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:

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

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.

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.

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.

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."

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.