Indian BPO exports blazing

Source: IRIS (22 August 2006)

India has been witnessing a boom of sorts in the information technologies-enabled services (ITES) sector.

Jairam Ramesh, Minister of State for Commerce & Industry gave this information in a written reply to a question raised by Jyotiraditya M. Scindia in Lok Sabha today.

The exports for 2005-2006 have been USD 6.3 billion, as compared with USD 5.2 billion for 2004-2005.

The government has taken various steps to promote the growth of IT software and services industry, such as automatic approvals for all foreign direct investment proposals relating to IT sector, reduction in peak customs rates, abolition of customs duty on Information Technology agreement (ITA-1) items, setting up of Special Economic Zones (SEZs), allowing income-tax exemption on export profits to software technology parks (STPs)/export oriented units (EOUs), etc.

As per NASSCOM, the share of large contracts won by Indian service providers has increased from 1% in 2003 to 5% in the first half of 2006. Some of the recent big deals have been won by Hindustan Computers Limited, Infosys, Satyam, TCS and Wipro.

Indian-Headquartered Offshore Service Players and Their Edge

August 13, 2006
Sadagopan S

Forrester's Stephanie Moore writes that major global service providers continue to lose ground to large Indian firms, especially in the application services market. She finds that the tier one Indian providers have continued to thrive while most legacy service providers have posted minimal to negative growth and goes on to assert that Indian firms will continue to grow — and not just because they are a lower-cost option but they have caused a fundamental and structural change in the service provider/client relationship.

More importantly, she nails the fact that offshore providers have taught clients to expect transparency, efficiency, and accountability in service delivery. Stephanie, well known in the analyst community/industry for her superior understanding of the Indian offshoring phenomenon earlier wrote how Accenture & Cap Gemini are scaling/distributing/perfecting their global delivery models.

Better delivery is ensuring that Indian-headquartered companies are growing better than the global majors with offshore presence says this article. Due to their focus and operational efficiencies, Indian headquartered vendors are winning more deals than traditional players. Gartner's Partha Iyengar is quoted therein in support of this observed trend.

A few months back, while acknowledging the impressive ramp up of offshore presence of global majors, I wrote that more and more opportunities are beginning to get won in large numbers and most of the Indian big players are anyway hiring Big Six veterans to help strategise better to go after bigger deals.

An acquisition of the big players may be the final assault on the dominance of Big Six - but this could mean that the Indian companies may need to have a different mindset to manage - (with limited margins and more longterm in their outlook).It may disrupt the traditional economics of the Indian players, but nonetheless would be a move much needed in time.

Infosys in their recent analysts meet again emphasized that acquisition for scale is not an approach aligned with the disruptive business model for the offshore players but niche/special expertise may be the drivers for acquisitions. Certainly, I expect that at least one/two acquisitions would be made by Indian players in the mega deal outsourcing players space in 2006/early 2007. This is possible, as adaptability and speed of operations have always characterized their growth in the last decade - the important thing is to not lose sight of humongous opportunities that lay in front and go after them as aggressively as they used to do while growing.

It's still not game even - the gap may seem to be narrowing but even then, Indian HQ players have a lot more advantages sitting on their side. This is not to underrate the significant strides that multinational players are making with their India-centric plans. The collective share of the offshore players business in the global outsourcing industry is still very small, but they are gaining marketshare rapidly. The services industry is by itself a very different type of industry governed by an entirely different set of drivers.

S. Sadagopan, heads consulting and eBusiness for Satyam in the Asia Pacific, Middle Eastern and African markets based out of Singapore. He has led several consulting and technology transformation engagements covering multiple industries cutting across a wide variety of technologies around the world. His blog is focused on emerging technologies & trends. These are his personal views.

KPO: India's the Eldorado!

It’s good news for Indian knowledge process outsourcing (KPO) firms. India is the most attractive destination for KPO activities, says a study by independent research company Asset Management in collaboration with Kelly Services. The study shows India will have a higher growth rate in KPO segment of 45% compared with 25% in the BPO segment. The latter will, however, remain the lead revenue earner and job creator due to the volume nature of this industry.

Ms Achal Khanna, country general manager, Kelly Services India, said: ‘’India still maintains the competitive advantage for providing the combination of the most cost-effective and high quality manpower. This is India’s strength in the off-shoring business.’’

The whitepaper focusing on India said, “Thanks to its competitive salaries (< 40% of USA); proficiency in English (70-plus million people); large and competent pool of quality professionals (nearly three million new graduates every year), India is the most attractive KPO destination.’’

India is expected to achieve a very high growth rate in all the technically advanced segments of the KPO industry with data and market research along with R&D in medical/pharma constituting 50-plus % of KPO business in India. “KPOs in India have the capability to compete on equal footing with the best in the world on process and technology,’’ it said.

The KPO white paper 2006 says the outsourcing business, which started with BPO, is now propelling the outsourcing of knowledge process work also. The move up the outsourcing value chain to KPO is complementary to the BPO business and not contradictory where BPO is processbased and KPO is the next step in the business (knowledge-based).

Ms Khanna said, “Unlike BPO, where the recruiting process is relatively simpler and aims to check voice, accent or data entry & attitudinal skills, KPO recruiting has to be much more complex as it also involves evaluation of domain knowledge, intelligence , analytical and data mining skills, decision-making abilities, conceptualising skills, verbal and written communication skills, attitude , ability to work in teams.’’

Outsource your engineering work to low cost countries

Within the European engineering community there is a general awareness of the growing economies and engineering capability in countries such as India and China. Often engineering companies see this as a threat to their business, as they fear that ‘copies’ of their own products will be manufactured more cheaply to undercut their own, or genuine alternative designs will be produced at a lower cost by using cheaper labour.

More progressive manufacturers see things differently; they want to sell into the growing markets, set up production facilities to take advantage of lower labour rates, or sub-contract assembly operations to companies in these countries to reduce overall costs.

In many cases European manufactures only think in terms of the manufacturing and assembly side of the business, but the engineering capability of countries such as India and China is now such that there is no reason why elements of design and development should not be moved abroad. The question, in that case, is which route to take? Large companies may simply set up a subsidiary and recruit local engineers, or acquire an existing engineering operation in its entirety. Joint ventures with local engineering companies are also possible. But all of these options carry risks and management challenges.

For those companies prepared to take a medium- to long-term strategic view, there is another alternative. Quest is a company incorporated in the USA that has a growing number of offices in Europe, plus others in India, China and Japan. The company works in the fields of aerospace, power generation, oil and gas, automotive and industrial engineering to provide cost-effective, hassle-free engineering resources. Once an agreement is in place, Quest creates a team of engineers and provides them with the necessary facilities, IT (information technology) equipment and software. Furthermore, Quest can also call in additional resources to cope with short-term peaks in the customer’s workload. The customer simply pays an agreed fee, and Quest manages all aspects of recruitment, training, facilities and IT.

Services provided typically have a bias towards 3D CAD modelling, but the level of expertise also extends as far as FEA (finite element analysis), CFD (computational fluid dynamics), design optimisation and design for Six Sigma. Further downstream in the development process, Quest’s engineers can also look after rapid prototyping, the design, fabrication and operation of test rigs, and the creation of technical publications. The aim is to allow the customer to focus on their core activities and let Quest perform the non-core engineering tasks. For some this means Quest will be involved in – or take full responsibility for – concept design and development at one end of the process and, at the other extreme, tooling design, and identifying, qualifying and managing relationships with tooling companies and low-cost component suppliers and manufacturing organisations.

Ajit Prabhu, co-founder and CEO of Quest, and a Six Sigma Green Belt certificate holder, says: “Customers usually start working with us on the mainstream design and development activities for new and legacy products, then branch out from there. What is a core activity for an engineering company today will be non-core within five years. Usually we start by providing low-level support to customers with their core activities, and then gradually take on full responsibility as those activities are no longer seen as core to the customer’s business. In the eight years since Quest was founded, our main customers have all followed this trend. Other companies have only used us as a tactical resource, but we prefer to work closely with customers in a strategic partnership; that way the customer gains the most from our approach to Global Product Development” (Fig. 1)

Teamwork

Quest will typically build a team of around 20 full-time engineers for a customer. However, to maximise the return on investment in infrastructure, the staff work in two shifts. Depending on the geographical location of the customer and the Quest office, this can also enable the customer's engineers to send a request for an engineering task to the Quest office one afternoon and have the result waiting for them when they return to their desks the next morning. Moreover, the two-shift working pattern can also help to reduce development timescales.

But the main reason for using global product development (GPD) is cost reduction. Ajit Prabhu comments: “In a project to develop an inlet plenum for a gas turbine (Fig. 2), the USA-based customer undertook the conceptual design phase and we worked alongside the customer on the detailed design. We then took responsibility for performance enhancement, design optimisation and preparation of manufacturing drawings. Quest worked with the customer on vendor qualification in the USA and China, and field support in the USA. As a direct result of our input to the project, design costs were reduced by 50 per cent, Six Sigma saved a further 8 per cent on material costs, and manufacturing costs were 30 per cent lower. These are figures taken from a specific project but, as a guide, customers can expect to reduce product development costs by 30 per cent, and 50 per cent is achievable when maximum use is made of the capability available.”

For companies that might currently be struggling to shave 5 or 10 per cent off their product development costs, the potential for saving 30 per cent or more through GPD partnerships is very attractive.

Ajit Prabhu says: “We currently have around 60 customers, 15 of which are ‘core’ customers that make extensive use of what we can provide. Most of our customers have turnovers ranging from USA$2billion to USA$20billion. Pratt & Whitney, GE, Danaher, Smiths Aerospace, GM, Caterpillar, Toshiba, Honda, Nuovo Pignone, Heico Corporation and Sequa Corporation all use Quest’s services.”

In order that Quest can continually deliver the required resources, quarterly reviews are used to predict the numbers of engineers that will be needed in the future and, most importantly, the skills that they will need. Clearly there is a limit to the number of experienced engineers that can be recruited locally, so Quest has worked with six engineering colleges in India to establish Centres for Advanced Design and Manufacturing.

As well as the engineers that work in Quest’s offices to meet the base load requirements of customers, engineers can also be located in Quest’s other global offices to assist with tactical support. For instance, there are currently around 35 engineers based in offices in Florence, Italy, and others in Bristol and Nottingham in the UK. Approximately 50 engineers in Quest’s USA offices are currently providing tactical support for military programmes. Additional engineers are occasionally deployed to work on the customer's site for short-term projects, some of which may be local while others could be from Quest’s pool of engineers in India.

Ajit Prabhu comments: “Globalisation is here to stay. Around 60 per cent of our revenues currently come from North America and approximately 30 per cent from Europe. This figure will grow, as we are opening offices in Europe at the rate of one per year. Last year we set up an operation in Italy, and this year we will do the same in Germany. Clearly our continued expansion depends on our investment capability and pipeline customers, but we see major growth potential in Western Europe.”

Resistance to outsourcing

Companies that are new to the idea of GPD often have concerns that have to be overcome before they are comfortable with global outsourcing of product engineering. Quest finds that new customers often have little or no experience of working remotely and therefore have to introduce new management processes. Indeed, some customers have never outsourced any engineering tasks, even locally, which makes GPD a major step to take. Nonetheless, as Ajit Prabhu explains: “The transition is made as simple and painless as possible. We help customers to put the necessary management procedures in place and we encourage them to have a single point of contact – an account manager – through which communications are channelled with the corresponding remote account manager. Pilot projects are then identified, and the remote account manager takes responsibility for ensuring they are delivered to the customer’s satisfaction. Process improvements are identified and implemented at the pilot stage, so the outsourced functions can be revised or enlarged, based on the developing partnership. Once the processes and communications channels are proved to be working well, the scope of the outsourcing can be gradually increased and developed.”

Another fear-factor for some customers is the protection of intellectual property (IP). Ajit Prabhu is keen to emphasise the importance his company places on this: “Quest is a USA-incorporated company with 100 per cent owned subsidiaries in India and China. We also have local subsidiaries in the UK, Italy, Germany and Japan, and we have established legal entities in these countries to ensure customers have the comfort of doing business under local jurisdiction. We protect customers’ IP first through signing and abiding by documentation requested by them, such as non-disclosure agreements or proprietary information agreements. Further measures are taken as required by particular customers. This might include locating the Quest team in a standalone facility, creating a distinct, separate IT infrastructure that restricts access to the rest of Quest through a customer-approved firewall, and restricting physical access to only those people who are supporting that customer. In addition, non-compete restrictions can be applied to ensure engineers are not rotated to other Quest teams supporting competitor customers with similar projects.”

With rigorous protection of IP, the ability to react fast, and two-shift working that can help to reduce development times, it might seem that GPD could also be appropriate for manufacturers of consumer products. However, Ajit Prabhu feels that Quest’s approach to GPD is not a good fit for this sector: “Consumer product development is a very secretive business, and it is not always clear what the levels of investment are. But if you look at the dollar spend on research and development, it is much lower than in high-technology industry. We can therefore make the biggest difference in industries where a larger proportion of turnover is devoted to research and development – hence our focus on the high-tech sectors” (Fig. 3).

For companies that have decided that GPD is the way forward, a partnership with an organisation such as Quest may be the only real alternative to establishing a wholly-owned engineering centre in, say, India or China. Ajit Prabhu believes that outsourcing the engineering functions rather than managing a subsidiary offers a number of benefits.

Engineering companies in Europe that are looking for ways to reduce product development costs, that see the benefits of moving from a fixed-cost model to a variable-cost model, and that want to improve flexibility and get products to market faster, may feel that establishing a strategic partnership with a GPD service supplier could be the best way forward. While GPD is unlikely to deliver a return on investment in six months, it has the potential to make a substantial difference to profitability in the medium to long term.

Fig. 1. Ajit Prabhu: “Globalisation is here to stay, and we see major growth potential in Western Europe.”

Fig. 2. In a project to develop an inlet plenum for a gas turbine, Quest worked with the customer to reduce design costs by 50 per cent

Fig. 3. This graph illustrates how costs are apportioned in an engineering development project and where GPD is applicable.