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

Even 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 Priya Srinivasan.

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 to execution.

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.

	"In chip design, we have a 'follow the sun' notion-locate where the best talent is on a global basis" Ian Bertram, Vice President/Gartner
	"The domestic market is extremely important for India's future as part of the global delivery model" Craig Baty, Group VP & Chief of Research/Gartner
	"If you look at any offshoring-to-India impact, you've to account for the cost differential in manpower" Pranav Kumar, Research Director (Asia Pacific)/Gartner
	"Open source attacks at the business model level pushing developers further up the food chain" Steve Bittinger, Research Director/Gartner
	"Many Indian companies have started building quality into the product rather than just testing it" Partha Iyengar, VP (Research)/Gartner

BT: How did offshoring reflect on BaaN's bottomline finally?

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 markets.

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 cost-saving.

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 delivery model.

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 for you.

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.