Engineering the future: B.V.R. Mohan Reddy, Chairman and Managing Director, Infotech Enterprises; Kevin Dehoff, Vice-President, Bram Bluestein (centre), Senior Vice President, Vikas Sehgal, Executive Director (India Business), Booz Allen Hamilton; and Kiran Karnik, President, Nasscom

ESO. engineering services Outsourcing. Everyone would do well to remember the term. After it services, it enabled services, and new new thing it infrastructure management (fine, remote it infrastructure management), this, ESO, is the new, new new thing. So says a report that has been put out by Nasscom in association with consulting firm Booz Allen Hamilton. How attractive is the opportunity? $40 billion by 2020. A few hours before the report was to be released Business Today got the authors of the report, Bram Bluestein, Senior Vice President, Kevin Dehoff, Vice President, and Vikas Sehgal, Executive Director (India Business), Booz Allen Hamilton, B.V.R. Mohan Reddy, Chairman and Managing Director, Infotech Enterprises, one of India's pioneering ESO companies, and Kiran Karnik, President, Nasscom, to sit down and discuss the key findings. The discussion was moderated by Business Today's Managing Editor R. Sukumar. Excerpts:

R. Sukumar: The first issue I'd like to discuss is people. I don't know if you have seen the paper put out by Vivek Wadhwa, an entrepreneur who now teaches at Duke. He says India doesn't produce as many engineers as everyone thinks it does. At one level, without going into the nuances of either the quality of engineers or the report itself, I thought that would be something that would have a bearing at ESO.

Vikas Sehgal: Wadhwa says China's numbers are very high because the big part of it is the diploma, the two-year school they have, which skew the number in a very dramatic manner. In fact, you look at the numbers he has upfront, they say, India plus the us, is less than China. Keep in the mind that in China this was driven by socialist policies initially which focussed on getting (people) to work in the plants. You need more than that to play an engineering off-shoring game. We guess these numbers are true but for the business we are talking about, of engineering off-shoring, they will have to be modified heavily. When you look at that number, the US has the maximum production of engineers, next is India and China is pretty far behind.

"The Indian manufacturing industry and the ESO industry will go hand in hand as we go forward." Bram Bluestein Senior Vice President, Booz Allen Hamilton

RS: Another layer to this thing about engineers is that all through the 1990s, when the first wave of it services was on, anyone who went to engineering college would have this desire, irrespective of their stream, whether it was mechanical or chemical or electronics, to acquire skills in software and go to work for the software industry. This trend continues even today. Whereas, if you look at the skills required for ESO, which you have spoken of in the report, it is largely core engineering skills in addition to some it skills.

BVR Mohan Reddy: If you look at the curriculum in Indian colleges, there is not so much dilution that has happened in the areas like mechanical engineering, chemical engineering or civil engineering. There is some amount of work that they do in it, but the core competence in mechanical engineering or chemical engineering or civil engineering has not changed.

Some students who get into mechanical engineering do so, not because they cannot get into software engineering but because they want mechanical. But they migrate to it because the job opportunities are more in it. Today with engineering services becoming fairly dominant, people will do what they like to do. They want to design aircraft engines. They want to design cars. They want to get into styling. That is their ambition; not writing code. In the past, this opportunity wasn't there; now it is.

"The concern I have is the desperate need for radical education reform encompassing quality & quantity issues." Kiran Karnik President, Nasscom

Kevin Dehoff: Even in traditional mechanically focussed products, more of the functionality is actually coming from the software and the systems integration aspect. In aerospace, traditional hardware is becoming something like 20-30 per cent of the value of the product, whereas the systems integration and embedded software has become, like, 70 per cent. That is also happening in the automotive industry.

RS: How important is it, from the point of succeeding in ESO, to have a vibrant industry in that particular discipline, catering either to the domestic market, or as is the case with automobile ancillaries, an export market?

Reddy: It is important to have a vibrant domestic sector; that's where you will see more domain knowledge being created, a critical factor. We already have a strong manufacturing industry although it doesn't reflect in our GDP; it was 22 per cent of GDP last year.

Bram Bluestein: I think the best example is your automotive industry. By 2020, India would be one of the, if not the, largest auto market(s) in the world. The two (a local manufacturing industry and the ESO industry) will grow hand in hand as we go forward.

"In India, the enormous domain knowledge is there. But I am concerned at the volume of people required." B.V.R. Mohan Reddy Chairman and Managing Director, Infotech Enterprises

Reddy: Don't just look at the manufacturing space; look at the research and development base that is there in India. The number of public sector research labs and institutions.... That base is available for exploitation today.

RS: If you look at the barriers to ESO, are they going to be very similar to the barriers to BPO? Will there be any other significant barriers?

Karnik: There will be one very important difference. In the IT and it enabled services space, although there is enough research to show there is no correlation and people have gone back and forth, there is some amount of perception that moving work equals moving jobs. In this area it is vastly different. You are very often doing things which are not being done or cannot be done. You are not moving existing work.

Bluestein: In the short term, the incentive for doing this is the economic benefit. But growing global capabilities is the real opportunity. This is not about substitution (moving work from one location to another).

RS: Quite a few transnational companies already have R&D or innovation centres here. Going forward, do you think that is going to be the preferred model? A captive one as opposed to a third-party one?

"The key thing is the O part of the ESO and India is the only country to have perfected offshoring." Vikas Sehgal Executive Director (India), Booz Allen Hamilton

Reddy: We have some very successful independent vendors in it and it enabled services (think Infosys, TCS, Wipro, Genpact, WNS) and the Indian entrepreneur brings a certain amount of value.

RS: Well, in it and BPO, the trend is definitely in favour of third-party outsourcing.

Bluestein: There are really two costs in outsourcing. One is transition cost, and the other is operating cost. In setting a captive you minimise your transition cost, particularly when there isn't a strong vendor community. Over time, the value is in talent and the vendor community should win because it is going to be more innovative and capable; you have to remember how hard it is to maintain the competitiveness of a captive when you are not based in that country. But they are all going to survive.

Sehgal: $1 billion to $40 billion. There's so much to do; we need them both.

"The ESO opportunity is not lost on other parts of the world. We expect to see many entrants coming into the market." Kevin Dehoff Vice President, Booz Allen Hamilton

Dehoff: I actually think it is good that there are multiple models. We are getting to the core of the core here (with ESO), the essence of a company. And there will be issues related to competitive advantage and intellectual property.

RS: Finally, what do you think the one thing working in India's favour in the whole ESO thing, and the one thing working against?

Sehgal: The key thing is the o part of the ESO and India is the only country in the world to have perfected offshoring. What can prevent India? India can prevent India and it has shown itself capable of doing so in the past.

Bluestein: India's fundamentals are really compelling: the foundation in it and it enabled services, the talent, and the global competitiveness. The one concern is that India may underestimate the opportunity.

Dehoff: It is a natural evolution from it and it enabled services to ESO. However, this opportunity isn't not lost on other parts of the world. We expect to see a lot of entrants coming into the market.

Reddy: Talent is the key driver for this industry and that is one thing going for India, the enormous domain knowledge already there. But I am concerned at the volume of people required. A $40 billion opportunity would mean a requirement of a million people.

Karnik: The thing going for us is the technological foundation that has been put down in India starting the 1950s. The concern I have is the desperate need for radical education reform that encompasses issues related to quality and quantity. I don't see that happening in a business-as-usual model.