GLOBAL DELIVERY: Experiment to Strategy!

No matter how mainstream it has become today, the fact remains that

offshoring-as an idea-was mooted, marketed, and then successfully executed

by a set of spirited (then small) companies: TCS, Infosys, Wipro, and Satyam.

They challenged the very supremacy of established leaders like IBM and EDS, and

successfully sold the idea to American corporations that IT services could be

successfully executed thousands of miles away in a country that till then was

known for its mysticism, yoga, poverty.... This, at a time when 'outsourcing'

as an idea was still getting mainstream. No wonder, many started taking

offshoring and outsourcing as interchangeable terms. That hangover remains

today. But that is a different story.

They also ended up selling another idea-the country where incidentally all

of them had their roots-India. This idea would later impact the entire global

economy. That is yet another story-and a much bigger one at that.

Taking a cue from them, a few big TNCs in America and Europe-like GE,

American Express, and British Airways-started exploring the idea if they could

replicate a similar model to deliver business services, not just IT and computer

services. And they did succeed, though not as easily. They were soon joined by a

few independent companies who started providing these services to clients in

America and Europe, on a third-party basis. That was the BPO wave of 1999 and

2000.

As offshoring was turning from an idea to a viable model, and both captive

operations of large corporations and the India-based BPO service providers were

ramping up, big outsourcing companies still remained sidelined. What was worse:

they were perceived second-rung. In a survey of US automotive companies in the

second half of 2003, as many as 41 percent of the respondents said they would

prefer an offshore-based service provider for offshoring their services as

compared to only 16 percent who said they would prefer a big, US-based,

broad-based, outsourcing service provider.

Now, that was a little too much.

Since then, a lot has happened on ground. IBM has acquired Daksh to scale up

its India operations; Convergys has reached the 10,000 people mark and so has

Accenture. Today, they match any India-based company in capability as far as

executing processes in India is concerned.

Yet, in market perception they remained followers, not leaders.

They realized that offshoring had become too synonymous with India and till

the time it remains so, they will compete as equals-or worse still, sometimes

as followers-of the India-based service providers.

It was time for serious rethinking. They found the answer-well, almost-in

the global delivery network (though much smaller in size), which they had built

over years in different parts, including some near-shore locations. That is when

they tried to sell that as well. The permutations and combinations are only too

familiar: best shore, any shore, mixed shore and what not!

But it did not work out as well as they had expected. Till that time, they

believed it was a marketing challenge. As their phrase-coining skills did not

achieve the result they set out to, it was time for putting a slightly more

holistic approach.

The result is a true global delivery strategy, which most of them are now

trying to put in place. And, for the first time since a decade, they seem to

have an upper edge. The offshore-based providers are caught on the wrong foot.

Though the IBMs and Accentures know that an Infosys or a TCS can catch up, they

also know that it is going to be really tough for the latter, to emerge from the

shadow of their true strength, As it was for the former till now.

It is a classic role reversal. And at this point of time, it is clearly 'advantage

global majors'.

Weaving the Pieces



Contrary to popular belief, service delivery out of a location other than

the served market is not a new concept for most outsourcing majors. From

Philippines to Slovakia; from Dominican Republic to Ghana; and from Guatemala to

Hungary; they have all been there, serving their customers in developed (and

thus costlier) markets nearby. As is also evident from the table, there is

hardly any exception to that trend-be it a broad-based outsourcing service

providers like IBM, EDS, or ACS; or a customer service major like Convergys,

Sitel, or Teleperformance.

A. This region, comprising countries such as Mexico, Jamaica, Costa Rica, Brazil, Argentina, Dominican Republic, and even Guatemala have been used for near-shoring by global companies for some time. B. Eastern Europe has emerged as a near shoring destination for countries in Western Europe. Geographically closer, availability of people speaking languages such as German and French has been a major reason. Major destinations are Czech Republic, Slovakia, Poland, Bulgaria, Hungary, and even Russia. C. Asia, with its nerve-center at India are true offshoring destinations for both America and Europe. Some places like the Dalian province of China also serve Asian countries like Japan. Other major destinations are the Philippines and Malaysia. African nations such as Egypt and Ghana are emerging but may be part of a greater Afro-Asian cluster.

However, few had approached it from a strategic perspective. Most of these

locations of delivery were either the lowest-cost country in a particular

region; or a comparatively lower cost country that spoke the same language as a

major market, often geographically near. So if Costa Rica or Mexico served the

Spanish-speaking population in the US, East European countries served Germany,

and Chinese provinces like Dalian served Japan.

However, it is evident that beyond this tactical need, there was no major

objective to offer any integrated offering. It was believed that while some cost

saving could be achieved by operating some delivery centers in these locations,

it could never go mainstream as these locations could not offer scale beyond a

point.

That is one perception that India changed. It could offer a workforce of

millions, which could speak English-still the most spoken in outsourcing

markets-and do complex technology and business jobs.

Take IBM. In all these years it reach a size of 12—13,000 people in all its

offshore delivery locations put together. With just one acquisition in 2004 (Daksh),

it increased that by more than 50 percent.

Call it an irony if you like. The same India that was giving new hopes to

these companies to take offshore mainstream had, in the first place, forced them

to readjust!

But, competition is good for everyone. Incidentally, it is the US, not India,

which taught the world this mantra.

But, it was still offshore as the 'idea', and disparate

nearshore delivery to different regions in 'practice'. It was international,

not yet global.

Meanwhile, another major development was happening globally.

Most services industries-like financial services, insurance, telecom, and

technology-were getting more consolidated and globalized. The bigger TNCs-more

likely to be the clients of these companies than the smaller companies-were

approaching services procurement with a more global approach. This in turn was

not only driven by the changes in those industries but the increasing awareness

about and growing comfort levels with offshoring as a service delivery model.

While competition from offshore-centric players was an

igniting factor, it was changes in user mindset that catalyzed the globalizing

effort. Then, suddenly an IBM Europe was no more selling to Citicorp Germany. It

was IBM selling to Citicorp.

This required a global outsourcing company to not only

evaluate Hungary and Slovakia for delivery to a client in Germany; but evaluate

India and China as well. "These are truly global companies and they can

leverage on their global presence as it suits them," says David Tapper,

director of IT outsourcing, utility services and global offshore services with

IDC.

Most of these companies have embarked on a strategizing

journey, wherein they have charted out what value-add they would offer; what

pieces need to be put together; and what is needed to fill the gaps, if any: all

as an integrated strategy.

Today all expansion plans, selection of locations, and

mergers and acquisitions emanate from that integrated strategy. Here the central

idea is that the whole offers significantly higher value than the sum of parts.

While companies glued to one location try to build the bits and pieces, these

global companies plan to provide a real choice to the customer.

Do not be surprised if the phrase global delivery dominates

the outsourcing lingua franca through 2005.

2005: The Crystal Ball



Does it mean that the game is tilted in favor of the big and the famous?

If only global business was the simple....

• Some Imminent Trends....

Strategizing to continue: Merely realizing that a

global approach is the best bet does not necessarily mean that the

differentiation is achieved. For one, the strategy of each player has to be

differentiated. And then, a lot remains to be done on the ground. For example,

ACS and EDS still have a limited presence in India. Many like CapGemini, Atos

Origin, and BearingPoint are still not here significantly. They will have to

decide their expansion strategy. Also, the medium-sized, specialist, pure-play

offshore vendors-in IT and BPO-will increasingly play an important role by

being able to offer a differentiation as compared to both global majors and

India-based big players. They can play an important role in the inorganic growth

strategies of the big players. Entry strategy in each offshore location will be

different and only successful executions will see the companies through.

Call center companies have a challenge: While call

center companies like Convergys, Sitel, Sykes, Teleperformance led the

broad-based companies by moving out of the US to nearshore locations, many of

them have not been able to ramp up successfully in distant locations such as

India. Though almost all major names (other than APAC Customer Services) have

their delivery facilities in India, only Convergys has been aggressive in

ramping up. "Convergys is the only company that has had a genuine change of

heart; all others are still half-hearted," says an industry observer.

Convergys, has a global base of close to 60,000 employees. It has already

crossed the 10,000 mark (more than 16 percent) in India and is looking at

doubling that by the end of 2005. Otherwise too, Convergys has more than 40

percent of its people at offshore locations. Sitel, with a global base of close

to 35,000 people, has about 10 percent of its employees in India. However,

companies like TeleTech and Teleperformance have been far behind. It would be

decisively known who manages to stay in the offshoring game by the end of this

year.

Inorganic Growth to play a major role: Till now,

growing skills was the strategic objective of outsourcing companies; location

expansion was often tactical. Accordingly, we continue to see mergers and

acquisitions driven more by the need to acquire skill. With global service

delivery becoming a strategic objective, a lot of M&A will happen with this

objective. And no marks for guessing where the major part of the drama will

unfold!

Seamless delivery-the next driver: So far, the

offering is more from a 'what we can offer from where' standpoint, and the

actual service delivery is still isolated; e.g., if a center is running some

process with some skills, there is no simple way to deliver that from another

center in a short time, let alone seamlessly. The next phase will have to offer

that seamlessness. That will come from a different way of planning service

delivery, of distributing processes across locations; looking at skills other

than language; and somewhat seamless connectivity among major centers. While a

shift towards such an approach is imminent, it may not exactly happen in 2005.

Never take the Indians for granted: Some big

India-based vendors have also realized that they need to develop global

capability and would try to achieve that by a combination of organic and

inorganic means. And do not discount their inherent strength: they understand

long-distance relationships far better and know how to operate at low costs. Do

not write them off as yet.

New Kids on the block: With BPO growing fast enough,

companies with strong BPO skills may emerge. The most likely candidates are the

'captives turned third parties' who, like the broad-based BPOs, have diverse

skills, such as WNS and GECIS.

• India: A heady mix of hype and substance

Tech boom on the 90s elevated the stature of Indian tech

capabilities. In business process offshoring, that capability was matched by the

country's ability to scale up rapidly.

Excellence and scale; individual skills as well as craze for

quality; domain knowledge and tech capability-the combinations are deadly. No

wonder, India is leading the offshoring space with an almost two-thirds market

share. It is only fair that in the hype-loving American mindset, the mind share

is much more. Says Lewis P Wheller, CEO of US-based Rapidigm, a first-time

offshorer having established a center in Noida couple of years ago and now

looking at expansion in India, "Right now, India is on top of any CEO's

mind. The Indian work ethic, the Indian intelligence, the Indian technical

expertise beats anyone In the US, guess who is it that always volunteers to work

on a Sunday or a holiday. It is always an Indian." And a lot of Indians in

the technology space as well as verticals like financial services, banking,

insurance, and telecom (which lead outsourcing in general and offshoring in

particular) meant that the passage to India has so far been smooth.

Not only have companies brought some of their core

activities, many jobs that have never been outsourced have been offshored to

India, albeit as part of captive operations. HP's accounting delivery center

in Bangalore; Reuters' delivery center in the city; and equity research of

almost all major investment bankers (JP Morgan, Morgan Stanley, Glodman Sachs,

Lehman Brothers at the last count) is now being done from India.

Scale has matched the value: "The company will

hire 20,000 employees in India by end of 2007," John C Freker, president,

customer management group, Convergys had announced at the opening of the second

center in Bangalore just less than two years ago. Today, that target is for

end-2006. How many countries can offer that?

"India is an integral part of Accenture's strategic

delivery model, which enables the company to provide clients with seamless

delivery of services from multiple geographic locations," says Chet Kamat,

head of Accenture India delivery centers.

If value and scale are attractive, quality is taken for

granted the moment one enters India. In 2002, 60 of the 80 SEI CMM level 5

companies hailed from India. COPC's chairman himself does business development

in India in the call center community.

Yes, in some offshoring, scaling up is not so easy. There is

no scope for inorganic growth. Take F&A. HP had to grow organically.

"It is for similar reasons that the expansion of some major back-office

players like ACS, Hewitt, or even BearingPoint has not been dramatic,"

points out Avinash Vashistha, managing partner of NeoIT, a Bangalore-based

outsourcing consultancy firm.

Many have also opted for the partnership route or the

build-own-transfer route with third-party Indian service providers. BearingPoint

has tied up with Covensys, Perot Systems earlier had a joint venture with HCL

Technologies, Sitel has a joint-venture with the Tatas, and Xchanging has a

joint-venture with Patni BPO, Capita entered the country through Mastek, and

TeleTech through a joint venture with Bharti Group.

While most companies are gung-ho about India, Ken Touchman,

chairman and CEO of TeleTech said while responding to a query about the limited

TeleTech presence in India, "We have followed a very deliberate strategy as

far as India is concerned. The country has a lot of promise but it is still in

its infancy. The Indian management capability is still in its infancy. Therefore

we have been following a very calculated entry here. Being first is not

necessarily the most important but being consistent in our service delivery is.

The second reason is that we have a very big presence in the Asia-Pacific region

as compared to our competitors, so we do not need to stack our cards on

India."

For those who have placed their bets on India and are keen to

scale, a potential challenge especially for companies like BearingPoint is their

brand image within the country. Says Ravindra Datar, principal analyst, IT

services (India), BPO (Asia Pacific), Gartner India Research & Advisory

Services, "Now it is an open war for talent. Most companies are in the

ramp-up mode and brand recall becomes key in scale-up ability. Therefore a major

activity for companies is building brands, even though they do not sell their

products in India."

At this point, India's hype is matched by its ability. And

there is no other country, that is a close number two.

But as offshoring changes to global delivery, India cannot

retain its leadership by just being the biggest location. It has to be a hub of

activities. That is the challenge for now.

Balaka Baruah

Aggarwal