|The Gartner team:
(From left to right) Ian Bertram, Vice President, Gartner; Craig
Baty, Group VP & Chief of Research (Global IT Management Sector),
Gartner; Pranav Kumar, Research Director (Asia Pacific), Gartner;
Steve Bittinger, Research Director, Gartner; Partha Iyengar,
Vice President (Research), Gartner
as the rhetoric on offshoring reaches a crescendo as the US heads
for the polls, companies of all shapes and sizes overseas are only
intensifying their efforts at offshoring. Apart from obvious reasons
such as savings, the compulsions run far deeper, sometimes revolving
around the very business strategies of these companies. IT products,
services and chip design companies, in particular, can't get enough
of India. Business Today put
together a panel of leading analysts from Gartner (the discussion
coincided with Gartner's annual summit) to discuss the extent to
which India has entrenched itself in the mind of global tech corporations
as the preferred outsourcing destination. Excerpts from the discussion
which was moderated by BT's .
BT: In which product categories do you
see the impact of offshoring being felt the most?
Partha Iyengar: If you look at industry
segments and the history of offshoring, the primary beneficiaries
of it services or application outsourcing in the first wave have
been the type A, end-user companies, the GEs of the world; next
have been the software development houses, Oracle, sap; the third
wave has been these companies moving their R&D into India; the
fourth wave has been smaller companies, in some cases, a little
above start-ups, saying that for us to come up with competitive
offerings, offshore has to be a key component of the product development
strategy. The fifth wave is the venture-driven community where the
buzz is that it's very difficult to get funding without answering
the question, what is your India strategy? That's the kind of food
chain playing out there. One enterprise application vendor has a
product for which it is leveraging India, but in the next stage
there's a strong services practice, which it wants to pitch to clients
and compete with Indian vendors. This has put pressure on it to
offshore the services component to India and that's the broad-brush
scene. Ian could talk of what's happening in chip design.
Ian Bertram: You ask the question which
areas is offshoring focussed on, and the first wave has been around
shared services, which are those things within an organisation that
are common across businesses-call centres, help-desks, hr and finance-and
are well-defined processes that can be done overseas. The next wave
will be services from the supply or customer side, which is how
you get into more value services.
Pranav Kumar: Software products started
way back in the mid-80s and BaaN at that time was among the first
to come here. When these companies first came in, they moved low-risk
and low-value-added stuff here, but now they're doing high-level
functional design out of India. A large part of BaaN's latest offering,
the BaaN 6 called Gemini, has been designed here. All finance-related
enhancements to the product are now done in India, from conception
BT: What impact does this have on the
price of the product?
Kumar: It's very difficult to actually
link it back to the price of the product because ultimately whether
the savings should reflect on the price is the company's decision.
Offshoring is not done just to control the price in the marketplace;
there are several other reasons why offshoring is done.
chip design, we have a 'follow the sun' notion-locate where
the best talent is on a global basis"
||"The domestic market is
extremely important for India's future as part of the global
Group VP & Chief of Research/Gartner
you look at any offshoring-to-India impact, you've to account
for the cost differential in manpower"
Research Director (Asia Pacific)/Gartner
source attacks at the business model level pushing developers
further up the food chain"
Indian companies have started building quality into the product
rather than just testing it"
BT: How did offshoring reflect on BaaN's
Kumar: It's not something you can decipher
even from the accounting perspective i.e. their annual reports,
but if you look at any offshoring-to- India impact, you have to
account for the cost differential in manpower vis-a-vis the developed
Iyengar: If you look at the process
capability of what you can achieve in India, many Indian companies
have, for the first time, gone into this notion of actually building
quality into the product as opposed to just testing it and a lot
of the product companies are coming in for that.
Craig Baty: Cost can be taken out and
quality can be improved, but then you do have extra issues of project
management, communication, the skill sets and that adds the cost
back in. So although it might be that an Indian programmer costs
lesser than an American one, there will be an overhead in management.
BT: So, net net, what is the material
impact of offshoring?
Iyengar: If you look at the statistics
of what companies have achieved, then the anecdotal evidence points
to 25 to 60 per cent cost-saving, and that is the risk-adjusted
BT: Can we extrapolate this range of
saving to software products and chip design companies as well?
Baty: You may not get the same risk-adjusted
cost since the level of skill goes up in these segments.
Bertram: In chip design, we have this
notion that started 15 years ago called 'follow the sun'. 'Where
is my best talent on a global basis, whereby I can keep project
management going 24 hours a day.' Many companies at that point started
looking for the best quality people around the world. Look at Intel.
Some of the best quality work has not come out of Santa Clara, its
head office, but out of Israel and India. Many designers have gone
and worked in the Silicon Valley, then they came back and companies
are following them back to their country of residence. They are
following talent, not cost-savings.
Baty: Concentrating on the financials
alone is a completely wrong way to do it. If you are going to start
from lower-level offshoring, then cost-saving is something you look
at. Yes, 12 years ago, outsourcing surveys would look primarily
at cost-saving, but slowly costs went lower and lower on the list
and it has practically dropped off the list of the reasons to outsource
in Asia Pacific since they discovered that cost-saving was probably
number 10 on the list. But what they got was quality, cost control,
predictability and access to skill. As sourcing in various forms
matures, reasons for sourcing change. Services get commoditised
and savings are a given, then you start looking for the differentiators,
which you will find in different locations and that's the global
BT: If we were to approach the issue
from another angle, which is that software and hardware companies
are seeing tremendous price pressure globally, with clients asking
for up to 30 per cent discount, what is offshoring doing for these
companies in terms of easing the pressure?
Iyengar: Hardware is already semi- commoditised
and is being driven almost by price.
Steve Bittinger: Hate the word commoditised,
please say standardised
Iyengar: Fine, standardised. In software,
there are virtual machines coming up that will standardise the software
even more where hardware will become irrelevant, so the cost pressures
in that space are brutal. And then if you look at the impact of
open source on Microsoft and the competitive responses of allowing
source code access to some governments, or at local language light
versions, those pressures are not going away. Now if you try to
put numbers on that, saying (there is a) 40 per cent margin reduction
in different markets, that's very hard. It is safe to say that there
are pressures on software, hardware, even the services side. It's
all one ecosystem.
Bittinger: Even the business model.
The way application software developers operate is under threat
because open source attacks at the business model level and pushes
the software developers further up the food chain.
Iyengar: The other element of the cost
equation is the opportunity cost, especially in services, where
an IBM would say if I don't increase my offshore component, this
client of 20 years is going to give the business to Infosys. So
IBM would say, for me to make it to the shortlist on this deal,
I have to project a strong offshore component of the services. Take
the case of Microsoft, which has announced a light version that
has caused a furore. If they are going to come up with such a version
for India, China or Thailand, it makes sense for them to base some
of the development in these countries at a lower cost point.
Bertram: When we look at the cost of
infrastructure, it's always the total cost of ownership (TCO). The
purchase price and the hardware cost is somewhere between 15 and
20 per cent of the TCO: there are maintenance costs, education and
support, a whole raft of things around the purchase price. If you
then look at the sourcing model, people have focussed on savings
upfront; it used to cost me $1,000 a day per programmer, now it's
costing me $800 per day, now $400, but you've got to look at the
total value of the outsourcing model.
BT: Looking into the longer term with
the global delivery model- won't costs for high-skilled labour go
up? So India won't even be a low-cost destination, then what, what
comes next, is that the end of the India story?
Iyengar: Yes, absolutely, and our projection
for cost-rise this year is 15 per cent. That is a published number
BT: So then India would have to be really
core to the strategy for companies to continue to come here, right?
So how core is India to the global strategies of it MNCs?
Iyengar: If you look at the base of
countries that are nipping at India's heels, there are about 28
that we are tracking that all say they want a piece of this services
pie, which is 75 per cent of the global offshoring market. The biggest
challenges will be that a lot of the lower-end work like coding
and testing will be automated, the bigger need will be people with
mid-management expertise, programme managers, domain experts, designers.
Domain experts is India's biggest weakness; we have not developed
enough of them. And as companies start to move up the value chain,
what they will run up against is, 'hey, I don't want an army of
a thousand programmers. I need 20 architects, 20 project managers
who can manage a $100-or $200-million project'. India just doesn't
have those people. Look at TCS, Wipro or Infosys; they probably
have three people each who they would be comfortable putting in
front of the CEO or board of Citibank or AmEx.
Baty: The domestic market in India is
going to be critical to develop these skills. People who are implementing
for State Bank or the Railways-that's where they will get the next
level of talent pool to compete for value-added services. The domestic
market is extremely important for India's future as part of the
global delivery model.
Bertram: If you look at companies like
Infosys, TCS, you see what they are doing and where they are going.
Why are they expanding into other countries? So that some of their
low-level coding work can be done there. So I as a client am dealing
theoretically with an Indian company, but could actually be dealing
with a Singaporean or a Chinese who is effectively doing the work.
That's a very smart strategy to keep costs down. If they are going
to see a 15 per cent cost-rise domestically, how do they stay competitive?
Bittinger: Some Indian organisations
have achieved CMM level 5 and they stand out on a global scale,
others want to do that, but find it difficult. So over the last
decade, Indian companies have undergone a cultural transformation,
so by teaching and mentoring, they can take on a new role and we
see a few examples of that. In Australia, for example, the ANZ Bank
has an association with an Indian software company that had achieved
CMM level 5 and they sent some of the Australian programmers here
and some of the Indian programmers there intentionally to teach
them the cultural component of doing high quality CMM level 5; similarly,
it's starting to happen in the services arena.