offshore outsourcing. Offshoring is now an integral component of most outsourcing deals, so the big US-based players such as IBM, Accenture, HP, and Unisys (as well as UK-based BT) are scaling up dramatically in locations such as China and India, each adding thousands of people among their offshore resources. Companies looking to offshore service providers can now consider the US- and UK-based providers along with the local providers that are native to a particular country.
"This changes the game dramatically," Chitale comments. "The US-based providers already have a great hook in the US market; have the business relationships and can do the golf-course rounds, etc.; and now they can bring to the table a local country proposition too. So Indian companies are now competing with large companies for services delivered out of India."
But Nikhal Rajpal, Vice President, Everest Research Institute, says the entire global market is up for restructuring. "There is a lot of new competition and a lot of the market is up for grabs." He predicts "the global market will look very different two years from now and offshore players will have a large market share."
Everest Research Institute currently estimates there is around $88 billion in outsourcing deals up for renewal during 2006-2008. "This is a huge opportunity for restructuring with a different set of winners and losers," says Rajpal.
Challenge: Talent Supply Chain. Recent headlines in the US media reacted to NASSCOM reports indicating a potential shortage of talent in India that could be severe in the next four years. Indeed, the industry now faces threatening talent wars.
The impact of the US-based providers puts a strain on the supply chain for talent, Chitale says. "Earlier when we went to campuses for recruiting, we would find someone from IBM or Microsoft there too. But now we find that the Who's Who of the IT world is in India recruiting." Talented Indian workers now have many more employment opportunities.
New provider competition is not the only source of the talent supply chain challenge. Rajpal says the root of the talent war is not just that BPO and ITO are growing very fast in India but that the overall Indian economy is growing very fast at the same time.
"There are hundreds of thousands of new businesses created in India daily--car companies, retail stores, airline and taxi services, companies such as Nike, etc.--causing the need for a huge number of employees and providing a huge number of very good jobs in the country," Rajpal explains. He notes that fewer than one million jobs for India's one billion people are related to outsourcing; similarly, outsourcing accounts for only an approximate US$30 billion of India's US$600-700 billion economy.
"The talent wars are only going to intensify and all the big players now have huge issues with this," reports Rajpal. Thus he says "the big crunch for talent" is forcing providers to look elsewhere, to Tier-Two and Tier-Three cities in India and to Southeast countries such as Vietnam, Thailand, and Kuala Lampur. This is primarily relevant to BPO services, as ITO has for the most part already moved to alternative locations.
"Moving to Tier-Two and Tier-Three locations means the providers' risks will go up," predicts Rajpal. In addition to the poor infrastructure (power, roads, transportation, buildings, etc.), he says "the quality of the talent will drop, so the providers will be forced to invest in training and management in these locations."
"The talent shortage definitely is an issue, and providers have to get smarter about how they deal with this," states Tony Viola, Vice President, Marketing at Patni Computer Systems. He says the critical talent availability challenge can partially be resolved in the area of education.
"Providers are now getting much more involved in the education process within the country," says Viola. "Providers are pressing government to make reforms relative to ensuring that there is a deep talent pool available in the country by relaxing and/or accelerating some of the laws that govern private investment in educational institutions in India."
"We have seen examples of providers partnering with local universities and colleges to introduce curriculum changes," says Anand Ramesh, Senior Research Analyst, Everest Research Institute. "Especially in the smaller cities, where employability levels of the workforce are low, providers are driving changes that improve IT readiness and BPO readiness."
As a result of the talent wars, providers now need to invest in ways to deliver their services so they are not dependent exclusively on people. Many of the larger Indian providers, Viola says, "have business models that depend entirely on manpower to deliver their core competencies. "The ability to deliver more and more services in an automated fashion allows the provider to drive down its costs of operation, passing some of that along to clients as well as improving the provider's margins."
However, Viola points out it are difficult to shift away from a people-based model. "And there is also a struggle in India around social consciousness--having an obligation to put people to work." Smaller companies, he says, can more easily adapt to other delivery techniques.
Challenge: Differentiation. The quickly growing pool of employment opportunities for talented Indian workers presents another challenge for providers. "Indian companies now need to know how to differentiate their companies in order to get more employees and retain them," says Chitale. He warns that attrition rates are high and heavy pressure will be felt on the supply side of talent for the next couple of years as the big players continue to scale in India.
Differentiation of the Indian outsourcers comes into play on another competitive front. Buyers looking to outsource and attending the dog-and-pony shows of potential providers in the US are finding the process is not so simple in India.
"Buyers do what I call the 'pilgrimage of India,'" Chitale says. "They visit six suppliers in six days, go through similar presentations (including the history of Indian outsourcing, etc., six times) where you could delete the provider's name from the presentation slides and substitute another company's name and the presentation would be identical and still work for both companies. The guy at the sixth company on the pilgrimage has a tough job."
In the current hyper-growth mode--where most Indian providers are growing at 30-40 percent--there is a flavor of commodity. A commoditization mind-set is evident when customers ask: "We need 200 people in Java; can you provide them six weeks from now?"
"If we are to maintain our value propositions aside from commodities, we will have to figure out what value we bring and how we're different from each other," states Chitale. "Differentiation is becoming another big challenge right now."
Viola says one way that providers can differentiate themselves is delivering services in a way that is "not exclusively tied to cheap provision of good people."