Mar 30, 2003 (07:03 PM EST)
Read the Original Article at InformationWeek
On a recent mild March evening, executives from an IT services firm hosted a reception for customers and analysts at the Westin hotel in Santa Clara, Calif. The exuberant vibe and happy chatter over white wine, crab puffs, and chicken vindaloo created a distinct feeling of déjà vu--just three or four years ago, the same banquet room may well have been the site of a dot-com launch party.
Of course, the host this time wasn't a dot-com making merry. It was Satyam Computer Services Ltd., a technology-services company based in India, celebrating double-digit revenue growth and "a growing presence in Silicon Valley," according to the invitation.
American companies are finding that sending IT work offshore can cut project costs by as much as 70%, a compelling savings in a cost-conscious economy. Indian IT outsourcers including Satyam and its competitors, such as InfoSys, Tata Consultancy Services, and Wipro Technologies, among many others, have reaped the greatest benefits from the trend, honing their business models over the last several years to provide top-quality IT work, while maintaining relatively low costs. Satyam's revenue grew 12% to $343.4 million in the first nine months of its fiscal year ending March 31, while those of Infosys, Tata, and Wipro climbed about 30%.
Now Indian firms, feeling the heat from competitors in other low-cost locales, such as China, Eastern Europe, Malaysia, the Philippines, and Russia, are attempting to add high-end consulting, systems design, and even complete business-process modeling capabilities to their repertoire. Meanwhile, U.S. IT services companies are expanding their offshore sites and directly hiring low-cost staff. And boutique firms in the United States tout the advantages of experienced American IT professionals willing to work for less money, while pointing out obvious security concerns inherent in doing work in a foreign country (see story, "Made In The U.S.A.: Small Firms Tout Cheap Native Talent").
New competition is why Satyam, like other Indian outsourcers, is pushing to develop closer, more strategic relationships with its U.S. customers. "We're moving up the value chain," senior VP Vijay Prasad says. The company wants to encompass a wider range of services that include initial IT consulting, system planning, and implementation. "The question is, how do we maintain supremacy?" Prasad says. "What we need to do is engage right up front in customers' decision making and business planning."
Staff-level programmers don't play a huge part in this strategy--top-level consulting talent does. For example, modeling enterprise resource planning and customer-relationship management systems requires in-depth knowledge of a company's business processes, because the technology and processes are intertwined.
In the past three months, Satyam has hired 35 consultants from the top U.S. consulting firms, Prasad says, some of whom will relocate to India and others stay close to U.S. customers. Consulting services will carry higher price tags, Prasad admits, but buyers will still see substantial savings in programming and application development costs.
Satyam is offering exactly what auto-parts manufacturer TRW Automotive Inc. wants as it contemplates a large-scale project to standardize its business processes on SAP software at facilities around the world. Earlier this month, Satyam opened an office in Chennai, India, dedicated exclusively to the $10 billion-a-year TRW Auto- motive, a customer for more than two years.
Until now, TRW had used Satyam primarily to write code for projects. The SAP deployment is much more ambitious. "It's a very complicated project," Drouin says, requiring extensive planning and consulting and taking 12 to 18 months. "Satyam has tremendous SAP resources in India," he says. "There are people there that we know and who know us and our business processes."
Other IT executives are developing similar strategic relationships with Indian outsourcers. Tata Consultancy's work with Allianz Dresdner Asset Management Group has grown from integration of packaged applications several years ago to the recent planning, design, and implementation of a customized trading system. Tata analysts gained expertise in financial markets by building a similar system for a Swiss company. "You need the expertise to understand your business requirements and translate that into code and IT functionality of systems," says Oliver Bussmann, global IT head for Allianz Dresdner. The project for the U.S. financial markets could segue into a global trading-system project at a cost of up to $12 million. At $4 million, the U.S. project was one-third of what other services companies quoted.
The savings from using offshore outsourcers can mean the difference between whether a project lives or dies. There's still a chance TRW Automotive's big SAP project will get nixed, but the odds that it won't are much better with Satyam involved. "We probably couldn't, or wouldn't, afford this project if we were depending on a traditional consulting house," Drouin says.
U.S. services companies, many of which have been using overseas resources for a long time, aren't ready to concede the offshore market to Indian companies. Late last year, EDS launched what it calls its "Best Shore" initiative, a plan to enhance its worldwide network of operational centers. EDS's goal: to dispatch work to whichever region is best-suited for a particular job. The company plans to launch a state-of-the-art data center in Mumbai, India, this spring and will strengthen its presence in other locations where IT labor is less costly, including Argentina, Brazil, Canada, Germany, Hungary, Mexico, New Zealand, and South Africa. It will have 20,000 employees delivering offshore or near-shore services by next year, EDS says.
EDS executives say the company's geographic breadth gives it a competitive advantage over Indian companies, which have international operations but are concentrated on the subcontinent. "We have a number of customers who would rather go to New Zealand, for instance, than India," because they perceive it as more politically stable and secure, says Dan Zadorozny, EDS's president of application services. EDS's diverse locations, combined with technology that lets it move a customer's project from one region to another with minimal disruption, provide an added safety net, Zadorozny says. EDS generally includes in its contracts the right to relocate operations if a particular locale becomes too politically or economically volatile. It's a move the company has mulled over about work sourced to its Argentine operations, given ongoing economic and labor strife there.
IBM Business Consulting maintains offices in 160 countries, and, like EDS, it trumpets an ability to operate in virtually all corners of the globe. It has done work out of its Indian offices for British Airways and a major insurance company that wanted to move claims handling offshore, but it's also able to satisfy U.S. customers who don't feel comfortable placing operations so far from home. Mark Langlois, an IBM application-management services executive in Toronto, says some customers prefer using Canadian IT workers, even though savings there are about 50% less than outsourcing to India.
India will have a cost advantage for another four to five years, at which point some companies will be tempted to move elsewhere, at least for routine development projects, Langlois says. "China will be successful because it will then have the cost advantage," he says. One drawback: China lacks laws to protect companies' IT intellectual-property assets (see story, "Foreign Intrigue: Continuity Is A Legitimate Concern").
Another cost-effective location for companies that want to diversify offshore resources beyond India is the Philippines. Companies want to avoid "the risk of putting all of their development eggs in one basket," says Manny Rodriguez, president and managing director of the Philippines division of RCG Information Technology, an IT services firm in Edison, N.J. Revenue for his division, which employs 124 IT workers, has grown more than 30% a year for the past three years, he says. Colleges in the Philippines graduate 40,000 computer technology majors a year, most of whom stay in the country and work for annual salaries of about $10,000 to $15,000, Rodriguez says. His employees specialize in technologies such as Java 2 Enterprise Edition, Microsoft's .Net architecture, and Oracle databases.
World Vision International, a Christian relief and development organization, tapped RCG IT Philippines to develop a fund-raising database because of its low price and its location on the international date line. There's a 13-1/2-hour time difference between India and California, where World Vision is located, making it difficult to communicate during working hours. The Philippines is 16 hours ahead. It's early morning there when it's late afternoon in California, making communications more convenient, says Frank Corlette, senior manager of operations and development.
Despite growing competition, training and process-control techniques employed by Indian companies will help them maintain an edge, says C.K. Prahalad, a professor at University of Michigan Business School. In order to overcome doubts about programming quality, Indian companies have relied on rigorous development methodologies--some are certified level 5, the highest level of Carnegie Mellon University's Capability Maturity Model. "In North America, you need 100 people to do the work that is accomplished by 60 people in an Indian shop," Prahalad contends.
In India, "the quality and work ethic are stronger," Tranter says. Allmerica plans to outsource support and maintenance of the bulk of its IT systems, including its PeopleSoft Inc. environment, to Keane's support center in Hyderabad, India. Tranter says Keane ensures business continuity by maintaining backup sites and routinely sending code to servers in Worcester.
Project management remains a major concern when dealing with a company thousands of miles away, a reason many Indian firms are opening U.S. offices. "Rework is more expensive if you don't have access next door," says Jag Dalal, former CIO of Xerox Corp. and United Technologies Corp. and now a consultant to companies dealing with offshore outsourcers. Project-management requirements and the demands of distance cut into the savings offshore outsourcers advertise, Dalal says.
TRW Automotive's Drouin admits he probably gets billed more hours working with an offshore firm, since the distance and time difference create delays in communication. But those inefficiencies are more than offset by the rate savings. And the Web is solving some problems. For a recent project with Satyam aimed at developing software to give TRW visibility into its supply chain, TRW and Satyam workers here and overseas held meetings using Web collaboration software instead of by phone. "The project was very successful, and now we plan to broaden its scope," Drouin says.
Some tech execs are being cautious about how far they'll go, though. United Technologies CIO John Doucette plans to shift more outsourcing development work to India from the United States, to save about $20 million annually. But he says the $28 billion-a-year industrial and military contractor has to retain some in-house app development skills in order to effectively manage outsourced work. "If you've never painted a house, you wouldn't know the difference between a $1,000 job or a $6,000 job," he says.
And proponents face a delicate political issue when trying to farm out entire business processes overseas, even noncore tasks such as billing. Doing so would make sense for Allmerica, but corporate politics may inhibit offshore business-process outsourcing. "It was one thing to tell the business people you're outsourcing technology; it's a whole other thing to say you're sending their business processes to India," Tranter says. "There's a perception that you lose control. I don't think you do, but you do have to diligently manage the relationship."
Vivek Paul, the charismatic vice chairman and president of Wipro, has heard such concerns before, but insists the move to offshore business-process outsourcing is inevitable. "It was the same with application development: 'How could you do that?' they would say. The sound of air going over clenched teeth is natural, but eventually people get over it because it's the logical thing to do." Paul thinks offshore business-process outsourcing could redefine the role of the CIO, from head of IT operations to executive in charge of global delivery of business services. "We're creating an amazing opportunity for the CIO to step up to the plate," he says.
Indian firms have the ambition, talent, and resources to play a major role in business transformation. And they may be the most cost-effective facilitators--the question is for how long. --with John Soat
Illustration by Ken Orvidas