Ripples from the U.S. subprime mortgage crisis have reached India's back-office outsourcing sector, where mostly smaller firms are feeling the pinch as U.S. companies cut back or stop some spending on services.
Already struggling with a stronger rupee and rising wages, the fear for outsourcers is that the subprime woes will spread, although larger players such as Infosys Technologies say this could open up new opportunities.
"The key issue here is the number of challenges being faced at the same time," said Atul Vashistha, chief executive of U.S.-based outsourcing consultancy firm neoIT.
"The question is how do they handle the exposure to a slowdown in the financial sector as the subprime woes spread to their other financial businesses." Bangalore-based iGate Global Solutions Ltd (IGAT.BO: Quote, Profile, Research), a mid-sized outsourcer, has seen its income from U.S mortgage companies drop to 7 percent of its revenue in the June quarter from more than 10 percent in the December quarter.
"This has come like a second wave. It started in February-March and after that it kind of died down. Now it has picked up, which is of course a little concerning," iGate chief Phaneesh Murthy told Reuters.
iGate's clients include GreenPoint Mortgage Inc, a unit of Capital One Financial Corp which said on Monday it would shut the wholesale mortgage unit due to the downturn.
Last week, India-based outsourcing company WNS (Holdings) Ltd lowered its fiscal 2008 outlook as work stopped coming from U.S. mortgage lender First Magnus Financial Corp, which closed funding home loans and taking mortgage loan applications.
Currently the problems were confined to a small sector and there were no signs of a broader slowdown in the financial sector's technology spending, said iGate's Murthy, whose company offers services such as loan processing and helpdesk facilities. "However, as a general philosophy what has happened in the past is that when subprime goes, prime tends to follow with a few months lag. That's a concern because if the prime follows then it's a problem," he said.
The back-office firms have thrived providing western firms with services such as insurance claims processing, payroll management and answering customer queries. Driving the boom is a large, skilled -- and cheap -- English-speaking workforce.
In the year to March, back-office services exports grew by a third to $8.4 billion and they are projected to rise to $11 billion in the current financial year, according to the National Association of Software and Service Companies.
UBS Investment Research said in a report that if weakness in the U.S. mortgage sector spread through the financial services sector and led to a U.S. recession, then discretionary spending on services provided by companies such as Infosys would be hit.
However, Infosys BPO, the company's outsourcing unit, saw opportunity where others saw a threat. "We are not too concerned about this subprime mortgage impacting our processes," said Amitabh Chaudhry, chief executive of Infosys BPO.
Chaudhry said the key factor that drove the outsourcing boom -- a need to cut costs -- would be even more prevalent in any economic downturn. "I'm not saying that should happen, but if it does happen then I think it's not a negative, it's positive."
Friday, August 24, 2007
Offshore Software Outsourcing Services Push by India
Offshore Software Outsourcing Development is sector, in which India willing to take action allowing rich nations greater access by offering them good valuable services. These Indian companies, with their advanced expertise and huge development teams, are formidable competitors for domestic firms, which usually have only hundreds of people on staff. By means of that, these firms are providing valuable services to their global clients to survive in International market of Offshore Software Outsourcing. India is biggest market for Offshore Software Outsourcing services, the country like US, has a capital of 65,000 on such workers under its H1B visa programmed, with the majority going to India.
Fifty percentage of India's gross domestic product linked to services such as Offshore Software Outsourcing, retail and banking, developed countries are keen to tap the now limited sectors. By taking advantage of this India is pushing its comparative advantage in offering low-cost services by making concessions on agriculture to get more access for its technical workers abroad.
In the last WTO round of talks held in Qatar in 2001 have floundered, with developing countries including India arguing that government support to European and US farmers artificially depresses prices, effectively forcing their produce out of export markets. Almost two-thirds of India's workforce is linked to agriculture. “Politically, it's not so easy to push for a deal on services unless there is a breakthrough on agriculture though most people would agree that India would benefit from opening the services sector in field like Offshore Software Outsourcing Development.”
As far as concerned to competition for Indian Software Outsourcing Industry the China is next to it by offering the same services. Chinese software Outsourcing companies are looking to speed up their development in a bid to grab a larger slice of the global IT market and to fend off threats from their Indian counterparts.
In whatever way, jobs will move out at a higher pace than what we think. According to consultancy firm Research, 3.4 million US service-sector jobs are expected to have moved overseas by 2015. Observers say one-ninth of the world's service jobs could be done from any location. So it would be great opportunity for country like India to provide their services world-wide. India has repeatedly urged Western nations to make a commitment not to enact legislation that prohibits the off shoring of call centers and Software Outsourcing Development.
The classic reasons for Offshore Software Outsourcing is to provide services like reduced costs, improve quality, save management time and to effect transformations. Because a customer wants these, India provides these kinds of services better than anybody in world.
Wednesday, August 22, 2007
India needs education push to stay ahead of China in IT
India must make a huge push in education and infrastructure to ensure it is not overtaken by China as a global outsourcing destination, a top industry body warned on Tuesday.
China is unlikely to surpass India "in any significant manner over the next three to five years," said Kiran Karnik, president of the National Association of Software and Services Companies, or Nasscom.
"When I look in the rear view mirror, I don't see anyone there yet but I know they are out there and that they can move very fast... China must not be ignored," Karnik told reporters in New Delhi.
China, the only other country with a population of over one billion people, has come a long way in establishing itself as a destination for information technology sourcing with government and industry working towards increasing the talent pool and improving the regulatory environment, Karnik said.
"While India continues to be the most favoured destination by far" for global business process outsourcing, "we need to ensure we maintain this position in the years to come," he said.
"This will require a favourable policy and tax environment, a huge thrust in education and human resources and vastly better infrastructure," Karnik said.
The Asian Development Bank last month noted that education in India was lagging seriously behind its rapid economic growth with only 12,000 training and vocational institutes, compared to half a million in China.
India, which has the largest pool of English-speaking graduates outside the United States, who are willing to work for salaries far less than those paid in the West, has become a world leader in IT outsourcing as Western firms have sought to cut costs by moving many of their operations overseas.
Outsourcing has been vital in helping drive India's economic boom.
India's IT software and services revenues totalled 30.2 billion US dollars in 2006, up from 5.8 billion US dollars in 2000, with growth being driven by exports.
China trails far behind with IT software and services revenues totalling 12.2 billion US dollars in 2006, but that is up from just 2.4 billion in 2000, Nasscom said, with growth still driven by its domestic market.
"We know China is moving ahead very rapidly" thanks to its "systematic and planned approach to rapidly developing key sectors of its economy," its substantial domestic market and sizeable educated workforce, Karnik said.
"They are learning English at breakneck speed," he added.
The government in Beijing is extremely keen on promoting information technology and business process outsourcing, Nasscom added in a report on China's IT software and services industry.
Leading Chinese firms have reported average growth rates of 40 to 50 percent over the past few years and are beginning to receive a steady stream of business enquiries from Western customers, the report said.
India's outsourcing success has brought growing competition not only from China but from other nations including South Africa, Vietnam, South Korea and Mexico.
Karnik said the two Asian giants could learn from the experiences of the other, with infrastructure development strong in China and standardisation of quality a key asset in India.
Even if China catches up significantly, Karnik said he believed it would not hurt India in a major way.
"The global outsourcing phenomenon will only grow. There's going to be so much demand the only constraints will be supply-side constraints, not market share constraints," he predicted.
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Nasscom: China cannot outdo India on outsourcing
India will remain the most preferred destination for the global outsourcing business ahead of China even though the Asian giant is making fast strides in the area, says a major Indian lobby for the services sector.
China's educated workforce is growing rapidly and its government is supporting the growth of the outsourcing sector by providing incentives and fiscal support, says the National Association of Software and Service Companies (Nasscom).
But it is unlikely to catch India's lead in global outsourcing operations for the next 3-5 years as currently the IT software and services sector accounts for a just 0.5 percent of the country's gross domestic product, it said.
"India continues to remain the most favored destination by far for information technology (IT) and IT-enabled outsourcing. But we need to ensure that we maintain this position in the years to come," said Nasscom president Kiran Karnik.
"This will require a favorable policy and tax environment, a huge thrust in education and human resources and vastly better infrastructure," Karnik told a press conference here while releasing the report on China's IT industry.
Beijing, in its aggressive effort to boost the industry, has initiated as much as 10 million programmes with which it is aiming to promote 11 cities as key bases for undertaking offshore services.
The Chinese government, under its ministry of commerce, has also created a specific fund for providing specialized training to some 400,000 university students over the next five years, the report said.
"Each month we host delegations from China which seek to learn from India. India too must learn from China's experiences," Karnik said.
"China's systematic and planned approach to rapidly developing sectors and its strong focus on education and infrastructure offer key learnings that may be usefully adapted to the Indian context."
The Chinese software and services revenues have grown from $2.4 billion in 2000 to $12.3 billion in 2006, an increase of 31 percent. The industry is expected to grow to $28 billion within the next three years.
China's educated workforce is growing rapidly and its government is supporting the growth of the outsourcing sector by providing incentives and fiscal support, says the National Association of Software and Service Companies (Nasscom).
But it is unlikely to catch India's lead in global outsourcing operations for the next 3-5 years as currently the IT software and services sector accounts for a just 0.5 percent of the country's gross domestic product, it said.
"India continues to remain the most favored destination by far for information technology (IT) and IT-enabled outsourcing. But we need to ensure that we maintain this position in the years to come," said Nasscom president Kiran Karnik.
"This will require a favorable policy and tax environment, a huge thrust in education and human resources and vastly better infrastructure," Karnik told a press conference here while releasing the report on China's IT industry.
Beijing, in its aggressive effort to boost the industry, has initiated as much as 10 million programmes with which it is aiming to promote 11 cities as key bases for undertaking offshore services.
The Chinese government, under its ministry of commerce, has also created a specific fund for providing specialized training to some 400,000 university students over the next five years, the report said.
"Each month we host delegations from China which seek to learn from India. India too must learn from China's experiences," Karnik said.
"China's systematic and planned approach to rapidly developing sectors and its strong focus on education and infrastructure offer key learnings that may be usefully adapted to the Indian context."
The Chinese software and services revenues have grown from $2.4 billion in 2000 to $12.3 billion in 2006, an increase of 31 percent. The industry is expected to grow to $28 billion within the next three years.
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Tuesday, August 21, 2007
IBM, Allianz In New $330 Million Outsourcing Agreement
International Business Machines Corp.IBM$330 million , seven-and-a-half year outsourcing agreement with Allianz SE
The companies said
Allianz's Fireman's Fund Insurance Co. had previously outsourced some functions to
The agreement reflects about
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Preet Chandhoke
Defense Agency Proposes Outsourcing More Spying
The Defense Intelligence Agency is preparing to pay private contractors up to $1 billion to conduct core intelligence tasks of analysis and collection over the next five years, an amount that would set a record in the outsourcing of such functions by the Pentagon's top spying agency.
The proposed contracts, outlined in a recent early notice of the DIA's plans, reflect a continuing expansion of the Defense Department's intelligence-related work and fit a well-established pattern of Bush administration transfers of government work to private contractors.
Since 2000, the value of federal contracts signed by all agencies each year has more than doubled to reach $412 billion, with the largest growth at the Defense Department, according to a congressional tally in June. Outsourcing particularly accelerated among intelligence agencies after the 2001 terrorist attacks caught many of them unprepared to meet new demands with their existing workforce.
The DIA did not specify exactly what it wants the contractors to do but said it is seeking teams to fulfill "operational and mission requirements" that include intelligence "Gathering and Collection, Analysis, Utilization, and Strategy and Support." It holds out the possibility that five or more contractors may be hired and promised more details on Aug. 27.
The DIA's action comes a few months after CIA Director Michael V. Hayden, acting under pressure from Congress, announced a program to cut the agency's hiring of outside contractors by at least 10 percent. The CIA's effort was partly provoked by managers' frustration that officials with security clearances were frequently resigning to earn higher pay with government contractors while performing the same work -- a phenomenon that led lawmakers to complain that intelligence contract work was wasting money.
"Mind-blowing," was the reaction of Rep. Jan Schakowsky (D-Ill.), a member of the House Permanent Select Committee on Intelligence, when she learned of the DIA proposal. In a telephone interview, she described it as "definitely something to be concerned about."
In its notice, published on a procurement Web site, the DIA said that "the total price of all work to be performed under the contract(s) will exceed $1 billion," adding that the tally "is only an estimate and there is no guarantee that any orders will be placed."
A DIA spokesman, Cmdr. Terrence Sutherland, said this week that "this is the first DIA contract of its type specifically intended for the procurement of intelligence analysis and related services." He said the primary purpose of the proposal is to ensure that adequate outside support is ready to assist the DIA, as well as Army, Navy, Marine and Air Force intelligence centers and the military's overseas command centers.
In May, Schakowsky and Rep. David E. Price (D-N.C.) sponsored an amendment to the 2008 intelligence bill that requires the Defense Department to compile a database of all its intelligence-related contracts. The aim, Schakowsky said, is to force a review "of what contractors are doing and, importantly, whether contractors are performing inherently governmental functions."
Some activities, she said, are so sensitive that "if and when they are done," it may not be appropriate for the government to "contract these activities out."
Price asked during the debate whether contractors should be involved in intelligence collection and analysis, interrogation, and covert operations, or whether those activities are so sensitive that "they should only be performed by highly trained intelligence community professionals."
In a statement Friday, Price questioned whether "a contract award of this scale is consistent with the DNI's commitment to reduce the alarming portion of the intelligence budget that goes to private contractors." (DNI refers to the director of national intelligence, Mike McConnell.)
The DIA is the country's major manager and producer of foreign military intelligence, with more than 11,000 military and civilian employees worldwide and a budget of nearly $1 billion. It has its own analysts from the various services as well as collectors of human intelligence in the Defense HUMINT Service. DIA also manages the Defense attaches stationed in embassies all over the world.
Unlike the CIA, the DIA outsources the major analytical products known as all-source intelligence reports, a senior intelligence official said, speaking on the condition of anonymity.
A former senior Pentagon intelligence official said yesterday that the DIA is struggling to do "the in-depth intelligence work required under present circumstances" and that is why it is preparing to contract for outside help. He cited the military's efforts in Iraq to provide human intelligence sources to forces that rotate out after tours of a single year. "That is hardly enough time to develop serious, dependable Iraqi sources," he said.
The former official added that for years intelligence has not been a prime career path for officers who seek to reach the top positions in the Army, which favors infantry, armor and special forces as the specializations that lead to promotions.
The war in Iraq has required the hiring of outside contractors by the Pentagon to perform not just security jobs but also the collection of intelligence used for force protection. Earlier this year, retired Marine Gen. Anthony C. Zinni, a former head of the U.S. Central Command who today advises defense contractors, said there is a legitimate role for private firms in security missions. But he warned that problems can arise "when they take on quasi-military roles," such as planning intelligence operations.
In its report in June on the fiscal 2008 intelligence authorization bill, the Senate Select Committee on Intelligence noted that Congress had allowed full-time positions in the intelligence community to grow 20 percent since Sept. 11. But personnel caps forced the agencies to turn to contractors.
The committee questioned the additional costs involved in using contractors, citing an estimate that a government civilian employee costs on average $126,500 a year, while the annual cost of a core contractor, including overhead and benefits, is $250,000.
Many companies that provide contract workers to the CIA and Pentagon intelligence agencies are headed by former employees of those agencies. For example, Abraxas, which is run by a former CIA case officer, has hired -- and then contracted out to the government -- more than 100 former intelligence employees over the past six years.
The CIA imposed a rule that former personnel cannot perform work with a CIA contractor in the 18 months after they leave the agency.
The proposed contracts, outlined in a recent early notice of the DIA's plans, reflect a continuing expansion of the Defense Department's intelligence-related work and fit a well-established pattern of Bush administration transfers of government work to private contractors.
Since 2000, the value of federal contracts signed by all agencies each year has more than doubled to reach $412 billion, with the largest growth at the Defense Department, according to a congressional tally in June. Outsourcing particularly accelerated among intelligence agencies after the 2001 terrorist attacks caught many of them unprepared to meet new demands with their existing workforce.
The DIA did not specify exactly what it wants the contractors to do but said it is seeking teams to fulfill "operational and mission requirements" that include intelligence "Gathering and Collection, Analysis, Utilization, and Strategy and Support." It holds out the possibility that five or more contractors may be hired and promised more details on Aug. 27.
The DIA's action comes a few months after CIA Director Michael V. Hayden, acting under pressure from Congress, announced a program to cut the agency's hiring of outside contractors by at least 10 percent. The CIA's effort was partly provoked by managers' frustration that officials with security clearances were frequently resigning to earn higher pay with government contractors while performing the same work -- a phenomenon that led lawmakers to complain that intelligence contract work was wasting money.
"Mind-blowing," was the reaction of Rep. Jan Schakowsky (D-Ill.), a member of the House Permanent Select Committee on Intelligence, when she learned of the DIA proposal. In a telephone interview, she described it as "definitely something to be concerned about."
In its notice, published on a procurement Web site, the DIA said that "the total price of all work to be performed under the contract(s) will exceed $1 billion," adding that the tally "is only an estimate and there is no guarantee that any orders will be placed."
A DIA spokesman, Cmdr. Terrence Sutherland, said this week that "this is the first DIA contract of its type specifically intended for the procurement of intelligence analysis and related services." He said the primary purpose of the proposal is to ensure that adequate outside support is ready to assist the DIA, as well as Army, Navy, Marine and Air Force intelligence centers and the military's overseas command centers.
In May, Schakowsky and Rep. David E. Price (D-N.C.) sponsored an amendment to the 2008 intelligence bill that requires the Defense Department to compile a database of all its intelligence-related contracts. The aim, Schakowsky said, is to force a review "of what contractors are doing and, importantly, whether contractors are performing inherently governmental functions."
Some activities, she said, are so sensitive that "if and when they are done," it may not be appropriate for the government to "contract these activities out."
Price asked during the debate whether contractors should be involved in intelligence collection and analysis, interrogation, and covert operations, or whether those activities are so sensitive that "they should only be performed by highly trained intelligence community professionals."
In a statement Friday, Price questioned whether "a contract award of this scale is consistent with the DNI's commitment to reduce the alarming portion of the intelligence budget that goes to private contractors." (DNI refers to the director of national intelligence, Mike McConnell.)
The DIA is the country's major manager and producer of foreign military intelligence, with more than 11,000 military and civilian employees worldwide and a budget of nearly $1 billion. It has its own analysts from the various services as well as collectors of human intelligence in the Defense HUMINT Service. DIA also manages the Defense attaches stationed in embassies all over the world.
Unlike the CIA, the DIA outsources the major analytical products known as all-source intelligence reports, a senior intelligence official said, speaking on the condition of anonymity.
A former senior Pentagon intelligence official said yesterday that the DIA is struggling to do "the in-depth intelligence work required under present circumstances" and that is why it is preparing to contract for outside help. He cited the military's efforts in Iraq to provide human intelligence sources to forces that rotate out after tours of a single year. "That is hardly enough time to develop serious, dependable Iraqi sources," he said.
The former official added that for years intelligence has not been a prime career path for officers who seek to reach the top positions in the Army, which favors infantry, armor and special forces as the specializations that lead to promotions.
The war in Iraq has required the hiring of outside contractors by the Pentagon to perform not just security jobs but also the collection of intelligence used for force protection. Earlier this year, retired Marine Gen. Anthony C. Zinni, a former head of the U.S. Central Command who today advises defense contractors, said there is a legitimate role for private firms in security missions. But he warned that problems can arise "when they take on quasi-military roles," such as planning intelligence operations.
In its report in June on the fiscal 2008 intelligence authorization bill, the Senate Select Committee on Intelligence noted that Congress had allowed full-time positions in the intelligence community to grow 20 percent since Sept. 11. But personnel caps forced the agencies to turn to contractors.
The committee questioned the additional costs involved in using contractors, citing an estimate that a government civilian employee costs on average $126,500 a year, while the annual cost of a core contractor, including overhead and benefits, is $250,000.
Many companies that provide contract workers to the CIA and Pentagon intelligence agencies are headed by former employees of those agencies. For example, Abraxas, which is run by a former CIA case officer, has hired -- and then contracted out to the government -- more than 100 former intelligence employees over the past six years.
The CIA imposed a rule that former personnel cannot perform work with a CIA contractor in the 18 months after they leave the agency.
Outsourcing Your Healthcare
Medical tourism, or travel tourism as it is sometimes called, has been picking up momentum in the United States, where the costs of health care are often times quite excessive. Medical tourism is the practice of traveling outside of one's home country to simultaneously receive medical care (at a significantly lower cost) and take advantage of the opportunity to see a new travel destination, like Panama, Mexico, or India.
The cost saving benefits are clear: for example, the average cost of a U.S.-performed breast augmentation is $8,000. The same procedure performed in Costa Rica costs a mere $2,900. The savings of over $5,000 easily covers your travel expenses and accommodations. Of course, there are some risks to consider as well. But overall, look for this trend to become more popular.
The cost saving benefits are clear: for example, the average cost of a U.S.-performed breast augmentation is $8,000. The same procedure performed in Costa Rica costs a mere $2,900. The savings of over $5,000 easily covers your travel expenses and accommodations. Of course, there are some risks to consider as well. But overall, look for this trend to become more popular.
Monday, August 20, 2007
Outsourcing isn't child's play
If you are one of those entrepreneurs yearning to join the global outsourcing bandwagon, think hard before you take the plunge. For, life isn’t a bed of roses there. If you fail to live up to quality standards and other pre-requisites set by the large companies and retailers, you could end up with huge losses. Last week, a Chinese toy maker committed suicide after the US toy company Mattel decided to recall nearly a million plastic pre-school toys that the Chinese company had produced for its Fisher Price label, after it detected excessive amounts of lead in the paint used. Mattel said excessive quantity of lead would be harmful to children’s health. The supplier could not cope up with the thought of running up huge losses. Add to that the embarrassment of having, in a way, caused irreparable damage to the credibility of Chinese companies engaged in contract jobs for large US and European firms. “While factories are given the opportunity to improve their working conditions, certain violations are not tolerated and will result in an immediate banning of factory production for Wal-Mart.” In 2005, 141 factories were permanently banned from doing business with Wal-Mart, primarily because of underage labour violations. In addition, Wal-Mart disapproved another 23 factories as a result of multiple instances of non-compliance with the standards of suppliers. It is indeed interesting to note how a big retailer like Wal-Mart, which buys merchandise from suppliers located in more than 60 countries, manages to keep a tab of how these suppliers comply with standards. “We created one of the most active supplier monitoring programmes in the retail industry. In 2005, we audited more factories than any other company in the world, performing more than 13,600 initial and follow-up audits of 7,200 supplier factories. We work with our global suppliers to improve workplace conditions,” says Mr Jain. All this exercise is not only about finding problems. Big retailers also try to partner with the suppliers to resolve their problems. “When we find a problem, we fix it. Instead of halting our work with a supplier, our ethical standards team works with them, so they can improve their performance,” Mr Jain adds. Perhaps, termination or rejection of a supply order is only the last refuge. Back home, in India, the question haunting the suppliers is clear: Are we in a position to leverage the opportunities that organised retail will throw up? As far as Indian exporters are concerned, there’s nothing new in adhering to strict western quality norms. “Indian manufacturers cannot be compared to their Chinese counterparts. China may beat us in terms of volume, but in value terms, we are clearly the leaders. Perhaps, this is why, in the apparel sector only the regular jobs go to China while the high-end ones come to Indian manufacturers,” says Orient Craft chairman Sudhir Dhingra. Orient Craft is one of the biggest textile exporters in the country and is a leading supplier to some of the best-known international apparel brands, including Gap, JC Penny, Levi’s and Ralph Lauren. Some industry experts do feel that manufacturers will have to self-impose a new quality regime to meet the new opportunities. “Speed and efficiency are the new battle cries. In the initial phase, some-not-so efficient players may survive. But gradually as organised retailing gets matured, they will be wiped out,” says JHS managing director Nikhil Nanda. Delhi-based JHS, a manufacturer and supplier of dental care products to some leading FMCG and retail companies including Oral-B, Prudent, Aldi Stores, Dollar Stores (USA), Boots, Leader Price, Savon Drugs, Wallgreens and Wal-Mart. However, coming to smaller suppliers, it’s not always as rosy as it may appear. At least, for suppliers operating on small margins. “There is a problem with the payment cycles. Also, unlike that in the west, there isn’t an organised market for rejected products or manufacturing wastes,” says Craftos director PK Saxena. Craftos is a Manesar-based manufacturing unit that supplies to some well-known home furnishings retailers. Some others also feel that supplying to retailers in India will not be the same as that to foreign brands and chains. “Not that there will be any relaxation as far as quality parameters are concerned. One clear benefit that manufacturers will have here is in terms of the cycle time,” says a Delhi-based retail consultant. This event is the latest in a slew of scandals involving Chinese-made products that includes seafood, toothpastes, toys, tyres, pet food, medicines and food products and ingredients, among others. Global retailers and brand owners have decided to delist many third-party manufacturers in China citing quality issues, many of which can jeopardise the health of customers. Indian contract manufacturers, too, are on the watchlist, like those which make medicines. If it is, indeed, found that a company sold fake drugs to Americans, it would not bode well for the health of the Indian pharmaceutical industry. Says Chandigarh-based Ind-Swift Labs’ joint MD VK Mehta: “The possibility of rejection is very bleak in the pharma sector as vendors are governed by rules of the US food & drugs authority (FDA). However, if a rejection does happen in any sector, the loss is mutual and the buyer too has to bear the brunt.” This becomes further evident if one notes that just one recall by Mattel will result in its second-quarter pretax operating income decline by $30 million or 47% year-on-year. For the big foreign retailers, who outsource product manufacturing to low-cost countries like India and Chine, the writing on the wall is clear: the fittest survive. If you cannot adhere to quality norms, there is no room for you. Says Wal-Mart India president Raj Jain: |
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Insurance outsourcing can hit $10 b in 5 years
IT Outsourcing by insurance companies in India could be an $8-10 billion opportunity over the next five years, according to global offshoring advisory firm Everest Group.
The outsourceable functions include systems integration, reengineering, IT infrastructure management, business intelligence solutions and business process outsourcing (BPO). The BPO business alone is expected to account for about $4-5 billion over the next five years. Currently, the banking, financial services and insurance (BFSI) vertical accounts for about 24-47% of Indian IT companies' revenue.
The domestic insurance sector is expected to grow to $60.5 billion by 2010 from the current $10.2 billion, according to estimates by industry chamber Assocham. Over 70 million insurance policies would be sold over the next five years and insurance companies would require over 0.5 million agents, besides several thousand operations staff for tasks like claims processing and customer service, according to Everest estimates.
“IT outsourcing has assumed strategic importance. Telecom companies like Bharti and Idea have outsourced their IT functions to the experts so that they can focus on their core functions and achieve greater capital efficiency,” says Everest Group country head Gaurav Gupta said.
The BFSI sector was the highest spender on IT in 2006 and is expected to see its IT spends increase 12-27% this year, according to industry body Nasscom.
Indian IT companies, however, need to invest more in developing capabilities to tap this outsourceable market. Technology service providers can partner insurance companies for go-to-market strategies and help in expansion, Mr Gupta said. “TCS, for instance, has leveraged its experience working with global insurance majors and its acquisition of Pearl's UK back office and was involved in the operational set up of a leading insurance firm in the country,” he added.
Companies could use the output-based pricing model to develop long-term relationship with clients. “Buyers are looking for a 'partner in growth', rather than a supplier,” Mr Gupta says. To arrive at the outsourceable component, Everest Group took into account the outsourceable IT functions and the associated costs, based on its experience of working with global insurance clients. It then arrived at estimates for India on the basis of the domestic insurance market.
According to a similar projection by Everest, IT outsourcing by domestic retailers over the next five years could be an $1.5-2 billion opportunity.
Source: Economic Times
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Sunday, January 29, 2006
The Future Of Outsourcing
Globalization has been brutal to midwestern manufacturers like the Paper Converting Machine Co. For decades, PCMC's Green Bay (Wis.) factory, its oiled wooden factory floors worn smooth by work boots, thrived by making ever-more-complex equipment to weave, fold, and print packaging for everything from potato chips to baby wipes.
But PCMC has fallen on hard times. First came the 2001 recession. Then, two years ago, one of the company's biggest customers told it to slash its machinery prices by 40% and urged it to move production to China. Last year, a St. Louis holding company, Barry-Wehmiller Cos., acquired the manufacturer and promptly cut workers and nonunion pay. In five years sales have plunged by 40%, to $170 million, and the workforce has shrunk from 2,000 to 1,100. Employees have been traumatized, says operations manager Craig Compton, a muscular former hockey player. "All you hear about is China and all these companies closing or taking their operations overseas."
But now, Compton says, he is "probably the most optimistic I've been in five years." Hope is coming from an unusual source. As part of its turnaround strategy, Barry-Wehmiller plans to shift some design work to its 160-engineer center in Chennai, India. By having U.S. and Indian designers collaborate 24/7, explains Vasant Bennett, president of Barry-Wehmiller's engineering services unit, PCMC hopes to slash development costs and time, win orders it often missed due to engineering constraints -- and keep production in Green Bay. Barry-Wehmiller says the strategy already has boosted profits at some of the 32 other midsize U.S. machinery makers it has bought. "We can compete and create great American jobs," vows CEO Robert Chapman. "But not without offshoring."
Come again? Ever since the offshore shift of skilled work sparked widespread debate and a political firestorm three years ago, it has been portrayed as the killer of good-paying American jobs. "Benedict Arnold CEOs" hire software engineers, computer help staff, and credit-card bill collectors to exploit the low wages of poor nations. U.S. workers suddenly face a grave new threat, with even highly educated tech and service professionals having to compete against legions of hungry college grads in India, China, and the Philippines willing to work twice as hard for one-fifth the pay.
Workers' fears have some grounding in fact. The prime motive of most corporate bean counters jumping on the offshoring bandwagon has been to take advantage of such "labor arbitrage" -- the huge wage gap between industrialized and developing nations. And without doubt, big layoffs often accompany big outsourcing deals.
The changes can be harsh and deep. But a more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is "transformational outsourcing." Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But it's peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.
Thus entrepreneurs such as Chapman see a chance to turn around dying businesses, speed up their pace of innovation, or fund development projects that otherwise would have been unaffordable. More aggressive outsourcers are aiming to create radical business models that can give them an edge and change the game in their industries. Old-line multinationals see offshoring as a catalyst for a broader plan to overhaul outdated office operations and prepare for new competitive battles. And while some want to downsize, others are keen to liberate expensive analysts, engineers, and salesmen from routine tasks so they can spend more time innovating and dealing with customers. "This isn't about labor cost," says Daniel Marovitz, technology managing director for Deutsche Bank's global businesses (DB ). "The issue is that if you don't do it, you won't survive."
The new attitude is emerging in corporations across the U.S. and Europe in virtually every industry. Ask executives at Penske Truck Leasing why the company outsources dozens of business processes to Mexico and India, and they cite greater efficiency and customer service. Ask managers at U.S.-Dutch professional publishing giant Wolters Kluwer (WTKWY ) why they're racing to shift software development and editorial work to India and the Philippines, and they will say it's about being able to pump out a greater variety of books, journals, and Web-based content more rapidly. Ask Wachovia Corp. (WB ), the Charlotte (N.C.)-based bank, why it just inked a $1.1 billion deal with India's Genpact to outsource finance and accounting jobs and why it handed over administration of its human-resources programs to Lincolnshire (Ill.)-based Hewitt Associates (HEW ). It's "what we need to do to become a great customer-relationship company," says Director of Corporate Development Peter J. Sidebottom. Wachovia aims to reinvest up to 40% of the $600 million to $1 billion it hopes to take out in costs over three years into branches, ATMs, and personnel to boost its core business.
Here's what such transformations typically entail: Genpact, Accenture (ACN ), IBM Services, or another big outsourcing specialist dispatches teams to meticulously dissect the workflow of an entire human resources, finance, or info tech department. The team then helps build a new IT platform, redesigns all processes, and administers programs, acting as a virtual subsidiary. The contractor then disperses work among global networks of staff ranging from the U.S. to Asia to Eastern Europe.
In recent years, Procter & Gamble (PG ), DuPont (DD ), Cisco Systems (CSCO ), ABN Amro (ABN ), Unilever, Rockwell Collins (COL ), and Marriott (MAR ) were among those that signed such megadeals, worth billions.
In 2004, for example, drugmaker Wyeth Pharmaceuticals transferred its entire clinical-testing operation to Accenture Ltd. "Boards of directors of virtually every big company now are insisting on very articulated outsourcing strategies," says Peter Allen, global services managing director of TPI, a consulting firm that advised on 15 major outsourcing contracts last year worth $14 billion. "Many CEOs are saying, 'Don't tell me how much I can save. Show me how we can grow by 40% without increasing our capacity in the U.S.,"' says Atul Vashistha, CEO of outsourcing consultant neoIT and co-author of the book The Offshore Nation.
Some observers even believe Big Business is on the cusp of a new burst of productivity growth, ignited in part by offshore outsourcing as a catalyst. "Once this transformation is done," predicts Arthur H. Harper, former CEO of General Electric Co.'s equipment management businesses, "I think we will end up with companies that deliver products faster at lower costs, and are better able to compete against anyone in the world." As executives shed more operations, they also are spurring new debate about how the future corporation will look. Some management pundits theorize about the "totally disaggregated corporation," wherein every function not regarded as crucial is stripped away.
PROCESSES, NOW ON SALE
In theory, it is becoming possible to buy, off the shelf, practically any function you need to run a company. Want to start a budget airline but don't want to invest in a huge back office? Accenture's Navitaire unit can manage reservations, plan routes, assign crew, and calculate optimal prices for each seat.
Have a cool new telecom or medical device but lack market researchers? For about $5,000, analytics outfits such as New Delhi-based Evalueserve Inc. will, within a day, assemble a team of Indian patent attorneys, engineers, and business analysts, start mining global databases, and call dozens of U.S. experts and wholesalers to provide an independent appraisal.
Want to market quickly a new mutual fund or insurance policy? IT services providers such as India's Tata Consultancy Services Ltd. are building software platforms that furnish every business process needed and secure all regulatory approvals. A sister company, Tata Technologies, boasts 2,000 Indian engineers and recently bought 700-employee Novi (Mich.) auto- and aerospace-engineering firm Incat International PLC. Tata Technologies can now handle everything from turning a conceptual design into detailed specs for interiors, chassis, and electrical systems to designing the tooling and factory-floor layout. "If you map out the entire vehicle-development process, we have the capability to supply every piece of it," says Chief Operating Officer Jeffrey D. Sage, an IBM and General Motors Corp. (GM ) veteran. Tata is designing all doors for a future truck, for example, and the power train for a U.S. sedan. The company is hiring 100 experienced U.S. engineers at salaries of $100,000 and up.
Few big companies have tried all these options yet. But some, like Procter & Gamble, are showing that the ideas are not far-fetched. Over the past three years the $57 billion consumer-products company has outsourced everything from IT infrastructure and human resources to management of its offices from Cincinnati to Moscow. CEO Alan G. Lafley also has announced he wants half of all new P&G products to come from outside by 2010, vs. 20% now. In the near future, some analysts predict, Detroit and European carmakers will go the way of the PC industry, relying on outsiders to develop new models bearing their brand names. BMW has done just that with a sport-utility vehicle. And Big Pharma will bring blockbuster drugs to market at a fraction of the current $1 billion average cost by allying with partners in India, China, and Russia in molecular research and clinical testing.
Of course, corporations have been outsourcing management of IT systems to the likes of Electronic Data Systems (EDS ), IBM (IBM ), and Accenture for more than a decade, while Detroit has long given engineering jobs to outside design firms. Futurists have envisioned "hollow" and "virtual" corporations since the 1980s.
It hasn't happened yet. Reengineering a company may make sense on paper, but it's extremely expensive and entails big risks if executed poorly. Corporations can't simply be snapped apart and reconfigured like LEGO sets, after all. They are complex, living organisms that can be thrown into convulsions if a transplant operation is botched. Valued employees send out their résumés, customers are outraged at deteriorating service, a brand name can be damaged. In consultant surveys, what's more, many U.S. managers complain about the quality of offshored work and unexpected costs.
But as companies work out such kinks, the rise of the offshore option is dramatically changing the economics of reengineering. With millions of low-cost engineers, financial analysts, consumer marketers, and architects now readily available via the Web, CEOs can see a quicker payoff. "It used to be that companies struggled for a few years to show a 5% or 10% increase in productivity from outsourcing," says Pramod Bhasin, CEO of Genpact, the 19,000-employee back-office-processing unit spun off by GE last year. "But by offshoring work, they can see savings of 30% to 40% in the first year" in labor costs. Then the efficiency gains kick in. A $10 billion company might initially only shave a few million dollars in wages after transferring back-office procurement or bill collection overseas. But better management of these processes could free up hundreds of millions in cash flow annually.
Those savings, in turn, help underwrite far broader corporate restructuring that can be truly transformational. DuPont has long wanted to fix its unwieldy system for administering records, payroll, and benefits for its 60,000 employees in 70 nations, with data scattered among different software platforms and global business units. By awarding a long-term contract to Cincinnati-based Convergys Corp., the world's biggest call-center operator, to redesign and administer its human resources programs, it expects to cut costs 20% in the first year and 30% a year afterward. To get corporate backing for the move, "it certainly helps a lot to have savings from the outset," says DuPont Senior Human Resources Vice-President James C. Borel.
Creative new companies can exploit the possibilities of offshoring even faster than established players. Crimson Consulting Group is a good example. The Los Altos (Calif.) firm, which performs global market research on everything from routers to software for clients including Cisco, HP, and Microsoft (MSFT ), has only 14 full-time employees. But it farms out research to India's Evalueserve and some 5,000 other independent experts from Silicon Valley to China, the Czech Republic, and South Africa. "This allows a small firm like us to compete with McKinsey and Bain on a very global basis with very low costs," says CEO Glenn Gow. Former GE exec Harper is on the same wavelength. Like Barry-Wehmiller, his new five-partner private-equity firm plans to buy struggling midsize manufacturers and use offshore outsourcing to help revitalize them. Harper's NexGen Capital Partners also plans to farm out most of its own office work. "The people who understand this will start from Day One and never build a back room," Harper says. "They will outsource everything they can."
Some aggressive outsourcers are using their low-cost, superefficient business models to challenge incumbents. Pasadena, (Calif.)-based IndyMac Bancorp Inc. (NDE ), founded in 1985, illustrates the new breed of financial services company. In three years, IndyMac has risen from 22nd-largest U.S. mortgage issuer to No. 9, while its 18% return on equity in 2004 outpaced most rivals. The thrift's initial edge was its technology to process, price, and approve loan applications in less than a minute.
But IndyMac also credits its aggressive offshore outsourcing strategy, which Consumer Banking CEO Ashwin Adarkar says has helped make it "more productive, cost-efficient, and flexible than our competitors, with better customer service." IndyMac is using 250 mostly Indian staff from New York-based Cognizant Technology Solutions Corp. (CTSH ) to help build a next-generation software platform and applications that, it expects, will boost efficiency at least 20% by 2008. IndyMac has also begun shifting tasks, ranging from bill collection to "welcome calls" that help U.S. borrowers make their first mortgage payments on time, to India's Exlservice Holdings Inc. and its 5,000-strong staff. In all, Exlservice and other Indian providers handle 33 back-office processes offshore. Yet rather than losing any American jobs, IndyMac has doubled its U.S. workforce to nearly 6,000 in four years -- and is still hiring.
SUPERIOR SERVICE
Smart use of offshoring can juice the performance of established players, too. Five years ago, Penske Truck Leasing, a joint venture between GE and Penske Corp., paid $768 million for trucker Rollins Truck Leasing Corp. -- just in time for the recession. Customer service, spread among four U.S. call centers, was inconsistent. "I realized our business needed a transformation," says CFO Frank Cocuzza. He began by shifting a few dozen data-processing jobs to GE's huge Mexican and Indian call centers, now called Genpact. He then hired Genpact to help restructure most of his back office. That relationship now spans 30 processes involved in leasing 216,000 trucks and providing logistical services for customers.
Now, if a Penske truck is held up at a weigh station because it lacks a certain permit, for example, the driver calls an 800 number. Genpact staff in India obtains the document over the Web. The weigh station is notified electronically, and the truck is back on the road within 30 minutes. Before, Penske thought it did well if it accomplished that in two hours. And when a driver finishes his job, his entire log, including records of mileage, tolls, and fuel purchases, is shipped to Mexico, punched into computers, and processed in Hyderabad. In all, 60% of the 1,000 workers handling Penske back-office process are in India or Mexico, and Penske is still ramping up. Under a new program, when a manufacturer asks Penske to arrange for a delivery to a buyer, Indian staff helps with the scheduling, billing, and invoices. The $15 million in direct labor-cost savings are small compared with the gains in efficiency and customer service, Cocuzza says.
Big Pharma is pursuing huge boosts in efficiency as well. Eli Lilly & Co.'s (LLY ) labs are more productive than most, having released eight major drugs in the past five years. But for each new drug, Lilly estimates it invests a hefty $1.1 billion. That could reach $1.5 billion in four years. "Those kinds of costs are fundamentally unsustainable," says Steven M. Paul, Lilly's science and tech executive vice-president. Outsourcing figures heavily in Lilly's strategy to lower that cost to $800 million. The drugmaker now does 20% of its chemistry work in China for one-quarter the U.S. cost and helped fund a startup lab, Shanghai's Chem-Explorer Co., with 230 chemists. Lilly now is trying to slash the costs of clinical trials on human patients, which range from $50 million to $300 million per drug, and is expanding such efforts in Brazil, Russia, China, and India.
Other manufacturers and tech companies are learning to capitalize on global talent pools to rush products to market sooner at lower costs. OnStor Inc., a Los Gatos (Calif.) developer of storage systems, says its tie-up with Bangalore engineering-services outfit HCL Technologies Ltd. enables it to get customized products to clients twice as fast as its major rivals. "If we want to recruit a great engineer in Silicon Valley, our lead time is three months," says CEO Bob Miller. "With HCL, we can pick up the phone and get somebody in two or three days."
Such strategies offer a glimpse into the productive uses of global outsourcing. But most experts remain cautious. The McKinsey Global Institute estimates $18.4 billion in global IT work and $11.4 billion in business-process services have been shifted abroad so far -- just one-tenth of the potential offshore market. One reason is that executives still have a lot to learn about using offshore talent to boost productivity. Professor Mohanbir Sawhney of Northwestern University's Kellogg School of Management, a self-proclaimed "big believer in total disaggregation," says: "One of our tasks in business schools is to train people to manage the virtual, globally distributed corporation. How do you manage employees you can't even see?"
The management challenges will grow more urgent as rising global salaries dissipate the easy cost gains from offshore outsourcing. The winning companies of the future will be those most adept at leveraging global talent to transform themselves and their industries, creating better jobs for everyone.
But PCMC has fallen on hard times. First came the 2001 recession. Then, two years ago, one of the company's biggest customers told it to slash its machinery prices by 40% and urged it to move production to China. Last year, a St. Louis holding company, Barry-Wehmiller Cos., acquired the manufacturer and promptly cut workers and nonunion pay. In five years sales have plunged by 40%, to $170 million, and the workforce has shrunk from 2,000 to 1,100. Employees have been traumatized, says operations manager Craig Compton, a muscular former hockey player. "All you hear about is China and all these companies closing or taking their operations overseas."
But now, Compton says, he is "probably the most optimistic I've been in five years." Hope is coming from an unusual source. As part of its turnaround strategy, Barry-Wehmiller plans to shift some design work to its 160-engineer center in Chennai, India. By having U.S. and Indian designers collaborate 24/7, explains Vasant Bennett, president of Barry-Wehmiller's engineering services unit, PCMC hopes to slash development costs and time, win orders it often missed due to engineering constraints -- and keep production in Green Bay. Barry-Wehmiller says the strategy already has boosted profits at some of the 32 other midsize U.S. machinery makers it has bought. "We can compete and create great American jobs," vows CEO Robert Chapman. "But not without offshoring."
Come again? Ever since the offshore shift of skilled work sparked widespread debate and a political firestorm three years ago, it has been portrayed as the killer of good-paying American jobs. "Benedict Arnold CEOs" hire software engineers, computer help staff, and credit-card bill collectors to exploit the low wages of poor nations. U.S. workers suddenly face a grave new threat, with even highly educated tech and service professionals having to compete against legions of hungry college grads in India, China, and the Philippines willing to work twice as hard for one-fifth the pay.
Workers' fears have some grounding in fact. The prime motive of most corporate bean counters jumping on the offshoring bandwagon has been to take advantage of such "labor arbitrage" -- the huge wage gap between industrialized and developing nations. And without doubt, big layoffs often accompany big outsourcing deals.
The changes can be harsh and deep. But a more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is "transformational outsourcing." Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But it's peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.
Thus entrepreneurs such as Chapman see a chance to turn around dying businesses, speed up their pace of innovation, or fund development projects that otherwise would have been unaffordable. More aggressive outsourcers are aiming to create radical business models that can give them an edge and change the game in their industries. Old-line multinationals see offshoring as a catalyst for a broader plan to overhaul outdated office operations and prepare for new competitive battles. And while some want to downsize, others are keen to liberate expensive analysts, engineers, and salesmen from routine tasks so they can spend more time innovating and dealing with customers. "This isn't about labor cost," says Daniel Marovitz, technology managing director for Deutsche Bank's global businesses (DB ). "The issue is that if you don't do it, you won't survive."
The new attitude is emerging in corporations across the U.S. and Europe in virtually every industry. Ask executives at Penske Truck Leasing why the company outsources dozens of business processes to Mexico and India, and they cite greater efficiency and customer service. Ask managers at U.S.-Dutch professional publishing giant Wolters Kluwer (WTKWY ) why they're racing to shift software development and editorial work to India and the Philippines, and they will say it's about being able to pump out a greater variety of books, journals, and Web-based content more rapidly. Ask Wachovia Corp. (WB ), the Charlotte (N.C.)-based bank, why it just inked a $1.1 billion deal with India's Genpact to outsource finance and accounting jobs and why it handed over administration of its human-resources programs to Lincolnshire (Ill.)-based Hewitt Associates (HEW ). It's "what we need to do to become a great customer-relationship company," says Director of Corporate Development Peter J. Sidebottom. Wachovia aims to reinvest up to 40% of the $600 million to $1 billion it hopes to take out in costs over three years into branches, ATMs, and personnel to boost its core business.
Here's what such transformations typically entail: Genpact, Accenture (ACN ), IBM Services, or another big outsourcing specialist dispatches teams to meticulously dissect the workflow of an entire human resources, finance, or info tech department. The team then helps build a new IT platform, redesigns all processes, and administers programs, acting as a virtual subsidiary. The contractor then disperses work among global networks of staff ranging from the U.S. to Asia to Eastern Europe.
In recent years, Procter & Gamble (PG ), DuPont (DD ), Cisco Systems (CSCO ), ABN Amro (ABN ), Unilever, Rockwell Collins (COL ), and Marriott (MAR ) were among those that signed such megadeals, worth billions.
In 2004, for example, drugmaker Wyeth Pharmaceuticals transferred its entire clinical-testing operation to Accenture Ltd. "Boards of directors of virtually every big company now are insisting on very articulated outsourcing strategies," says Peter Allen, global services managing director of TPI, a consulting firm that advised on 15 major outsourcing contracts last year worth $14 billion. "Many CEOs are saying, 'Don't tell me how much I can save. Show me how we can grow by 40% without increasing our capacity in the U.S.,"' says Atul Vashistha, CEO of outsourcing consultant neoIT and co-author of the book The Offshore Nation.
Some observers even believe Big Business is on the cusp of a new burst of productivity growth, ignited in part by offshore outsourcing as a catalyst. "Once this transformation is done," predicts Arthur H. Harper, former CEO of General Electric Co.'s equipment management businesses, "I think we will end up with companies that deliver products faster at lower costs, and are better able to compete against anyone in the world." As executives shed more operations, they also are spurring new debate about how the future corporation will look. Some management pundits theorize about the "totally disaggregated corporation," wherein every function not regarded as crucial is stripped away.
PROCESSES, NOW ON SALE
In theory, it is becoming possible to buy, off the shelf, practically any function you need to run a company. Want to start a budget airline but don't want to invest in a huge back office? Accenture's Navitaire unit can manage reservations, plan routes, assign crew, and calculate optimal prices for each seat.
Have a cool new telecom or medical device but lack market researchers? For about $5,000, analytics outfits such as New Delhi-based Evalueserve Inc. will, within a day, assemble a team of Indian patent attorneys, engineers, and business analysts, start mining global databases, and call dozens of U.S. experts and wholesalers to provide an independent appraisal.
Want to market quickly a new mutual fund or insurance policy? IT services providers such as India's Tata Consultancy Services Ltd. are building software platforms that furnish every business process needed and secure all regulatory approvals. A sister company, Tata Technologies, boasts 2,000 Indian engineers and recently bought 700-employee Novi (Mich.) auto- and aerospace-engineering firm Incat International PLC. Tata Technologies can now handle everything from turning a conceptual design into detailed specs for interiors, chassis, and electrical systems to designing the tooling and factory-floor layout. "If you map out the entire vehicle-development process, we have the capability to supply every piece of it," says Chief Operating Officer Jeffrey D. Sage, an IBM and General Motors Corp. (GM ) veteran. Tata is designing all doors for a future truck, for example, and the power train for a U.S. sedan. The company is hiring 100 experienced U.S. engineers at salaries of $100,000 and up.
Few big companies have tried all these options yet. But some, like Procter & Gamble, are showing that the ideas are not far-fetched. Over the past three years the $57 billion consumer-products company has outsourced everything from IT infrastructure and human resources to management of its offices from Cincinnati to Moscow. CEO Alan G. Lafley also has announced he wants half of all new P&G products to come from outside by 2010, vs. 20% now. In the near future, some analysts predict, Detroit and European carmakers will go the way of the PC industry, relying on outsiders to develop new models bearing their brand names. BMW has done just that with a sport-utility vehicle. And Big Pharma will bring blockbuster drugs to market at a fraction of the current $1 billion average cost by allying with partners in India, China, and Russia in molecular research and clinical testing.
Of course, corporations have been outsourcing management of IT systems to the likes of Electronic Data Systems (EDS ), IBM (IBM ), and Accenture for more than a decade, while Detroit has long given engineering jobs to outside design firms. Futurists have envisioned "hollow" and "virtual" corporations since the 1980s.
It hasn't happened yet. Reengineering a company may make sense on paper, but it's extremely expensive and entails big risks if executed poorly. Corporations can't simply be snapped apart and reconfigured like LEGO sets, after all. They are complex, living organisms that can be thrown into convulsions if a transplant operation is botched. Valued employees send out their résumés, customers are outraged at deteriorating service, a brand name can be damaged. In consultant surveys, what's more, many U.S. managers complain about the quality of offshored work and unexpected costs.
But as companies work out such kinks, the rise of the offshore option is dramatically changing the economics of reengineering. With millions of low-cost engineers, financial analysts, consumer marketers, and architects now readily available via the Web, CEOs can see a quicker payoff. "It used to be that companies struggled for a few years to show a 5% or 10% increase in productivity from outsourcing," says Pramod Bhasin, CEO of Genpact, the 19,000-employee back-office-processing unit spun off by GE last year. "But by offshoring work, they can see savings of 30% to 40% in the first year" in labor costs. Then the efficiency gains kick in. A $10 billion company might initially only shave a few million dollars in wages after transferring back-office procurement or bill collection overseas. But better management of these processes could free up hundreds of millions in cash flow annually.
Those savings, in turn, help underwrite far broader corporate restructuring that can be truly transformational. DuPont has long wanted to fix its unwieldy system for administering records, payroll, and benefits for its 60,000 employees in 70 nations, with data scattered among different software platforms and global business units. By awarding a long-term contract to Cincinnati-based Convergys Corp., the world's biggest call-center operator, to redesign and administer its human resources programs, it expects to cut costs 20% in the first year and 30% a year afterward. To get corporate backing for the move, "it certainly helps a lot to have savings from the outset," says DuPont Senior Human Resources Vice-President James C. Borel.
Creative new companies can exploit the possibilities of offshoring even faster than established players. Crimson Consulting Group is a good example. The Los Altos (Calif.) firm, which performs global market research on everything from routers to software for clients including Cisco, HP, and Microsoft (MSFT ), has only 14 full-time employees. But it farms out research to India's Evalueserve and some 5,000 other independent experts from Silicon Valley to China, the Czech Republic, and South Africa. "This allows a small firm like us to compete with McKinsey and Bain on a very global basis with very low costs," says CEO Glenn Gow. Former GE exec Harper is on the same wavelength. Like Barry-Wehmiller, his new five-partner private-equity firm plans to buy struggling midsize manufacturers and use offshore outsourcing to help revitalize them. Harper's NexGen Capital Partners also plans to farm out most of its own office work. "The people who understand this will start from Day One and never build a back room," Harper says. "They will outsource everything they can."
Some aggressive outsourcers are using their low-cost, superefficient business models to challenge incumbents. Pasadena, (Calif.)-based IndyMac Bancorp Inc. (NDE ), founded in 1985, illustrates the new breed of financial services company. In three years, IndyMac has risen from 22nd-largest U.S. mortgage issuer to No. 9, while its 18% return on equity in 2004 outpaced most rivals. The thrift's initial edge was its technology to process, price, and approve loan applications in less than a minute.
But IndyMac also credits its aggressive offshore outsourcing strategy, which Consumer Banking CEO Ashwin Adarkar says has helped make it "more productive, cost-efficient, and flexible than our competitors, with better customer service." IndyMac is using 250 mostly Indian staff from New York-based Cognizant Technology Solutions Corp. (CTSH ) to help build a next-generation software platform and applications that, it expects, will boost efficiency at least 20% by 2008. IndyMac has also begun shifting tasks, ranging from bill collection to "welcome calls" that help U.S. borrowers make their first mortgage payments on time, to India's Exlservice Holdings Inc. and its 5,000-strong staff. In all, Exlservice and other Indian providers handle 33 back-office processes offshore. Yet rather than losing any American jobs, IndyMac has doubled its U.S. workforce to nearly 6,000 in four years -- and is still hiring.
SUPERIOR SERVICE
Smart use of offshoring can juice the performance of established players, too. Five years ago, Penske Truck Leasing, a joint venture between GE and Penske Corp., paid $768 million for trucker Rollins Truck Leasing Corp. -- just in time for the recession. Customer service, spread among four U.S. call centers, was inconsistent. "I realized our business needed a transformation," says CFO Frank Cocuzza. He began by shifting a few dozen data-processing jobs to GE's huge Mexican and Indian call centers, now called Genpact. He then hired Genpact to help restructure most of his back office. That relationship now spans 30 processes involved in leasing 216,000 trucks and providing logistical services for customers.
Now, if a Penske truck is held up at a weigh station because it lacks a certain permit, for example, the driver calls an 800 number. Genpact staff in India obtains the document over the Web. The weigh station is notified electronically, and the truck is back on the road within 30 minutes. Before, Penske thought it did well if it accomplished that in two hours. And when a driver finishes his job, his entire log, including records of mileage, tolls, and fuel purchases, is shipped to Mexico, punched into computers, and processed in Hyderabad. In all, 60% of the 1,000 workers handling Penske back-office process are in India or Mexico, and Penske is still ramping up. Under a new program, when a manufacturer asks Penske to arrange for a delivery to a buyer, Indian staff helps with the scheduling, billing, and invoices. The $15 million in direct labor-cost savings are small compared with the gains in efficiency and customer service, Cocuzza says.
Big Pharma is pursuing huge boosts in efficiency as well. Eli Lilly & Co.'s (LLY ) labs are more productive than most, having released eight major drugs in the past five years. But for each new drug, Lilly estimates it invests a hefty $1.1 billion. That could reach $1.5 billion in four years. "Those kinds of costs are fundamentally unsustainable," says Steven M. Paul, Lilly's science and tech executive vice-president. Outsourcing figures heavily in Lilly's strategy to lower that cost to $800 million. The drugmaker now does 20% of its chemistry work in China for one-quarter the U.S. cost and helped fund a startup lab, Shanghai's Chem-Explorer Co., with 230 chemists. Lilly now is trying to slash the costs of clinical trials on human patients, which range from $50 million to $300 million per drug, and is expanding such efforts in Brazil, Russia, China, and India.
Other manufacturers and tech companies are learning to capitalize on global talent pools to rush products to market sooner at lower costs. OnStor Inc., a Los Gatos (Calif.) developer of storage systems, says its tie-up with Bangalore engineering-services outfit HCL Technologies Ltd. enables it to get customized products to clients twice as fast as its major rivals. "If we want to recruit a great engineer in Silicon Valley, our lead time is three months," says CEO Bob Miller. "With HCL, we can pick up the phone and get somebody in two or three days."
Such strategies offer a glimpse into the productive uses of global outsourcing. But most experts remain cautious. The McKinsey Global Institute estimates $18.4 billion in global IT work and $11.4 billion in business-process services have been shifted abroad so far -- just one-tenth of the potential offshore market. One reason is that executives still have a lot to learn about using offshore talent to boost productivity. Professor Mohanbir Sawhney of Northwestern University's Kellogg School of Management, a self-proclaimed "big believer in total disaggregation," says: "One of our tasks in business schools is to train people to manage the virtual, globally distributed corporation. How do you manage employees you can't even see?"
The management challenges will grow more urgent as rising global salaries dissipate the easy cost gains from offshore outsourcing. The winning companies of the future will be those most adept at leveraging global talent to transform themselves and their industries, creating better jobs for everyone.
Labels:
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Preet Chandhoke
Saturday, January 28, 2006
From Russia with Technology?
Is the country poised to become a global software leader? With a little government help, it just might be ready to join the big leagues
It has a technological tradition that put man into space and launched the first satellite. Its computer programmers are the envy of the world, and it produces 200,000 scientific and technology graduates each year -- as many as India, which has five times the population. So why, Russians ask themselves, can't their country be a global powerhouse of software development?
Perhaps it is on its way to becoming one. Although small, Russia's software outsourcing industry is growing fast. After China and India, Russia is now the third-largest software outsourcing destination in the world. In 2005, software exports reached an estimated $1 billion, up from just $120 million in 2000 and a 33% increase from 2004. Most of these revenues are earned by home-grown software development companies, exporting services to Western clients.
"Just three countries, India, China, and Russia, are big enough to become IT superpowers," says Dmitry A. Loschinin, CEO of Russia's largest software development company, Luxoft. "And in terms of geography Russia has a pretty big advantage. In the long term it will be a very good [outsourcing] destination for Europe."
"SERIOUS BREAKTHROUGH." Still, Russia's expanding software exports are a drop in the ocean compared with the tens of billions of dollars it earns each year from natural resources. Russians worry about their country's lack of value-added exports, and consequent dependence on unstable world commodity markets. They look with envy at India's success at building a thriving software export industry.
Literally so, in the case of Russia's President Vladimir Putin. On a state visit to India in December, 2004, Putin stopped off in Bangalore, the center of India's software development industry, to see for himself the secrets of India's success. He came away singing the praises of government-backed "technoparks" and other forms of state support for IT development.
A month after his trip to India, in a speech at a scientific township near Novosibirsk, Putin called for a program of technology parks to be developed in Russia, with backing from the state. "The country can achieve a serious breakthrough in the area of information technology. We simply mustn't waste this chance -- especially as other countries have achieved success without such a strong starting position," Putin said.
GOVERNMENT HELP. That's music to the ears of Russia's software developers. They argue that in India, government assistance has been crucial in fostering the industry. In contrast, Russia's state has typically been more of a hindrance than a help. Software exporters complained that it was next to impossible to reclaim VAT on exports, thanks to outdated legislation and obstructive bureaucracy. And until the creation of a new Ministry for IT and Communications in 2004, government policy toward the sector lacked central coordination.
Now, with prodding from President Putin, policy-makers seem to be waking up to the industry's importance. Russia plans at least four state-funded technoparks to be completed by 2010, located in Dubna (a scientific center near Moscow), St. Petersburg, Nizhny Novgorod, and Novosibirsk. The idea is to create economies of scale and encourage collaboration between businesses and scientific researchers.
Each park is due to receive state funding of $80 million to $100 million to create the necessary infrastructure. Companies setting up in the parks will also be entitled to receive tax and customs benefits. The government has also promised to promote the IT industry through additional tax breaks. A draft law, due to be approved this year, will provide simplified taxation procedures and cut social security tax from 26% to 14% of salaries.
DOWN TO BUSINESS. Industry representatives are positive about the new measures, which follow recommendations submitted by the industry. "The key issue is that the [development] concept was prepared by business, not by the government," says Valentin Makarov, president of Russoft, the Russian software developers association. But as usual in Russia, there are still concerns about the implementation.
It has a technological tradition that put man into space and launched the first satellite. Its computer programmers are the envy of the world, and it produces 200,000 scientific and technology graduates each year -- as many as India, which has five times the population. So why, Russians ask themselves, can't their country be a global powerhouse of software development?
Perhaps it is on its way to becoming one. Although small, Russia's software outsourcing industry is growing fast. After China and India, Russia is now the third-largest software outsourcing destination in the world. In 2005, software exports reached an estimated $1 billion, up from just $120 million in 2000 and a 33% increase from 2004. Most of these revenues are earned by home-grown software development companies, exporting services to Western clients.
"Just three countries, India, China, and Russia, are big enough to become IT superpowers," says Dmitry A. Loschinin, CEO of Russia's largest software development company, Luxoft. "And in terms of geography Russia has a pretty big advantage. In the long term it will be a very good [outsourcing] destination for Europe."
"SERIOUS BREAKTHROUGH." Still, Russia's expanding software exports are a drop in the ocean compared with the tens of billions of dollars it earns each year from natural resources. Russians worry about their country's lack of value-added exports, and consequent dependence on unstable world commodity markets. They look with envy at India's success at building a thriving software export industry.
Literally so, in the case of Russia's President Vladimir Putin. On a state visit to India in December, 2004, Putin stopped off in Bangalore, the center of India's software development industry, to see for himself the secrets of India's success. He came away singing the praises of government-backed "technoparks" and other forms of state support for IT development.
A month after his trip to India, in a speech at a scientific township near Novosibirsk, Putin called for a program of technology parks to be developed in Russia, with backing from the state. "The country can achieve a serious breakthrough in the area of information technology. We simply mustn't waste this chance -- especially as other countries have achieved success without such a strong starting position," Putin said.
GOVERNMENT HELP. That's music to the ears of Russia's software developers. They argue that in India, government assistance has been crucial in fostering the industry. In contrast, Russia's state has typically been more of a hindrance than a help. Software exporters complained that it was next to impossible to reclaim VAT on exports, thanks to outdated legislation and obstructive bureaucracy. And until the creation of a new Ministry for IT and Communications in 2004, government policy toward the sector lacked central coordination.
Now, with prodding from President Putin, policy-makers seem to be waking up to the industry's importance. Russia plans at least four state-funded technoparks to be completed by 2010, located in Dubna (a scientific center near Moscow), St. Petersburg, Nizhny Novgorod, and Novosibirsk. The idea is to create economies of scale and encourage collaboration between businesses and scientific researchers.
Each park is due to receive state funding of $80 million to $100 million to create the necessary infrastructure. Companies setting up in the parks will also be entitled to receive tax and customs benefits. The government has also promised to promote the IT industry through additional tax breaks. A draft law, due to be approved this year, will provide simplified taxation procedures and cut social security tax from 26% to 14% of salaries.
DOWN TO BUSINESS. Industry representatives are positive about the new measures, which follow recommendations submitted by the industry. "The key issue is that the [development] concept was prepared by business, not by the government," says Valentin Makarov, president of Russoft, the Russian software developers association. But as usual in Russia, there are still concerns about the implementation.
Friday, January 27, 2006
US SMEs to push India's outsourcing business
With US companies likely to step up investments, the outlook remains buoyant for India's IT outsourcing and business process out-sourcing (BPO) industry this year. Analysts say the market would expand, engulfing mid-sized US companies.
A recently released survey titled 'Outsourcing trends to watch in 2006' by Forrester Research's Tom Pholmann and Katherine Brown confirms this view. The authors claim IT outsourcing from the US will soon become a $130 billion market while BPO should grow an additional $40 million to $50 billion.
The paper also highlights the growing aggressiveness of Indian software service providers who are now looking beyond applications out-sourcing to expand their service offerings.
This could lead to more action on the acquisition or partnership scene, as Indian software service companies seek a larger slice of the infrastructure and consulting deals. Both these require more feet on the street, which Indian vendors presently cannot offer while keeping costs down.
Hence, the report suggests focus on more acquisitions or partnerships by the top tier Indian firms, replicating TCS' example in 2005 for a BPO presence in the UK and Chile.
The paper expects growth to come from a widening market for out-sourced services, as mid-sized firms enter the scene. The providers, on the other hand, will emphasise their differentiators, based on deal governance and implementation skills.
As out-sourcing spreads, clients are getting savvier in their expectations from the vendor. Meanwhile, new customers in the form of smaller enterprises in the US are entering the field. These companies, which account for 43 percent of the US IT spend, have lagged in adoption of the out-sourcing model. But this is likely to be targeted by vendor companies.
Every service provider of the seven that Forrester interviewed noted that they would not only pursue these players but also chase the smaller, single-tower deals with large clients. The research notes that in this segment, the smaller of the large vendors would be more acceptable to the clients because of comparable sizes.
Also, expect out-sourcing contracts to get shorter and more flexible, says the research. Contracts will also get more adaptive to customer needs as these change during the course of the out-sourcing deal. The service provider will have to be a lot more nimble otherwise it could lose ground to the more flexible provider who re-uses technology and processes across clients.
Unsurprisingly, cost reduction will remain top of the agenda for those looking at out-sourcing work, the report notes. It also records a market learning of 2005: that the BPO market is a series of micro-markets, each of which requires customisation, resulting in higher costs. So, providers will need both, leverage and scale, to achieve their margins.
These will come best from running the infrastructure and applications on which the business processes run. Although clients may not seek bundled BPO/IT out-sourcing deals, providers with the process and domain expertise plus infrastructure will win on the basis of aggressive pricing and service levels.
As the out-sourcing market widens, users of the service are getting smarter. This is expected to lead to greater transparency on deals and the emergence of stronger vendor management groups who will govern multiple service providers.
This could lead to niche consulting emerging in the area of deal governance and recovery. This new advisory service will focus on the delivery part of the deal, allowing firms like Deloitte to bring out their change management and IT governance playbooks and apply them to post-contract out-sourcing advice.
Technologies which manage and measure service delivery will get more attention in the year, as clients want higher service quality at a lower price.
Hence, greater automation is expected to emerge from this as clients want the right level of service aligned with business needs. Service providers and tool vendors could make investments in this space and begin the convergence of service delivery and measurement by combining functionality like contract management, asset management and service catalogues.
A recently released survey titled 'Outsourcing trends to watch in 2006' by Forrester Research's Tom Pholmann and Katherine Brown confirms this view. The authors claim IT outsourcing from the US will soon become a $130 billion market while BPO should grow an additional $40 million to $50 billion.
The paper also highlights the growing aggressiveness of Indian software service providers who are now looking beyond applications out-sourcing to expand their service offerings.
This could lead to more action on the acquisition or partnership scene, as Indian software service companies seek a larger slice of the infrastructure and consulting deals. Both these require more feet on the street, which Indian vendors presently cannot offer while keeping costs down.
Hence, the report suggests focus on more acquisitions or partnerships by the top tier Indian firms, replicating TCS' example in 2005 for a BPO presence in the UK and Chile.
The paper expects growth to come from a widening market for out-sourced services, as mid-sized firms enter the scene. The providers, on the other hand, will emphasise their differentiators, based on deal governance and implementation skills.
As out-sourcing spreads, clients are getting savvier in their expectations from the vendor. Meanwhile, new customers in the form of smaller enterprises in the US are entering the field. These companies, which account for 43 percent of the US IT spend, have lagged in adoption of the out-sourcing model. But this is likely to be targeted by vendor companies.
Every service provider of the seven that Forrester interviewed noted that they would not only pursue these players but also chase the smaller, single-tower deals with large clients. The research notes that in this segment, the smaller of the large vendors would be more acceptable to the clients because of comparable sizes.
Also, expect out-sourcing contracts to get shorter and more flexible, says the research. Contracts will also get more adaptive to customer needs as these change during the course of the out-sourcing deal. The service provider will have to be a lot more nimble otherwise it could lose ground to the more flexible provider who re-uses technology and processes across clients.
Unsurprisingly, cost reduction will remain top of the agenda for those looking at out-sourcing work, the report notes. It also records a market learning of 2005: that the BPO market is a series of micro-markets, each of which requires customisation, resulting in higher costs. So, providers will need both, leverage and scale, to achieve their margins.
These will come best from running the infrastructure and applications on which the business processes run. Although clients may not seek bundled BPO/IT out-sourcing deals, providers with the process and domain expertise plus infrastructure will win on the basis of aggressive pricing and service levels.
As the out-sourcing market widens, users of the service are getting smarter. This is expected to lead to greater transparency on deals and the emergence of stronger vendor management groups who will govern multiple service providers.
This could lead to niche consulting emerging in the area of deal governance and recovery. This new advisory service will focus on the delivery part of the deal, allowing firms like Deloitte to bring out their change management and IT governance playbooks and apply them to post-contract out-sourcing advice.
Technologies which manage and measure service delivery will get more attention in the year, as clients want higher service quality at a lower price.
Hence, greater automation is expected to emerge from this as clients want the right level of service aligned with business needs. Service providers and tool vendors could make investments in this space and begin the convergence of service delivery and measurement by combining functionality like contract management, asset management and service catalogues.
Thursday, January 26, 2006
Global experts favour outsourcing of jobs
Global experts favour outsourcing jobs from developed nations to countries such as India and China, even though 'anxieties' over job securities exist in US and other parts of the world.
Unconventional jobs such as healthcare and personal trainers are expected to be the most demanding non-managerial jobs in the coming years while being a plumbers or electrician may be an even more rewarding profession in developed nations than software p rogrammers.
Debating job related issues at the World Economic Forum's annual meeting, experts agreed that flexibility and mobility was the buzz of the hour in the job market.
"Stop being insecure about off-shoring. It created more jobs in the North America," Mr David Arkless of leading HR firm, Manpower said.
Mr Jagdish Bhagwati, professor, Columbia University also favoured outsourcing and said that western nations were at an advantage by outsourcing jobs to countries with a different time zone like India and China.
"However, there are anxieties due to flux. You have to be prepared for flexibility and augment your skills," he said.
Favouring outsourcing of high-end jobs, Tata Consultancy Services CEO, Mr S Ramadorai said, "It is a question of dynamics, flexibility and mobility. Value added services always stay but commodity-based services shift according to costs."
Unconventional jobs such as healthcare and personal trainers are expected to be the most demanding non-managerial jobs in the coming years while being a plumbers or electrician may be an even more rewarding profession in developed nations than software p rogrammers.
Debating job related issues at the World Economic Forum's annual meeting, experts agreed that flexibility and mobility was the buzz of the hour in the job market.
"Stop being insecure about off-shoring. It created more jobs in the North America," Mr David Arkless of leading HR firm, Manpower said.
Mr Jagdish Bhagwati, professor, Columbia University also favoured outsourcing and said that western nations were at an advantage by outsourcing jobs to countries with a different time zone like India and China.
"However, there are anxieties due to flux. You have to be prepared for flexibility and augment your skills," he said.
Favouring outsourcing of high-end jobs, Tata Consultancy Services CEO, Mr S Ramadorai said, "It is a question of dynamics, flexibility and mobility. Value added services always stay but commodity-based services shift according to costs."
Outsourcing: Matter of Course for Small Biz
Lori Booker says her public relations firm's profits rose 25 percent after she hired a company to handle the business' human resources needs. The reason: She had been devoting so much of her time to employee issues before she turned elsewhere for help.
When small companies outsource parts of their operations, owners and top executives find they can focus more on what really matters _ building the business and serving clients and customers better. And with a growing number of companies available to do virtually any kind of work for another business, an owner can outsource as much as he or she can afford.
Booker handled her HR issues herself for the first decade that her Maitland, Fla.-based company, Carlman Booker Reis PR, was in existence. But about 10 years ago, after spending an entire day interviewing workers' compensation insurance providers, Booker said she'd had enough. She signed up with a professional employer organization that is now her HR operation.
Besides saving her time and energy, Booker said of the PEO, "they keep me from making mistakes that could hurt the agency," by keeping track of changes in employment-related laws and regulations.
PEOs and other HR providers are a popular resource for small businesses. Accounting and billing, marketing and sales are other company operations that business owners cheerfully offload onto someone else who's an expert.
Outsourcing of course is not a new concept, having been around for decades _ manufacturers, for example, may have turned out their own products, but most bought components and packaging from other companies. But outsourcing continues to expand as a necessary part of doing business for a growing number of small businesses.
Not everyone automatically embraces outsourcing _ many new entrepreneurs tend to be a little resistant to the idea. First, many believe they should do everything themselves. Second, it does cost money to have someone else do your work for you, and in the early years of a business, cash flow is a particular concern.
But small businesses that do outsource say the expense is well worth it. Garvey's Office Products in Niles, Ill., outsources its prospecting for new customers because it's more cost-effective than having its own salespeople make cold calls.
"It's a time consuming job to do. You need to be able to make 50 calls an hour to sometimes get one or two appointments," marketing director Sheila Gartland said. "We'd much rather have our sales reps focusing on the accounts they have and making sure they get taken care of."
Gartland said the company doesn't outsource any other operations. "We do like having someone in-house for anything to do with human resources or our employees and anything to do with our customers," she said.
While support functions such as HR and accounting are the areas that tend to be outsourced the most, some companies find it makes sense to outsource even some of their core operations. Writing is a major part of the job description for executives at Booker's firm, but sometimes writing projects will be outsourced to people who have a particular skill or talent. Many advertising firms outsource some of their graphic arts projects, although they have their own artists on staff.
What to outsource is a very individual decision for many firms. It depends not just on where a firm's strengths lie, but also the philosophy of its owners.
PrescribedSolutions, a New York-based company that makes customized skin care products sold at doctor's offices, outsources testing and manufacturing, but it won't ask another company to handle its marketing.
"Where we can add more value and make us most unique, that's what we keep in-house," chief operating officer Aurelian Lis said.
It also won't outsource sales, because that cuts down on contact with the doctors who are the company's customers. "We found that customer relationships are too valuable. ... If we outsource that, we lose that feedback," Lis said.
The increasing sophistication of accounting software, which now includes inventory controls, has also made it easier and more sensible for the company to keep its own books rather than outsource, Lis said.
A word of caution: If you decide to outsource part of your operation to an individual, be sure the person you hire is clearly an independent contractor, and not an employee. If you are able to exercise too much control over him or her _ for example, controlling work hours or having the work done on your premises _ you could run afoul of tax authorities who decide this is really your employee, not your contractor.
When small companies outsource parts of their operations, owners and top executives find they can focus more on what really matters _ building the business and serving clients and customers better. And with a growing number of companies available to do virtually any kind of work for another business, an owner can outsource as much as he or she can afford.
Booker handled her HR issues herself for the first decade that her Maitland, Fla.-based company, Carlman Booker Reis PR, was in existence. But about 10 years ago, after spending an entire day interviewing workers' compensation insurance providers, Booker said she'd had enough. She signed up with a professional employer organization that is now her HR operation.
Besides saving her time and energy, Booker said of the PEO, "they keep me from making mistakes that could hurt the agency," by keeping track of changes in employment-related laws and regulations.
PEOs and other HR providers are a popular resource for small businesses. Accounting and billing, marketing and sales are other company operations that business owners cheerfully offload onto someone else who's an expert.
Outsourcing of course is not a new concept, having been around for decades _ manufacturers, for example, may have turned out their own products, but most bought components and packaging from other companies. But outsourcing continues to expand as a necessary part of doing business for a growing number of small businesses.
Not everyone automatically embraces outsourcing _ many new entrepreneurs tend to be a little resistant to the idea. First, many believe they should do everything themselves. Second, it does cost money to have someone else do your work for you, and in the early years of a business, cash flow is a particular concern.
But small businesses that do outsource say the expense is well worth it. Garvey's Office Products in Niles, Ill., outsources its prospecting for new customers because it's more cost-effective than having its own salespeople make cold calls.
"It's a time consuming job to do. You need to be able to make 50 calls an hour to sometimes get one or two appointments," marketing director Sheila Gartland said. "We'd much rather have our sales reps focusing on the accounts they have and making sure they get taken care of."
Gartland said the company doesn't outsource any other operations. "We do like having someone in-house for anything to do with human resources or our employees and anything to do with our customers," she said.
While support functions such as HR and accounting are the areas that tend to be outsourced the most, some companies find it makes sense to outsource even some of their core operations. Writing is a major part of the job description for executives at Booker's firm, but sometimes writing projects will be outsourced to people who have a particular skill or talent. Many advertising firms outsource some of their graphic arts projects, although they have their own artists on staff.
What to outsource is a very individual decision for many firms. It depends not just on where a firm's strengths lie, but also the philosophy of its owners.
PrescribedSolutions, a New York-based company that makes customized skin care products sold at doctor's offices, outsources testing and manufacturing, but it won't ask another company to handle its marketing.
"Where we can add more value and make us most unique, that's what we keep in-house," chief operating officer Aurelian Lis said.
It also won't outsource sales, because that cuts down on contact with the doctors who are the company's customers. "We found that customer relationships are too valuable. ... If we outsource that, we lose that feedback," Lis said.
The increasing sophistication of accounting software, which now includes inventory controls, has also made it easier and more sensible for the company to keep its own books rather than outsource, Lis said.
A word of caution: If you decide to outsource part of your operation to an individual, be sure the person you hire is clearly an independent contractor, and not an employee. If you are able to exercise too much control over him or her _ for example, controlling work hours or having the work done on your premises _ you could run afoul of tax authorities who decide this is really your employee, not your contractor.
Wednesday, January 25, 2006
Changing face of outsourcing
Times are changing, and rapidly so. Outsourcing may have started off on the basis of a labour arbitrage benefit in non-core jobs, but it is now rapidly redefining business models. Changing macro-economic factors supplemented by technological advances have led to the evolution of the outsourcing industry. There is a growing movement up the value chain towards Knowledge Process Outsourcing (KPO), as higher end skilled processes are executed efficiently and speedily through experts.
Growth engine
KPO, simply put, is BPO but at a higher level in the intellectual value chain. The crux of KPO is to provide value to the client primarily in business critical and strategic decision making processes.
KPO is expected to be one of the major segments of the outsourcing business, not only in terms of the revenue stream it would generate, but also the profitability it implies, and the creation of new jobs. As per recent projections by NASSCOM, KPO revenues will be approximately US$ 17 billion by 2010, implying a growth rate of 45 per cent. Improved productivity would be a key driver for the KPO Industry — 240 per cent higher for the KPO than the BPO industry. The US is the largest consumer of outsourced services, followed by Europe.
The constantly higher need for flexibility, drastic reduction in time required to ‘go to the market’, increased competition in the global arena, and of course, cost pressures, have all been the driving forces of KPO. Traditional sectors which have seen KPOs bloom are healthcare, pharmaceuticals, bio-technology and intellectual property rights (IPR). However, recent ‘hot areas’ are financial and legal services, and even communication and media services.
Each of these sectors has been the genesis of ‘pure play’ niche/boutique type KPO firms. Of course, it is only logical that the KPO space has also seen the entrance of BPO companies attempting to rapidly acquire capabilities for providing multiple solutions to a single client, as a one-stop shop alternative. In addition, large firms are moving their research and analytics divisions to offshore locations, making up the third kind of KPO players.
For example, Intel and Texas instruments have off-shored a part of their R&D to India, while Goldman Sachs does equity research and portfolio management of US securities from India and is able to provide 24x7 service to its internal and external customers.
Advantage India
Like in the BPO space, India is positioned at the fore front of the KPO revolution too. As it is, thanks to the time zone difference, India can easily help enable 24x7 capabilities for organisations across the globe. India, today, has an additional edge in ‘knowledge’ based services basically because of its large, cost efficient talent pool. India churns out around 75,000 MBA graduates and more than 2,50,000 graduates annually with excellent proficiency in English speaking and writing skills.
The additional ‘secret recipe’ that India seems to possess is made up of rigorous processes, high productivity, confidentiality, sound HR policies and good risk management skills — all in the right quantities. Processes like high level customer interactions, integrated with customer relationship management (CRM) skills, on-time delivery processes, quality checks while ensuring compliance and yet confidentiality to the clients are now very much an ingrained part of our corporate culture.
HR processes have also refined to ensure that the ‘right’ talent is recruited, that performance management procedures are in place to boost employees’ performance levels and that attrition is reduced through a mix of learning, skill enhancement, as well as fat paychecks.
Evolving paradigm
Even as the world is getting excited about KPOs, off-shoring has already moved one step ahead. This can be seen in the quality of services — which have shifted to high-end decision making analytics. These services in fact require greater levels of client interaction and co-working than plain vanilla BPO or KPO offerings. This means that the rationale for outsourcing is shifting from cost saving to value addition; and the working relationship is shifting from one of buyer-supplier to one of partners and collaborators.
Some niche organisations have spotted this opportunity early on and are now focused on providing specialised and customised services to clients. One such company is Empower Research LLC, working in the emerging field of Business Research and Information Consulting (BRIC). Empower provides value-driven, customised research and analytics to clients across industries, thus supporting strategic decision making.
In future KPO will get increasingly rarefied at the top with offerings like BRIC, will margins here start getting squeezed.
Growth engine
KPO, simply put, is BPO but at a higher level in the intellectual value chain. The crux of KPO is to provide value to the client primarily in business critical and strategic decision making processes.
KPO is expected to be one of the major segments of the outsourcing business, not only in terms of the revenue stream it would generate, but also the profitability it implies, and the creation of new jobs. As per recent projections by NASSCOM, KPO revenues will be approximately US$ 17 billion by 2010, implying a growth rate of 45 per cent. Improved productivity would be a key driver for the KPO Industry — 240 per cent higher for the KPO than the BPO industry. The US is the largest consumer of outsourced services, followed by Europe.
The constantly higher need for flexibility, drastic reduction in time required to ‘go to the market’, increased competition in the global arena, and of course, cost pressures, have all been the driving forces of KPO. Traditional sectors which have seen KPOs bloom are healthcare, pharmaceuticals, bio-technology and intellectual property rights (IPR). However, recent ‘hot areas’ are financial and legal services, and even communication and media services.
Each of these sectors has been the genesis of ‘pure play’ niche/boutique type KPO firms. Of course, it is only logical that the KPO space has also seen the entrance of BPO companies attempting to rapidly acquire capabilities for providing multiple solutions to a single client, as a one-stop shop alternative. In addition, large firms are moving their research and analytics divisions to offshore locations, making up the third kind of KPO players.
For example, Intel and Texas instruments have off-shored a part of their R&D to India, while Goldman Sachs does equity research and portfolio management of US securities from India and is able to provide 24x7 service to its internal and external customers.
Advantage India
Like in the BPO space, India is positioned at the fore front of the KPO revolution too. As it is, thanks to the time zone difference, India can easily help enable 24x7 capabilities for organisations across the globe. India, today, has an additional edge in ‘knowledge’ based services basically because of its large, cost efficient talent pool. India churns out around 75,000 MBA graduates and more than 2,50,000 graduates annually with excellent proficiency in English speaking and writing skills.
The additional ‘secret recipe’ that India seems to possess is made up of rigorous processes, high productivity, confidentiality, sound HR policies and good risk management skills — all in the right quantities. Processes like high level customer interactions, integrated with customer relationship management (CRM) skills, on-time delivery processes, quality checks while ensuring compliance and yet confidentiality to the clients are now very much an ingrained part of our corporate culture.
HR processes have also refined to ensure that the ‘right’ talent is recruited, that performance management procedures are in place to boost employees’ performance levels and that attrition is reduced through a mix of learning, skill enhancement, as well as fat paychecks.
Evolving paradigm
Even as the world is getting excited about KPOs, off-shoring has already moved one step ahead. This can be seen in the quality of services — which have shifted to high-end decision making analytics. These services in fact require greater levels of client interaction and co-working than plain vanilla BPO or KPO offerings. This means that the rationale for outsourcing is shifting from cost saving to value addition; and the working relationship is shifting from one of buyer-supplier to one of partners and collaborators.
Some niche organisations have spotted this opportunity early on and are now focused on providing specialised and customised services to clients. One such company is Empower Research LLC, working in the emerging field of Business Research and Information Consulting (BRIC). Empower provides value-driven, customised research and analytics to clients across industries, thus supporting strategic decision making.
In future KPO will get increasingly rarefied at the top with offerings like BRIC, will margins here start getting squeezed.
Major Players in Outsourcing
More and more multinational companies are turning to offshore outsourcing to help them cut costs and free talent to come up with new products and services. In recent years, Procter & Gamble, DuPont, Cisco, Unilever, ABN Amro, and Marriott have all signed megadeals with global outsourcing companies to overhaul internal operations such as accounting or human resources or to upgrade their technology.
This table represents research and consulting company Gartner Inc.'s analysis of the hot players in the global outsourcing business. Gartner's 10,000 global clients most frequently inquire about these companies as potential offshore partners. Gartner's hot list includes companies that offer software development, computer network support, R&D and engineering services, call centers, and business services from accounting to procurement. They have offshore staff stretching from Argentina to India to Tunisia. The companies represented here include boutique outfits that do under $100 million in offshore business a year and giants that take in billions through global outsourcing. The ranking is based on the frequency of queries from Gartner's 10,000 clients.
This table represents research and consulting company Gartner Inc.'s analysis of the hot players in the global outsourcing business. Gartner's 10,000 global clients most frequently inquire about these companies as potential offshore partners. Gartner's hot list includes companies that offer software development, computer network support, R&D and engineering services, call centers, and business services from accounting to procurement. They have offshore staff stretching from Argentina to India to Tunisia. The companies represented here include boutique outfits that do under $100 million in offshore business a year and giants that take in billions through global outsourcing. The ranking is based on the frequency of queries from Gartner's 10,000 clients.
Major Players in Outsourcing
| Company and Headquarters | Specialty | Low-Cost Locations | Offshore Revenue Range |
|---|---|---|---|
| Accenture (US) | Software Development, Network Support, Finance & Accounting (F&A) Human Resources (HR) Procurement, Insurance Operations, General Banking | India, Philippines, Spain, China, Czech Republic, Slovakia, Brazil, Australia | Over $5 billion |
| ACS (US) | F&A, HR, Payroll, Procurement. Telecom, Transportation, Healthcare Operations; General Banking, Mortgage Processing | India, China, Dominican Republic, Ghana, Guatemala, Jamaica, Malaysia, Mexico, Spain | $1 billion-$5 billion |
| Capgemini (France) | Software Development | Canada, Mexico, Spain, Poland, India, Australia | $1 billion-$5 billion |
| ClientLogic (US) | Call Centers | India, Philippines, Poland | $100 million-$500 million |
| Cognizant Technology Solutions (US) | Software Development, Network Support | India, China, and Canada | $500 million-$999 million |
| Convergys (US) | Call Centers | "India, China, Indonesia, Malaysia, Philippines, Sri Lanka, Taiwan, Thailand, Argentina, Brazil, Colombia, Mexico, Australia, Canada | Over $1 billion |
| CSC (US) | Software Development, Insurance Operations, Demand Management | Canada, Bulgaria, Ireland, India, Mexico, Malaysia, South Africa, Spain | Over $5 billion |
| EDS (US) | Software Development, Network Support; F&A, HR, Payroll, Demand Management, Procurement, Insurance, General Banking, Telecom, Transportation, Health Care Operations | Canada, Mexico, Brazil, Argentina, India, Australia, South Africa, Spain, Hungary | Over $5 billion |
| eTelecare International, Inc. (US) | Customer Service | Philippines | Below $100 million |
| ExlService Holdings, Inc. (India) | Insurance, Transportation Operations | India | Below $100 million |
| HCL Technologies (India) | Software Development, Network Support, R&D/Engineering, Financial Services | India | $500 million-$999 million |
| Hewitt Associates (US) | HR, Payroll, Procurement | India, China, Philippines, Thailand, Malaysia, Czech Republic, Poland, Hungary, Brazil, Mexico, Argentina, Chile | Over $5 billion |
| Hewlett-Packard (US) | F&A, Payroll, Procurement | India | Over $5 billion |
| IBM (US) | Software Development, Network Support, F&A, HR, Payroll, Procurement, Insurance Operations | India, Brazil, China, Mexico, Belarus, Philippines, South Africa, Romania, and Argentina | Over $5 billion |
| ICICI OneSource (India) | Call centers | India | Below $100 million |
| ICT Group (US) | Call centers | Philippines | $100 million-$500 million |
| Infosys Technologies (India) | Software Development, Network Support, Banking, Mortgage Processing | India, Czech Republic, China, Australia | $1 billion-$5 billion |
| Mphasis Corp. (India) | Financial Services | India, China, Australia | Under $100 million |
| OfficeTiger (US) | F&A, Financial Services, Transaction Processing | India, Sri Lanka | Under $100 million |
| Patni Computer Systems (India) | Software Development,Network Support, R&D/Engineering | India | $500 million-$999 million |
| Sapient (US) | Software Development | India | $100 million-$500 million |
| Satyam (India) | Software Development, Network Support, R&D/Engineering | India, China, Hungary, Brazil, Australia | $500 million-$999 million |
| SITEL (US) | Call Centers | India, Phillipines, Brazil, Spain, Mexico, Panama | $500 million-$999 million |
| Softtek (Mexico) | Software Development | Mexico, Spain, and Brazil. | $100 million-$500 million |
| SR.Teleperformance (France) | Call Centers | Philippines, Indonesia, Mexico, Brazil, Argentina, Spain | Over $1 billion |
| Stream (US) | Call Centers | India, Tunisia, Dominican Republic, Poland | $100 million-$500 million |
| Sykes Enterprises (US) | Call Centers | India, Philippines, China | $100 million-$500 million |
| Syntel (US) | Software Development | India | $100 million-$500 million |
| Tata Consultancy Services (India) | Software Development, R&D/Engineering, F&A, Telecom, Transportation, Hospitality Operations | India, Hungary, Brazil, Uruguay, Chile, China | $1 billion-$5 billion |
| TeleTech (US) | Call Centers | India, Philippines, Malaysia, China, Northern Ireland; Spain, Mexico, Argentina, Brazil | Over $1 billion |
| vCustomer Corp. (US) | Call Centers | India | Below $100 million |
| West Corp. (US) | Call Centers | India, Philippines, Mexico, Canada, Jamaica | $500 million-$999 million |
| Wipro (India) | Software Development, R&D/Engineering, Demand Management, Mortgage Processing, Transportation Operations, Healthcare Operations, Banking, Mortgage Processing | India, Canada | $1 billion-$5 billion |
| WNS Global Services (India) | Transportation Operations, Healthcare Operations, Banking, Mortgage Processing | India, Sri Lanka | Below $100 million |
| 24/7 Customer (India) | Customer Service | India, Philippines | Below $100 million |
| Data: Gartner, Company |
Tuesday, January 24, 2006
Growing Indian Animation
One could easily slip and go sprawling on all fours, like a character in a cartoon show, on the polished granite floor at DQ Entertainment’s office in Hyderabad, India. This newly minted building houses 700-odd tightly packed animators churning out the stuff that kids love: cartoons, television shows, and full-length animated features for deep-pocketed but cost-conscious Western clients like NBC Universal, Walt Disney, and Mattel.
A rapid sequence of images creates the movement of characters within an animation. Just a few seconds of movement requires hundreds of drawings, and the animators at DQ spend hours perfecting that motion. Contrary to common perception, animated movies and television series are still very much the literal handiwork of artists. A two-hour animated movie takes thousands of man-hours to complete, and hundreds of people work simultaneously to produce it.
Because of high labor costs in the United States and Europe, even the largest production houses now outsource production work to Asian countries where jobs can be completed at one-fourth the price, says Jacques Muller, a Frenchman who until recently worked for Walt Disney. Due to a shortage of animation talent in India, DQ CEO Tapaas Chakravarti recruited Mr. Muller to teach his employees in a four-month-long session on “classic” cartooning.
Despite that scarcity, India’s animation sector has quickly gone from almost nonexistent to bagging large orders from the most elite members of the club: Walt Disney, Pixar, Mattel, Sony Animation, Universal Studios, the Cartoon Network, and Imageworks. DQ, founded three years ago, now has more than 100 Indian competitors and counting: Paprikaas (see Work of Art), Toonz Animation, Crest Communications, Maya Entertainment, Silvertoon Studio, Pentamedia Graphics, and JadooWorks, among them.
Slave and Master
India’s animation industry clocked revenues of $285 million in 2005, and trade group Nasscom predicts numbers could reach as high as $950 million by 2009. (See India Animation to Reach $950M).
So far, the relationship between Indian animation firms and their customers has clearly been that of slave and master—the master sends the storyline, the drawings of the central characters, even the angles from which the viewer should perceive each frame, and “Indian artists just follow the reference sheets,” says Rajat Sharma, an analyst with Frost & Sullivan. Meanwhile, management works to elevate the workers’ status from mere outsourcing drones to more autonomous designers.
Forty-five-year-old Mr. Chakravarti has learned that smaller animation production companies are the key to gaining more value. Brand names like Sony and Walt Disney will only outsource work, while smaller firms are willing to co-produce a title. Under these terms, DQ would become an investment partner in the new film or series, retaining a portion of the intellectual property and sharing the rewards when the production hits the screen.
DQ’s investors also want their rewards. The company has received $9 million in private equity and venture capital funding from five companies: International Finance Corporation (IFC), an arm of the World Bank, TDA Capital (an associate of U.S.-based Templeton Group), Gary Wendt Capital, iLabs Funds, and India’s IL&FS Investment Managers.
For now, DQ mainly does work-for-hire, but Mr. Chakravarti still beams as he recounts his recent wins. There’s a big Disney project in the works, but he won’t reveal the title. DQ artists are collaborating closely with 70 customers in 14 countries: They’ve done all the production and compositing work for Mattel’s new Barbie movie, and are now working on a comedy show called Ron White that’s being spun off into a TV series. DQ and a South Korean firm are jointly working on The Boondocks, a TV series from the Sony Animation stable based on the edgy newspaper comic strip by Aaron Magruder. The firm is also collaborating with companies in South Korea, China, and the U.S. for a Nickelodeon project called Tak. Altogether, DQ is working on 28 new projects in various stages of progress. More are expected.
The Slog for Survival
Mr. Chakravarti rattles off these names casually, as if it required no effort to get the business. But the truth is that Indian animation firms have worked extremely hard to get the big orders, charging rates that only ensure survival, slaving for quality, and slowly earning the trust of customers.
All while dealing with a shortage of trained animators. To overcome this, DQ has spread its centers across eight locations in India, and added two in China and one in the Philippines. DQ employs more experienced Filipino animators at dollar salaries, more than double what Indian animators draw, say industry observers.
“Productivity improves hugely with experience in this industry,” says Mr. Chakravarti.
Competitors Toonz Animation and Paprikaas also have international talent from across the globe at senior levels in their creative teams. There is no clear count, but about 100 Indian animation companies outsource labor to studios. And many of them are working toward generating original content, not only for the local market but for exports.
Mr. Chakravarti is determined to take DQ to the next level. “We need to now reap the rewards, balance work and profit,” he says. To that end, DQ has set up a production company called Power Kidz in Mumbai to look after the distribution rights of titles in south Asia. “When we license a series, it becomes a long-term business model, not a one-off outsourcing deal,” says Mr. Chakravarti.
DQ has won the rights to distribute several of its co-productions in the Indian market, and is mainly selling the content to local television channels. Among these are Choose your own Adventure, co-produced with Mike Yong Productions of the U.S., and Petpals, And Yet it Moves, Ratman, and Little Leonardo, all with Italy’s Rai Fiction.
With more series co-produced, revenues are expected to shoot up. Mr. Chakravarti expects revenues to touch the $100 million mark by 2008, a big chunk of it coming from the content distribution strategy. The privately held company won’t reveal current revenue figures.
Living Forever
PlayStation and Xbox are not distributed in India by their creators because the local market is not yet big enough, but DQ is on the road to produce games for these 3D consoles. DQ has already started work on the Skyland series, an action adventure sci-fi TV serial featuring a heroic young brother and sister team searching for their parents in a new world order, for the PlayStation and Xbox. Mr. Chakravarti expects this business to yield $30 million to $40 million in revenue in the next three years.
But before that, he says he plans to take the company public, though he won’t reveal any details. Going public may be necessary to gain access to more funds. “To make original content, one requires not only universally appealing storylines and characters, but also large investments,” says Deepak Kapoor, PricewaterhouseCoopers’ Indian entertainment & media practice leader.
To realize returns from such a large investment in original content, one must ensure that the product is aimed at larger audiences—hence the requirement for universally appealing content. Indian service providers have thus far come up with primarily Indian mythological characters, which have limited universal appeal. “Thus Indian animation producers demonstrate limited credentials, which in turn restricts their ability to garner larger investments,” says Mr. Kapoor. Though the industry has evolved from pure vanilla outsourcing to co-productions, for making a full-fledged original production, the growth is likely to be gradual, he feels.
For DQ, despite striving for original content, the outsourcing deals will not cease. Nor does Mr. Chakravarti see anything negative about them. In fact, he relates with quiet pride that one of his favorite book series as a child—Curious George—is being made into an animated series for the first time for NBC Universal by the folks at DQ.
The final dream: to create a character in India that will live forever, and fetch royalties forever. The challenge DQ and other Indian companies face is to find that character before Disney or Sony do.
A rapid sequence of images creates the movement of characters within an animation. Just a few seconds of movement requires hundreds of drawings, and the animators at DQ spend hours perfecting that motion. Contrary to common perception, animated movies and television series are still very much the literal handiwork of artists. A two-hour animated movie takes thousands of man-hours to complete, and hundreds of people work simultaneously to produce it.
Because of high labor costs in the United States and Europe, even the largest production houses now outsource production work to Asian countries where jobs can be completed at one-fourth the price, says Jacques Muller, a Frenchman who until recently worked for Walt Disney. Due to a shortage of animation talent in India, DQ CEO Tapaas Chakravarti recruited Mr. Muller to teach his employees in a four-month-long session on “classic” cartooning.
Despite that scarcity, India’s animation sector has quickly gone from almost nonexistent to bagging large orders from the most elite members of the club: Walt Disney, Pixar, Mattel, Sony Animation, Universal Studios, the Cartoon Network, and Imageworks. DQ, founded three years ago, now has more than 100 Indian competitors and counting: Paprikaas (see Work of Art), Toonz Animation, Crest Communications, Maya Entertainment, Silvertoon Studio, Pentamedia Graphics, and JadooWorks, among them.
Slave and Master
India’s animation industry clocked revenues of $285 million in 2005, and trade group Nasscom predicts numbers could reach as high as $950 million by 2009. (See India Animation to Reach $950M).
So far, the relationship between Indian animation firms and their customers has clearly been that of slave and master—the master sends the storyline, the drawings of the central characters, even the angles from which the viewer should perceive each frame, and “Indian artists just follow the reference sheets,” says Rajat Sharma, an analyst with Frost & Sullivan. Meanwhile, management works to elevate the workers’ status from mere outsourcing drones to more autonomous designers.
Forty-five-year-old Mr. Chakravarti has learned that smaller animation production companies are the key to gaining more value. Brand names like Sony and Walt Disney will only outsource work, while smaller firms are willing to co-produce a title. Under these terms, DQ would become an investment partner in the new film or series, retaining a portion of the intellectual property and sharing the rewards when the production hits the screen.
DQ’s investors also want their rewards. The company has received $9 million in private equity and venture capital funding from five companies: International Finance Corporation (IFC), an arm of the World Bank, TDA Capital (an associate of U.S.-based Templeton Group), Gary Wendt Capital, iLabs Funds, and India’s IL&FS Investment Managers.
For now, DQ mainly does work-for-hire, but Mr. Chakravarti still beams as he recounts his recent wins. There’s a big Disney project in the works, but he won’t reveal the title. DQ artists are collaborating closely with 70 customers in 14 countries: They’ve done all the production and compositing work for Mattel’s new Barbie movie, and are now working on a comedy show called Ron White that’s being spun off into a TV series. DQ and a South Korean firm are jointly working on The Boondocks, a TV series from the Sony Animation stable based on the edgy newspaper comic strip by Aaron Magruder. The firm is also collaborating with companies in South Korea, China, and the U.S. for a Nickelodeon project called Tak. Altogether, DQ is working on 28 new projects in various stages of progress. More are expected.
The Slog for Survival
Mr. Chakravarti rattles off these names casually, as if it required no effort to get the business. But the truth is that Indian animation firms have worked extremely hard to get the big orders, charging rates that only ensure survival, slaving for quality, and slowly earning the trust of customers.
All while dealing with a shortage of trained animators. To overcome this, DQ has spread its centers across eight locations in India, and added two in China and one in the Philippines. DQ employs more experienced Filipino animators at dollar salaries, more than double what Indian animators draw, say industry observers.
“Productivity improves hugely with experience in this industry,” says Mr. Chakravarti.
Competitors Toonz Animation and Paprikaas also have international talent from across the globe at senior levels in their creative teams. There is no clear count, but about 100 Indian animation companies outsource labor to studios. And many of them are working toward generating original content, not only for the local market but for exports.
Mr. Chakravarti is determined to take DQ to the next level. “We need to now reap the rewards, balance work and profit,” he says. To that end, DQ has set up a production company called Power Kidz in Mumbai to look after the distribution rights of titles in south Asia. “When we license a series, it becomes a long-term business model, not a one-off outsourcing deal,” says Mr. Chakravarti.
DQ has won the rights to distribute several of its co-productions in the Indian market, and is mainly selling the content to local television channels. Among these are Choose your own Adventure, co-produced with Mike Yong Productions of the U.S., and Petpals, And Yet it Moves, Ratman, and Little Leonardo, all with Italy’s Rai Fiction.
With more series co-produced, revenues are expected to shoot up. Mr. Chakravarti expects revenues to touch the $100 million mark by 2008, a big chunk of it coming from the content distribution strategy. The privately held company won’t reveal current revenue figures.
Living Forever
PlayStation and Xbox are not distributed in India by their creators because the local market is not yet big enough, but DQ is on the road to produce games for these 3D consoles. DQ has already started work on the Skyland series, an action adventure sci-fi TV serial featuring a heroic young brother and sister team searching for their parents in a new world order, for the PlayStation and Xbox. Mr. Chakravarti expects this business to yield $30 million to $40 million in revenue in the next three years.
But before that, he says he plans to take the company public, though he won’t reveal any details. Going public may be necessary to gain access to more funds. “To make original content, one requires not only universally appealing storylines and characters, but also large investments,” says Deepak Kapoor, PricewaterhouseCoopers’ Indian entertainment & media practice leader.
To realize returns from such a large investment in original content, one must ensure that the product is aimed at larger audiences—hence the requirement for universally appealing content. Indian service providers have thus far come up with primarily Indian mythological characters, which have limited universal appeal. “Thus Indian animation producers demonstrate limited credentials, which in turn restricts their ability to garner larger investments,” says Mr. Kapoor. Though the industry has evolved from pure vanilla outsourcing to co-productions, for making a full-fledged original production, the growth is likely to be gradual, he feels.
For DQ, despite striving for original content, the outsourcing deals will not cease. Nor does Mr. Chakravarti see anything negative about them. In fact, he relates with quiet pride that one of his favorite book series as a child—Curious George—is being made into an animated series for the first time for NBC Universal by the folks at DQ.
The final dream: to create a character in India that will live forever, and fetch royalties forever. The challenge DQ and other Indian companies face is to find that character before Disney or Sony do.
Monday, January 23, 2006
Architectural outsourcing - drawing a new design
ASK an architect fresher what he or she is earning, and he or she will mumble something about `growth prospects' and `initial period', because the field, they say, is a slow starter in terms of salaries. However, today freshers have the option of making close to five figures if they choose to go into offshoring companies.
Architects say that while medium-sized architecture firms pay a starting salary of Rs 5,000-6,000 for fresh architecture graduates and Rs 3,500 for fresh draughtsmen, architecture-outsourcing companies start with a salary of Rs 10,000-12,000 and about Rs 6,000 respectively.
Architectural outsourcing could mean anything from designing an entire building that is going to be erected thousands of miles away with the help of satellite pictures, to receiving a few rough sketches from faraway clients and filling in the details.
Mr Umesh Pujara, ASE Design Soft, an engineering design and draughting services company, said the company's clients provide it with a few rough sketches, and the company then takes over the entire back office work, from detailing to elevations. "The complete job is done here," he said.
The driving force, of course, is the cost, about one-tenth of what it would cost in the US, according to Ms Sujitha Arvind, Lead Architect, Exceed International, India, a company that specialises in commercial development. "Also, the number of professionals in the US and Europe have decreased in the last few years," she added.
Ms Arvind explained that detailing of projects from the US is simple because all the details are standardised. She said that a fresher could be trained in the details over a period of six months. In fact, Exceed prefers to recruit freshers. "We have very few senior people," she added.
And as an industry it seems to be picking up. ASE Design Soft has seen the number of projects that come in double over the last three years since its inception in 2003, according to Mr Pujara.
The real estate division of Exceed's Chennai branch started two years ago with four employees, and now has about a hundred draughtsmen, architects, engineers and project managers. "And we can expect to grow to around 1,000 in two years," said Ms Arvind.
As a result, mainstream architectural companies are being deprived of their share of an already decreasing pool of talent. Mr Pramod Balakrishnan, Senior Architect, Edifice, an architecture and interior design company, said, "Growth in terms of number of employees is not as much as we would like. The volume of work is growing, but there is a real paucity in available talent." Architects said that the top students passing out of architecture schools opt to study abroad, while it is the bottom half that stays back, which might account for that paucity.
Ms Arvind said that not only is the pay much higher, but also BPOs provide a better work environment. "The facilities at a BPO are at the same standard as a multinational corporation, both in terms of work environment and also software," she added.
And the smaller companies have been hit the hardest. Mr Yogesh Sharma, Architect/Partner, Design Works, said the attrition rate at his firm is high. "Freshers work for one or two years, and then go either to a bigger firm or to an outsourcing company. We have become like a training centre."
He said that despite the salary factor, the growth opportunities are not as strong in an architectural BPO, because you cannot build up a significant portfolio working there. ry.
Architects say that while medium-sized architecture firms pay a starting salary of Rs 5,000-6,000 for fresh architecture graduates and Rs 3,500 for fresh draughtsmen, architecture-outsourcing companies start with a salary of Rs 10,000-12,000 and about Rs 6,000 respectively.
Architectural outsourcing could mean anything from designing an entire building that is going to be erected thousands of miles away with the help of satellite pictures, to receiving a few rough sketches from faraway clients and filling in the details.
Mr Umesh Pujara, ASE Design Soft, an engineering design and draughting services company, said the company's clients provide it with a few rough sketches, and the company then takes over the entire back office work, from detailing to elevations. "The complete job is done here," he said.
The driving force, of course, is the cost, about one-tenth of what it would cost in the US, according to Ms Sujitha Arvind, Lead Architect, Exceed International, India, a company that specialises in commercial development. "Also, the number of professionals in the US and Europe have decreased in the last few years," she added.
Ms Arvind explained that detailing of projects from the US is simple because all the details are standardised. She said that a fresher could be trained in the details over a period of six months. In fact, Exceed prefers to recruit freshers. "We have very few senior people," she added.
And as an industry it seems to be picking up. ASE Design Soft has seen the number of projects that come in double over the last three years since its inception in 2003, according to Mr Pujara.
The real estate division of Exceed's Chennai branch started two years ago with four employees, and now has about a hundred draughtsmen, architects, engineers and project managers. "And we can expect to grow to around 1,000 in two years," said Ms Arvind.
As a result, mainstream architectural companies are being deprived of their share of an already decreasing pool of talent. Mr Pramod Balakrishnan, Senior Architect, Edifice, an architecture and interior design company, said, "Growth in terms of number of employees is not as much as we would like. The volume of work is growing, but there is a real paucity in available talent." Architects said that the top students passing out of architecture schools opt to study abroad, while it is the bottom half that stays back, which might account for that paucity.
Ms Arvind said that not only is the pay much higher, but also BPOs provide a better work environment. "The facilities at a BPO are at the same standard as a multinational corporation, both in terms of work environment and also software," she added.
And the smaller companies have been hit the hardest. Mr Yogesh Sharma, Architect/Partner, Design Works, said the attrition rate at his firm is high. "Freshers work for one or two years, and then go either to a bigger firm or to an outsourcing company. We have become like a training centre."
He said that despite the salary factor, the growth opportunities are not as strong in an architectural BPO, because you cannot build up a significant portfolio working there. ry.
Sunday, January 22, 2006
Here comes the 3rd generation outsourcing
There is more action on the outsourcing deal street. Just last week, while Genpact bagged the German technology group Linde’s finance and accounts processes contract, HCL Technologies signed a co-sourcing deal with Europe’s leading electrical retailer DSG.
While deals are nothing new, what we are seeing now is actually the third generation of outsourcing, or call it outsourcing Version 3.0. With this current wave of outsourcing, the mega-deals era is all but over. And that goes for not just new deals, but deals coming up for renewal and being renegotiated mid-way.
Companies renegotiating deals want to change what they signed on the dotted line. Now they want to offshore services to multiple vendors around the world and not with just one vendor taking home the whole cake.
TPI, the global sourcing advisor, is helping renegotiate $15-bn worth of deals at present. Asked about this trend, TPI partner Siddharth A Pai told ET: “This is the third generation of outsourcing.
In the first generation, one big vendor took home a mammoth deal. For instance, EDS bagged the $10bn Xerox contract or IBM-Kodak signed an $8bn IT outsourcing deal. In the second wave, that is, in the 1990s and till recently, the deal size was still big but smaller than the first generation. Like the $4-bn IBM deal with Cable & Wireless.”
The third generation deal is typified by the rise of offshore companies (like TCS, Wipro, Infosys). Deals are getting smaller and being split among multiple vendors. Like the $2.2bn ABN Amro outsourcing deal. That one involved IBM, Accenture, TCS, Infosys and Patni Computer Systems.
While deals are being split, there is also a move among companies to pitch jointly. For instance, a global vendor may pitch alongside a strong local player to get a bite into a bigger deal. Like EDS is pitching for the General Motors contract along with Wipro Technologies. Back in the 1980s EDS alone had bagged the $16bn GM outsourcing contract.
When asked about the new kind of deals, this is what HCL Technologies president Vineet Nayar had to say. “About 30-40% of outsourcing earlier was that of assets. Now companies are retaining strategy and assets and outsourcing specialised tasks like infrastructure management, applications development. Also, there are more co-sourcing arrangements, like we have signed with DSG. The company retains the strategy while we do the rest.”
On the third generation of offshoring, Nasscom vice president Sunil Mehta said: “In the earlier eras, outsourcing was actually transfer of credit risk, with the vendor taking over the people and assets of the company. Now among other things, the credit rating of global vendors has come down and so large mega deals are not very attractive.”
However, in the new deals managing multiple relationships may be a challenge. To overcome this Mr Pai feels that companies will have one deal guardian, possibly the vendor that bags the biggest chunk, like IBM in case of the ABN Amro deal.
“The company outsourcing work will have operating level agreements with all vendors”, he said. It’s therefore time the Indian vendors got their act together to bag a bigger slice of the deals and become the guardian angels.
While deals are nothing new, what we are seeing now is actually the third generation of outsourcing, or call it outsourcing Version 3.0. With this current wave of outsourcing, the mega-deals era is all but over. And that goes for not just new deals, but deals coming up for renewal and being renegotiated mid-way.
Companies renegotiating deals want to change what they signed on the dotted line. Now they want to offshore services to multiple vendors around the world and not with just one vendor taking home the whole cake.
TPI, the global sourcing advisor, is helping renegotiate $15-bn worth of deals at present. Asked about this trend, TPI partner Siddharth A Pai told ET: “This is the third generation of outsourcing.
In the first generation, one big vendor took home a mammoth deal. For instance, EDS bagged the $10bn Xerox contract or IBM-Kodak signed an $8bn IT outsourcing deal. In the second wave, that is, in the 1990s and till recently, the deal size was still big but smaller than the first generation. Like the $4-bn IBM deal with Cable & Wireless.”
The third generation deal is typified by the rise of offshore companies (like TCS, Wipro, Infosys). Deals are getting smaller and being split among multiple vendors. Like the $2.2bn ABN Amro outsourcing deal. That one involved IBM, Accenture, TCS, Infosys and Patni Computer Systems.
While deals are being split, there is also a move among companies to pitch jointly. For instance, a global vendor may pitch alongside a strong local player to get a bite into a bigger deal. Like EDS is pitching for the General Motors contract along with Wipro Technologies. Back in the 1980s EDS alone had bagged the $16bn GM outsourcing contract.
When asked about the new kind of deals, this is what HCL Technologies president Vineet Nayar had to say. “About 30-40% of outsourcing earlier was that of assets. Now companies are retaining strategy and assets and outsourcing specialised tasks like infrastructure management, applications development. Also, there are more co-sourcing arrangements, like we have signed with DSG. The company retains the strategy while we do the rest.”
On the third generation of offshoring, Nasscom vice president Sunil Mehta said: “In the earlier eras, outsourcing was actually transfer of credit risk, with the vendor taking over the people and assets of the company. Now among other things, the credit rating of global vendors has come down and so large mega deals are not very attractive.”
However, in the new deals managing multiple relationships may be a challenge. To overcome this Mr Pai feels that companies will have one deal guardian, possibly the vendor that bags the biggest chunk, like IBM in case of the ABN Amro deal.
“The company outsourcing work will have operating level agreements with all vendors”, he said. It’s therefore time the Indian vendors got their act together to bag a bigger slice of the deals and become the guardian angels.
Saturday, January 21, 2006
Outsourcing companies may send work across street
After seven years in business, Message Broadcast in Newport Beach, Calif., grew to need more legal assistance than its outside law firm had time for. But the marketing firm still didn't have so much legal work that it needed to hire a full-time general counsel.
Instead, the company decided to outsource the work — not to China, but to Orange County, Calif.
Enter The General Counsel, an Orange County firm that goes to clients' sites to fill the gap between companies that need only occasional legal advice and those that must hire a staff attorney.
Message Broadcast gets experienced, cost-effective legal help, and The General Counsel gets to include Message Broadcast in a broad base of customers that provide it with consistent work.
Outsourcing is often equated with sending work to other countries. But studies about outsourcing — such as a report from consulting firm PriceWaterhouseCoopers that 73 percent of U.S. executives outsource at least some business processes — typically don't distinguish between work sent halfway around the world and what's sent across the street.
While the motivation to send work to foreign countries usually is saving money, domestic outsourcing often enables small or growing companies to tap greater expertise than they could afford to hire as employees. It also gives them greater flexibility when their workload spikes temporarily.
Marketing and human resources are among the functions that businesses most frequently handle through domestic outsourcing.
In contrast to companies that outsource abroad, flexibility rather than cheap labor is the greater motivation for companies' outsourcing to local third-party providers.
Filenet, a Costa Mesa, Calif., software company, has 100 marketing employees worldwide, but hires The PowerMark Group, a San Juan Capistrano, Calif., technology marketing firm, for special projects such as planning its recent user conference in Las Vegas.
"I expect outsourcing to smooth out the peaks and valleys, so I don't hire people for the whole year to do three months' work," said chief marketing officer Martin Christian.
Domestic firms that handle outsourced tasks tend to have experienced people in specialized areas, said Denise Chavez, chief executive of Conduit International, a Long Beach, Calif., marketing company.
Instead, the company decided to outsource the work — not to China, but to Orange County, Calif.
Enter The General Counsel, an Orange County firm that goes to clients' sites to fill the gap between companies that need only occasional legal advice and those that must hire a staff attorney.
Message Broadcast gets experienced, cost-effective legal help, and The General Counsel gets to include Message Broadcast in a broad base of customers that provide it with consistent work.
Outsourcing is often equated with sending work to other countries. But studies about outsourcing — such as a report from consulting firm PriceWaterhouseCoopers that 73 percent of U.S. executives outsource at least some business processes — typically don't distinguish between work sent halfway around the world and what's sent across the street.
While the motivation to send work to foreign countries usually is saving money, domestic outsourcing often enables small or growing companies to tap greater expertise than they could afford to hire as employees. It also gives them greater flexibility when their workload spikes temporarily.
Marketing and human resources are among the functions that businesses most frequently handle through domestic outsourcing.
In contrast to companies that outsource abroad, flexibility rather than cheap labor is the greater motivation for companies' outsourcing to local third-party providers.
Filenet, a Costa Mesa, Calif., software company, has 100 marketing employees worldwide, but hires The PowerMark Group, a San Juan Capistrano, Calif., technology marketing firm, for special projects such as planning its recent user conference in Las Vegas.
"I expect outsourcing to smooth out the peaks and valleys, so I don't hire people for the whole year to do three months' work," said chief marketing officer Martin Christian.
Domestic firms that handle outsourced tasks tend to have experienced people in specialized areas, said Denise Chavez, chief executive of Conduit International, a Long Beach, Calif., marketing company.
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