Survival Strategy: Riding the Offshore Outsourcing Wave

Survival Strategies Diversify or Die The BPO route Riding the Offshore Outsourcing Wave Rein the Expenses

During the boom period, onsite projects in the US were instrumental in the phenomenal 100 per cent year on year growth rate in profits recorded by the Indian IT service industry. Prior to the slowdown, Indian companies bagged projects for $75 per hour but with the slowdown companies outbid each other and rates bottomed to $12 and $15 an hour. Under immense pressure Indian companies altered their business models in favour of offshore rather than onsite development. The impact on the bottomline was immediate; year on year growth declined by 70 per cent. But the changed model helped the sector to record 30 per cent growth rates, a significant achievement considering the unshakeable recessionary pressures on the global economy. Aware of the pressures on customers, Indian companies were quick to reinvent their marketing spiel and aggressively marketed itself as a cost effective high value outsourcing destination. India's cost attractiveness and expertise offer global companies to prune development costs by 70 per cent. Aware of the pressures on customers, Indian companies were quick to reinvent their marketing spiel. Consider this:

Last quarter, Tata Consultancy Services bagged a $100 million offshore contract from GE Medical Systems, the largest ever by an Indian company, to provide a complete range of global IT solutions and services.

For the year ending 31 March 2002, Wipro's offshore revenue was up 48 per cent.

Polaris' Software offshore centric revenues climbed by 45 per cent to Rs. 177 crore. The company has projected a 50 per cent growth rate for the current fiscal on account of the current offshore model.

Sat yam's offshore business gained momentum and grew to 69.8 per cent as compared to 51.9 per cent in previous years.

Syntax, envisaging a huge demand in offshore outsourcing, moved out of body shopping. The gamble paid off with the company now realizing 87 per cent of its revenues through outsourcing activities in verticals such as finance, automotive, retail and health care. The company today has an impressive clientele like Ford and Daimler Chrysler.

During the last one year, LG Soft India shifted focus from a predominantly onsite to an offshore model. During the boom period 90 per cent of the company's revenues accrued from onsite work. Today, onsite revenues constitute less than 10 per cent of revenues and the company is optimistic about achieving higher than industry average growth.

With two out of five Fortune 500 companies currently outsourcing operations to India, the industry is witnessing the emergence of new outsourcing models. The GE-TCS contract was a trendsetter. Global companies now prefer to outsource a huge project spread over multiple continents to one company, rather than dividing a project across multiple companies. This trend helps Indian companies such as TCS and a handful of its Indian peers, as smaller companies don't have the required size in terms of manpower and geographic presence to bid for such projects. The size of outsourced projects earlier was 70-80 man-year projects, but the TCS-GE alliance provides evidence of an increasing trend to outsource 300-400 man-year projects. Analysts expect the average size of contracts from global companies is now expected to jump 10-fold from the current $2.5 million to around $30 million.

Large Indian IT companies, including Tate Consultancy Services (TCS), are going a step further in getting large and long-term multi-million outsourcing. The deal involves taking over the complete asset (like software and hardware) and even employees of an IT division of a firm, in any sector. The supplier in turn provides complete IT services for the company on a long-term contract. Hitherto, only multinationals such as Accenture, EDS and IBM have been successful in bagging such large outsourcing projects. However, having realized the vast potential such projects offer, the large Indian firms have started directly to bid for such multi-million outsourcing projects and fight against such giants. The average revenue size of the deal could be around $150 million per year. The outsourcing projects works like this. For instance, a manufacturing firm has a large in-house IT division. The supplier of IT services would bid for taking the assets and people of the division on its roll and in turn provide complete IT services. This includes software, hardware, upgrade and maintenance. Under the arrangement the manufacturing company not only gets a cost saving of 30-40 per cent, but also gets efficient services. The arrangement also allows the company to concentrate on its core competence, which is manufacturing, he said. The trend is however restricted to large service majors desperate to make an entry into the global league.

Indian companies are also extending services to global corporations to launch offshore development from their facilities, In March Wipro Technologies tied up with Corona Networks a leading developer of next generation network-based edge aggregation and intelligent IP service platforms for the setting up of a Global Development Center. As part of the contract, Corona will get the dual benefit of leveraging on Wipro's technology expertise for product development and ensuring significant cost savings. Mascon Global has set up an ODC for 3Com. HCL Technologies has formed a joint venture with US-based Answer think. The new company, HCL-Answer think, will outsource the IT requirements of these clients to HCL Technologies offshore development centers, leveraging its expertise across a host of verticals and domains. ITC InfoTech Ltd, recently, announced the setting up of a dedicated offshore software development facility for its largest customer, Abbey National, a £10- billion group based in the UK.

The offshore outsourcing wave has in turn led to an increase in sub-contracting work to other service vendors. For instance Sasken has entered into an alliance with Centillium; Global Edge Software is working for HP India, Tata Elxsi is working on a project for Texas Instruments India and Deccanet Designs with Motorola. Mid-sized companies rather than compete for large projects with large corporations are capitalizing on their niche skills and specific technology expertise to bag a part of the projects from large companies.

Indian companies have definitely succeeded in making India the No 1 outsourcing destination. Worldwide, IT spends are pegged $700 billion; Of which analysts estimate IT services market to be approximately $300 billion. India currently accounts for two per cent, which is roughly around $6 billion, of the total market share. It is expected that by the year 2005, India will double its contribution. The current slowdown may enable companies to do just that.

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