Offshore Outsourcing, Software Outsourcing, India Outsourcing, Outsourcing

Financial Firms Hasten Their Move to Outsourcing

2004-08-18T22:06:00.000-04:00

August 18, 2004
www.nytimes.com
Financial Firms Hasten Their Move to Outsourcing
By SARITHA RAI

ANGALORE, India, Aug. 16 - Last February, when the online lending company E-Loan wanted to provide its customers faster and more affordable loans, it began a program in India. Since then, 87 percent of E-Loan's customers have chosen to have their loans financed two days faster by having their applications processed in India.

"Offshoring is not just a fad, but the reality of doing business today," said Chris Larsen, chairman and chief executive of E-Loan, "and this is really just the beginning."

Indeed, seemingly a myriad of financial institutions including banks, mutual funds, insurance companies, investment firms and credit-card companies are sending work to overseas locations, at a scorching speed.

From 2003 to 2004, Deloitte Research found in a survey of 43 financial institutions in 7 countries, including 13 of the top 25 by market capitalization, financial institutions in North America and Europe increased jobs offshore to an average of 1,500 each from an average of 300. The Deloitte study said that about 80 percent of this went to India.

Deloitte said the unexpectedly rapid growth rate for offshore outsourcing showed no signs of abating, despite negative publicity about job losses. Although information technology remains the dominant service, financial firms are expanding into other areas like insurance claims processing, mortgage applications, equity research and accounting.

"Offshoring has created a truly global operating model for financial services, unleashing a new and potent competitive dynamic that is changing the rules of the game for the entire industry," the report said.

Michael Haney, a senior analyst at research firm, Celent Communications, said: "With its vast English-speaking, technically well-trained labor pool and its low-cost advantages, India is one of the few countries that can handle the level of offshoring that U.S. financial companies want to scale to." .

In a recent report "Offshoring, A Detour Along the Automation Highway," Mr. Haney estimated that potentially 2.3 million American jobs in the banking and securities industries could be lost to outsourcing abroad.

Girish S. Paranjpe, president for financial solutions at Wipro, a large outsourcing company in India, said, "Pent-up demand, recent regulatory changes and technology upgrade requirements are all making global financial institutions increase their outsourcing budgets." His company's customers include J. P. Morgan Chase, for which it is building systems for measuring operational risk, and Aviva and Prudential, the British insurers.

Several recent studies concur that there has been an unexpected and large shift of work since the outsourcing pioneer Citigroup set up a company in India two decades ago. They cite cost advantages as the primary reason. According to Celent, in 2003 the average M.B.A. working in the financial services industry in India, where the cost of living is about 30 percent less than in the United States, earned 14 percent of his American counterpart's wages. Information technology professionals earned 13 percent, while call center workers who provide customer support and telemarketing services earned 7 percent of their American counterparts' salaries.

Experts say that with China, India, the former Soviet Union and other nations embracing free trade and capitalism, there is a population 10 times that of the United States with average wage advantages of 85 percent to 95 percent.

"There has never been an economic discontinuity of this magnitude in the history of the world," said Mark Gottfredson, co-head of the consulting firm Bain & Company's global capability sourcing practice. "These powerful forces are allowing companies to rethink their sourcing strategies across the entire value chain."

A study by India's software industry trade body, the National Association of Software and Services Companies, or Nasscom, estimated that United States banks, financial services and insurance companies have saved $6 billion in the last four years by offshoring to India.

But cheap labor is not the only reason for outsourcing. Global financial institutions are moving work overseas to spread risks and to offer their customers service 24 hours a day.

"Financial institutions are achieving accelerated speed to market, and quality and productivity gains in outsourcing to India," said Anil Kumar, senior vice president for banking and financial services at Satyam Computer Services, a software and services firm. Satyam works with 10 of the top global capital markets firms on Wall Street.

Mastek, an outsourcing company based in Mumbai, is another example. Two years ago, Mastek turned from doing diverse types of offshore work to specializing in financial services. The results are already showing. In the year ended in June, 42 percent of Mastek's revenues, $89.28 million, came from offering software and back-office services to financial services firms, up from 22 percent last June.

Fidelity Investments, the world's largest mutual fund manager, started outsourcing to Mastek 18 months ago and is now among the top five clients in its roster.

Sudhakar Ram, chief executive of Mastek, said, "It is rare that within a year a new customer turns a top customer; this illustrates the momentum in the market."

Another Mastek customer, the CUNA Mutual Group, which is based in Madison, Wis., and is part of the Credit Union National Association, started a project billed at less than $100,000 two years ago. Now the applications that Mastek is building for CUNA, to handle disability claims, amount to a multimillion-dollar deal.

In the transaction-intensive financial services industry, offshoring of high-labor back-office tasks is becoming the norm.

ICICI OneSource, based in Mumbai, has added 2,100 employees in six months and signed on four new financial services clients, including the London-based bank Lloyd's TSB, for which it provides customer service.

In one year from March 2003 to March 2004, ICICI OneSource grew to $42 million in revenues from $17 million. Today, more than 70 percent of its revenues come from the financial services industry, up from 40 percent two years ago.

For India's outsourcing firms, growth has not been without hiccups. Earlier this year, Capital One canceled a telemarketing contract with India's biggest call center company, Spectramind, owned by Wipro, after some workers were charged with enticing the credit-card company's customers with unauthorized free gifts. Weeks earlier, the investment bank Lehman Brothers canceled a contract with Wipro saying it was dissatisfied with its workers' training.

In response, outsourcing companies are improving their offerings. Leading companies are investing in privacy and security due diligence as they handle sensitive customer data, doing reference checks on employees, providing secure physical environments with cameras, and banning employees from using cellphones and other gadgetry on the work floor.

Deloitte forecasts that by the year 2010, the 100 largest global financial institutions will move $400 billion of their work offshore for $150 billion in annual savings. Its survey forecasts that more than 20 percent of the financial industry's global cost base will have gone offshore in that period.

With competence levels rising, Indian companies are tackling more complex tasks. DSL Software, a joint venture of Deutsche Bank and HCL Technologies, a software company, is handling intricate jobs for the securities processing industry. "Indian firms are taking offshoring to the next level; in the banking industry for instance, they are getting into wholesale banking, trade finance and larger loan processing type tasks," said Mr. Haney, the analyst from Celent.

But the relentless demand for skilled workers is putting pressure on wage rates, narrowing the wage gap with the United States and other Western economies. Simultaneously, companies are plagued by higher attrition rates that may lead to quality and deadline pressures.

For the moment, however, there is no indication the industry cannot cope with the unflagging demand to send work offshore. "If India can continuously pull less paid, less educated people into the labor pool," Mr. Haney said, "a substantial wage gap will continue to exist."

Offshoring Roundtable

2004-08-15T13:07:00.000-04:00

To bring perspective to the current debate on the issue of offshoring in the U.S., McKinsey convened a leadership breakfast for business executives and invited a panel representing an array of viewpoints on the topic. Michael Patsalos-Fox, McKinsey Chairman of the Americas, introduced the session held in New York city:

"The issue of offshoring has created a whirlwind of debate that could define the next generation of global economic growth. Key business issues - including corporate competitiveness, economic development, job growth, and productivity - are all tied to how offshoring evolves. The report on offshoring by the McKinsey Global Institute provides compelling analysis of the global benefits of offshoring. But, offshoring provides its own sets of challenges. We are very pleased to have with us today leading thinkers on the topic to provide their perspectives and insights for a discussion moderated by Tom Friedman of The New York Times."

Ishwari Singh
www.a1technology.com - Offshore Outsourcing

A richer future for India

2004-08-15T12:50:00.000-04:00

A richer future for India
Two industries havA richer future for India rest of the economy should follow suit.

Diana Farrell and Adil S. Zainulbhai

The McKinsey Quarterly, 2004 Special Edition:What global executives think

The astonishing election upset in India has put the future of its economic-reform program in question. With the victorious Congress Party depending on Leftist parties for parliamentary support, uncertainty is running high about the future of the country’s privatization, deregulation, and foreign-investment reforms.

Voters have sent a clear message about the need for broad-based economic growth that lifts all boats. But some members of the winning coalition may well misinterpret that message. India’s recent experience—and that of its Asian neighbors—shows that continuing rural poverty stems not from too much economic reform but rather from too little. Since liberalization began, in 1991, annual GDP growth has been twice as high as it had been previously. As a result, poverty rates have fallen by nearly a third in both rural and urban areas. The celebrated software and outsourcing industries are only the latest evidence of the effectiveness of the reforms, which have created hundreds of thousands of high-paying jobs and generated billions in export revenues.

The challenge facing the new ruling coalition is to extend the success of the IT and outsourcing industries into the broader economy. To that end, foreign investment and global competition must be allowed to reach more sectors, including some in which the government now plays a significant role. Although India has broadly cut import duties and increased foreign-ownership limits over the past ten years, large parts of the economy remain sheltered by high tariffs and restrictions on foreign direct investment (Exhibit 1), which amounts to just 0.7 percent of India’s GDP, compared with 4.2 percent in China and 3.2 percent in Brazil. Imports total less than $70 billion—a small fraction of China’s $413 billion.

New research by the McKinsey Global Institute1 indicates that the foreign direct investment that did find its way to India has had an overwhelmingly positive impact. The introduction of foreign competition in IT, business-process outsourcing, and the automotive industry has prompted Indian companies to revamp their operations and boost productivity, and some have become formidable global competitors. Thousands of new jobs have been created in these industries. Consumers benefit from lower prices, better quality, and a wider selection of products and services, while domestic demand has soared in response to lower prices.

The task now is to build on the current momentum by replicating these successes across the economy. Earlier MGI research2 found that product market regulations, the lack of clear land titles, and pervasive government ownership were preventing India from achieving 10 percent annual GDP growth. MGI’s latest research shows that the country must go further in lowering trade and foreign-investment barriers if it is to continue integrating itself into the global economy.

Shining stars
India’s $1.5 billion outsourcing business illustrates how foreign investment and trade have benefited the country. Along with IT and software, business-process outsourcing is perhaps the most open sector. In 2002, it attracted 15 percent of total foreign direct investment and accounted for 10 percent of all exports. By 2008, it is expected to attract one-third of all foreign direct investment and to generate $60 billion a year in exports, creating nearly a million new jobs in the process.

Without early investments by multinational companies, the outsourcing industry probably would never have emerged (Exhibit 2). Pioneers such as British Airways and GE were among the first to see the opportunity to move IT and other back-office operations to India. The success of these companies demonstrated to the world that the country was a credible offshoring destination. The multinationals trained thousands of local workers, many of whom transferred their skills to Indian companies that sprang up in response. Although Indian outsourcing firms now control over half of the intensely competitive global IT and back-office outsourcing market, all of the leading ones started as joint ventures or subsidiaries of multinational companies or were founded by managers who had worked for them.

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Of course, allowing foreign investment in an industry that has no large Indian companies was relatively painless. It is far harder to put local incumbents in the line of fire. Yet India has done so in its automotive industry, with impressive results. Until 1983, high tariffs and a ban on foreign investment shielded government-owned automakers—such as, Premier Automobiles Limited (PAL)—from global competition. Local incumbents produced just two car models, both based on antiquated technology, between them, and charged high prices. In 1983, Suzuki Motor was allowed to take a minority stake in a joint venture with Maruti Udyog, another government-owned enterprise, to produce passenger cars. The new competition forced the incumbents to respond. Within a few years, eight Indian car models were in production, and all of them—including those from PAL—were of better quality than the cars produced before this liberation took place.

In 1992, the government lifted many of the remaining barriers to foreign investment in the auto industry. Nine additional foreign carmakers responded, and today competition is stiff. As a result, labor productivity has increased more than threefold, in part because PAL has been forced out of business. Prices have fallen steadily by 8 to 10 percent annually in all market segments, unleashing a burst of consumer demand. Despite higher productivity and the closure of PAL, employment has held steady and workers have benefited from higher wages.

India’s competitive intensity could give it a better position than China to serve as a global low-cost auto-manufacturing base
Today, India’s $5 billion auto industry is expanding by 15 percent a year—one of the world’s fastest automotive-industry growth rates—and produces 13 times more cars than it did in 1983. This year, Tata Motors will make history by exporting to the United Kingdom 20,000 cars to be sold under the MG Rover brand—a feat no one would even have dreamed of just a decade ago, given the quality of Indian cars at the time. In view of the greater competitive intensity in the market, India may be better positioned than China is to become a global low-cost auto-manufacturing base. None of this would have been possible had India’s carmakers remained isolated from the world.

Hiding behind trade barriers
The dynamic growth and competitiveness of India’s outsourcing and automotive industries stand in contrast to most of its economy, where continuing restrictions on foreign investment and trade dampen competition and help inefficient companies survive.

Another sector, food retailing, illustrates how Indian industry fares when foreign investment is banned entirely. Labor productivity, for instance, is a mere 5 percent of US levels, in part because street markets and mom-and-pop counter stores account for 98 percent of the market, modern store formats (like supermarkets and hypermarkets) for just 2 percent. But productivity averages just 20 percent of US levels even in Indian supermarkets as a result of their small scale, poor merchandising and marketing skills, and inefficient operations. In other emerging markets, including Brazil, China, and Mexico, global retailers such as Carrefour and Wal-Mart Stores have intensified competition and increased productivity. If these retailers could invest in India, improved Indian supermarkets could, we estimate, offer prices 10 percent lower than those of traditional grocery stores. Indian consumers across the social spectrum would benefit, and as many as eight million new jobs would be created.

Getting the full benefit of foreign investment calls for competition within industries, since it forces companies to improve their operations and innovate. Many forms of protection and regulation can stifle competition and thus limit the impact of foreign investment. The consumer electronics industry is a prime example. The government lifted foreign-investment restrictions in the sector in the early 1990s. From 1996 to 2001, foreign direct investment in it averaged $300 million annually—20 percent of the total for India—a large sum, although just 8 percent of the consumer electronics investment going to China and just half of the investment going to Brazil and Mexico. Still, the entry of multinational players has boosted the local industry’s productivity and given Indian consumers more choice and lower prices.

Despite these gains, consumer electronics goods made in India still can’t compete internationally, and the country’s consumers pay unduly high prices for them. The industry’s average labor productivity is only half of Chinese and 13 percent of South Korean levels. Tariffs, taxes, and regulations are the main culprits. Tariffs of 35 to 40 percent on finished goods keep out imports and allow inefficient companies to continue operating. They also force even the best manufacturers to operate with subscale plants when, as usually happens, Indian demand doesn’t justify larger scale. Tariffs on inputs and indirect taxes (mostly sales and value-added taxes) add substantially to the price of final goods, further limiting demand (Exhibit 3). Meanwhile, labor laws that prevent the rationalization of plants and limit the use of contract labor increase production costs for both foreign and domestic companies. Red tape in getting export licenses and inefficiencies in India’s ports make exporting finished goods prohibitively expensive (Exhibit 4).

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These same problems limit foreign investment and prevent many industries—including banking, heavy industry, and textiles—from reaching their full potential. Ultimately, consumers and workers pay through higher prices and the anemic pace of job creation.

Going global
India has clearly benefited from closer integration into the global economy in industries such as automotive, business-process outsourcing, and IT. To build on that success, the government must now lower trade and foreign-investment barriers still further.

First, tariff levels should be cut to an average of 10 percent, matching those of India’s neighbors in the Association of South East Asian Nations (ASEAN). Although progress has been made on tariffs, the Indian government still prohibits imports of many goods and protects inefficient companies from foreign competition. To give those companies a chance to improve their operations, the government might first lower duties on capital goods and inputs. Then, over several years, it could reduce them on finished goods.

Foreign-ownership restrictions should be lifted throughout the economy as well, except in strategic areas, notably defense. At present, foreign ownership is not only prohibited altogether in industries such as agriculture, real estate, and retailing but also limited to minority stakes in many others, such as banking, insurance, and telecommunications.

India’s government should also reconsider the expensive but often ineffective incentives it offers foreign companies to attract foreign investment, for these resources would be put to better use improving the country’s roads, telecom infrastructure, power supply, and logistics. What’s more, MGI research found that the government often gives away substantial sums of money for investments that would have been made anyway.3 (To give one example, it has waived the 35 percent tax on corporate profits for foreign companies that move business-process operations to India, even though the country dominates the global industry.) Moreover, state governments often conduct unproductive bidding wars with one another and give away an assortment of tax holidays, import duty exemptions, and subsidized land and power. Yet MGI surveys show that foreign executives place relatively little value on these incentives and would rather see the government invest resources in the country’s poor infrastructure.

To attract foreign investment in labor-intensive industries, the government should consider making labor laws more flexible
Finally, interviews with foreign executives showed us that India’s labor laws deter foreign investment in some industries. It is no coincidence that software and business-outsourcing companies are exempt from many labor regulations, such as those regarding hours and overtime. Executives tell us that without these exemptions, it would be impossible to perform back-office operations in India. To attract foreign investment in labor-intensive industries, the government should therefore consider making labor laws more flexible.

Some Indian policy makers might argue that the reforms proposed here would undermine long-held social objectives, such as creating employment. But the evidence shows that regulations on foreign investment, foreign trade, and labor have actually slowed economic growth and lowered the standard of living. A decade ago, India’s per capita income was nearly the same as China’s; today, China’s is almost twice as high.

India’s economy has made real progress, but further liberalization will be needed to sustain its growth. The country now has 40 million people looking for work, and an additional 35 million will join the labor force over the next three years. Creating jobs for all these Indians will require more dynamic and competitive industries across the economy. Opening up to foreign competition, not hiding from it, is the answer.

About the Authors
Diana Farrell is the director of the McKinsey Global Institute, and Scratch Zainulbhai is a director in the Mumbai office.

Ishwari Singh
www.a1technology.com - Offshore Outsourcing

McKinsey Global Survey of Business Executives , July 2004

2004-08-15T12:39:00.000-04:00

McKinsey Global Survey of Business Executives , July 2004
The second McKinsey Global Survey of Business Executives finds that corporate leaders are still confident—especially about hiring, IT spending, China, and India—though they’ve tempered their earlier enthusiasm.

The McKinsey Quarterly, 2004 Special Edition:What global executives think

The latest McKinsey Quarterly survey of some 5,500 senior corporate leaders around the world shows that executives from a wide range of industries and regions remain broadly positive about the global economy. These executives have curbed their optimism since early this year, but many plan to step up hiring as well as spending on information technology. The most vigorously upbeat sentiment comes from India, where executives voice strong confidence in the new government's ability to advance economic liberalization, and from a rapidly expanding China, which is confident that it will continue to attract massive foreign direct investment (Exhibit 1).

Nonetheless, during a period when oil prices and fears of interest rate hikes rose, executives curbed their earlier enthusiasm about their own economies and industries. Overall, confidence levels have declined by 6 percent since the Quarterly's first survey, in January. The most dramatic decrease came in developing markets.

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Many executives also feel ongoing pressure on prices—a sign that competition remains heated. And though the promise of India and China continues to dazzle, not all business leaders believe that those countries can sustain their economic reforms. (For information about the survey respondents and on the use of the data, see sidebar "The McKinsey Global Confidence Index.")

The survey's regional data provide some of the most intriguing insights into the thinking of business executives. In January, for example, those in emerging markets were the most optimistic participants in the survey, but since then their confidence has fallen three times as far as that of their counterparts elsewhere—to a level below the global average. Although the confidence of executives in India and China declined, it remains so high in these two prime destinations for outsourcing and foreign investment as to buoy sentiment in the developing countries as a whole (Exhibit 2).

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Concern over the near term is greatest among executives in the developed Asia-Pacific economies: Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea, and Taiwan. Only 48 percent of the region's executives expect conditions in either their national economies or their industries to improve in the next six months. In contrast, European executives are much more enthusiastic about the prospects for their industries—no matter which one they work in—than for their national economies: only 51 percent of them expect even a moderate improvement in the latter, but 62 percent feel confident about the former.

A particular bright spot everywhere turned out to be information technology, where investment apparently is on the rise. Half of all chief information officers (CIOs) and chief technology officers (CTOs) who responded to the survey and nearly 40 percent of all other executives indicate that their companies are planning an increase in IT spending over the next six months. Indeed, nearly a third of both groups of respondents say that their companies intend to raise spending on technology by 11 to 25 percent.

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Despite these encouraging signs, executives don't see much leeway to raise prices. Around the world, most of the respondents say that their companies don't plan any price change, and 9 percent actually report plans to cut their prices. Even among the 26 percent of survey respondents who say that their companies will increase prices, most plan to do so only moderately (Exhibit 3).

Yet the survey provides hope for job seekers: after years of declining employment, 43 percent of the respondents say that their companies will start recruiting. Small businesses, however, are far more confident about adding to their payrolls than larger ones are (Exhibit 4, part 1). While Chinese and Indian companies plan to do much of the hiring, nearly half of the North American1 executives say that their companies intend to take on additional employees—11 to 25 percent more, according to 19 percent of them (Exhibit 4, part 2).

The McKinsey Global Confidence Index
The second in The McKinsey Quarterly's ongoing surveys of global executives garnered responses from 5,500 chief executives and other senior corporate leaders around the world: 11 percent from the developed countries of the Asia-Pacific region, 31 percent from Europe, 41 percent from North America, and 18 percent from developing markets.1 The next survey is planned for the autumn of 2004.

The Confidence Index is a barometer of the attitudes of business executives about the economy's near-term prospects. It expresses, in a single figure, responses to a standard set of four questions (exhibit) about current economic conditions and expectations. An index above 50 means that positive responses outnumber negative ones.

India wins in talent and R&D
Respondents in India completed the survey during those days in May when it became clear that the country's voters had handed the ruling Bharatiya Janata Party a stunning defeat. Despite the uncertainty the change created for local and foreign investors, Indian executives express remarkable confidence in the new government—a full 84 percent indicate that they are very or somewhat confident that it can continue to liberalize the economy and to manage economic growth effectively. Such support will be essential if the government is to move ahead on liberalizing trade and the rules for foreign direct investment (see "A richer future for India"). Indian executives are confident not only about their country's government but also about their economy: 66 percent are expecting it to be at least moderately better in six months. Only 56 percent of all executives surveyed are hopeful about their home economies.

India also stands out as a source of talent and as a destination for R&D investment. Executives from the developed Asia-Pacific economies—especially the big companies that are first movers in offshore investment and so are most familiar with the labor landscape in India and China—are particularly keen on India. Among respondents from large companies in the Asia-Pacific region, 71 percent see India as an important source of talent; in the world as a whole, 58 percent of such executives share that view. Except in the Asia-Pacific region, more executives of large companies say that they plan to invest in R&D facilities in India than in China (Exhibit 5).

The faith of Asia-Pacific executives in India's talent doesn't extend to the new government, however. Just 10 percent of them—a percentage lower than that in any other region—are very confident in its ability to manage the economy.

China has its admirers
The rapid growth of China's economy has raised worries that it could overheat, but executives there are highly optimistic about the government's efforts to manage growth. Indeed, some 95 percent of them are confident that the country's leaders can continue to liberalize and manage the economy.

Others are less certain. A meager 7 percent of North Americans, for example, feel very confident about the Chinese government (Exhibit 6). Indeed, North Americans feel more dubious about China than do executives from any other region. They are more upbeat about India; those from large companies, for example, tend to see it as a more important source of talent.

But even with the North Americans' lack of enthusiasm for China factored in, it still wins the race for foreign direct investment. More than half of the executives from large companies across the globe say that they plan to increase their investments in China during the next two years. Only 44 percent of executives from such companies say that they plan to increase their investments in India.

Chinese executives agree with these projections: 82 percent expect incoming foreign direct investment to increase over the next two years. Indeed, they are far more hopeful about continued investment in China than are their counterparts elsewhere. The North Americans are the least confident—and least interested. Even so, more executives from all regions expect their companies to invest in China than in India.

Renewing an interest in IT
Do CIOs and CTOs know something about their budgets that other top executives don't, or are they just more optimistic? Half of them expect spending on IT to increase over the next six months (Exhibit 7), while only 39 percent of other senior executives think that might happen. Among all executives who expect their companies to spend more on IT, nearly a third predict an increase of more than 10 percent; hardly any executives expect IT spending to fall.

Tech executives in India and China are more optimistic than those in other parts of the world: 86 percent of the Indian and 75 percent of the Chinese CIOs and CTOs say that their companies plan to increase IT spending. A third of the Chinese CIOs and CTOs report that it will rise by 26 percent or more (Exhibit 8).

But technology executives in the world as a whole are more downbeat about the economy's prospects than other top managers are: just 47 percent of the CIOs and CTOs in the survey thought that economic conditions in their countries had improved during the past six months, compared with 58 percent of the other executives (Exhibit 9). The divergent views of these two groups may play out most critically in the way they perceive the next round of technology purchases.

Surprisingly, few executives think that sales or purchasing are the corporate functions that depend most on IT; more list production, financial reporting, order fulfillment, or customer service. Some 18 percent of nontechnical executives think that financial reporting and control are the systems most reliant on IT, but only 11 percent of CIOs and CTOs do.

Ishwari Singh
www.a1technology.com

Offshore Outsourcing in Germany

2004-08-15T12:27:00.000-04:00

European companies have joined the movement to offshore service jobs to low-wage nations. A new perspective by the McKinsey Global Institute analyzing the impact of offshoring on Germany – Europe's largest outsourcer after the U.K. – suggests that while companies enjoy enormous savings from offshoring, European economies could lose out rather than benefit from the practice unless they undertake structural reforms.

This mixed outcome stands in sharp contrast to the impact of offshoring on the United States. MGI has found that every dollar of corporate spending that U.S. companies outsource to India generates as much as $1.14 in new wealth for the U.S. economy. Offshoring leads to cost savings, revenue gains, increased exports, repatriated earnings, and the creation of new, higher value-added jobs that generate more wealth for the U.S. than is lost.

Germany sees fewer benefits
A similar analysis shows that German companies save less than their American counterparts because language and cultural issues add extra management costs to offshoring projects. In addition, they frequently offshore to Eastern Europe, where wages and infrastructure costs are higher than in other low-wage offshoring destinations such as India. Germany misses out on many of the high tech exports that offshoring can spark because American firms now dominate that industry, and it misses out entirely on the repatriated earnings of offshoring providers abroad.

The key difference, however, lies in the limited ability of German workers to find new jobs. If the rate of re-employment matched that in the U.S. – nearly 70 percent – offshoring would create €1.05 of value for the German economy for every euro of corporate spending offshored. MGI estimates, however, that re-employment rates could be as low as 40 percent, meaning that Germany recaptures only E0.80 for every euro offshored.

Offshoring as catalyst for change
Protectionism is not the answer. Offshoring to low-wage nations enables companies to reduce costs, offer new products and services, and become more competitive. Moreover, Germany's aging population and low birth rates will reduce the total number of workers in the coming decades, making offshore labor necessary to supply the low-cost goods and services the country needs to maintain or improve its standard of living. Rather than viewing offshoring as a threat, Germany's leaders must instead view it as the catalyst for undertaking the structural reforms the economy has long needed.

Germany's case offers a cautionary tale for other EU economies that share similar labor issues. To ensure European economies win from offshoring, policymakers must make labor markets more flexible and rethink regulations that stifle competition and innovation.

Ishwari Singh
www.a1technology.com

Indian Outsourcing Industry to grow to $55 Billion

2004-08-04T15:24:00.000-04:00

Indian IT Industry to Grow to $55Bn by 2008 – IDC

According to a study titled ‘Directions 2005’ by IDC, the Indian IT industry will grow to USD 55 billion by the end of calendar year 2008, from USD 19.5 billion in 2003. The report adds that the Indian IT industry will witness a CAGR of 23.1 percent between 2003 and 2008, with exports growing 25.3 percent.

Kapil Dev Singh, Country Manager, IDC (India), said that the higher growth in exports between 2003 and 2008 will be contributed primarily by the BPO or ITeS, which is expected to grow at a CAGR of 36 percent.

The report further added that India's offshore BPO sector will continue to grow very strongly despite concerns like backlash and emergence of other destinations like the Philippines, China, Malaysia, Russia, Hungary, Brazil and Mexico. China, India and South Korea account for 80 percent of the incremental regional market revenue in 2004.

Reported by rediff.com / Hindustan Times

www.a1technology.com

Michigan Univ. Opens Business Research Center in Bangalore

2004-07-27T15:05:00.000-04:00

Michigan Univ. Opens Business Research Center in Bangalore

The University of Michigan has opened a business research center in Bangalore, India, center of India’s’ booming computer technology industry. The center is a part of the university's business school.

University of Michigan is among a growing number of US business schools using India as the role model for the global economy, even as many American workers and politicians rally against offshore outsourcing.

According to Mayuram S Krishnan, one of the two co-founders of the Center for Global Resource Leverage: India, “It is an acceptance of a reality that we need to prepare our students. Outsourcing is just a small component of what we will do.” In June, 2004, the University of Michigan had set up a permanent office at the Indian Institute of Information Technology (IIIT) in the city.

Krishnan added that the response from students willing to travel to Bangalore was overwhelming, as most students understand that they will manage a global work force and make decisions regarding outsourcing and emerging markets.

Since the late 1990s, Bangalore has developed into a research, education and industrial hub. More than 1,300 foreign and Indian technology companies employ around 150,000 employees.

Reported by mlive.com

Outsourcing to India

2004-07-26T17:58:00.000-04:00

SEPTEMBER 15, 2003 (COMPUTERWORLD) - An abundance of low-cost labor and a reputation for high-quality work will, for the next several years, continue to make India one of the top outsourcing destinations for U.S. companies looking to cut IT development and maintenance costs.
But a lack of industry-specific consulting skills and market presence in the U.S. could limit the appeal of Indian vendors for upstream IT consulting work in the future, observers say.

"India Inc. as a brand has become very visible," says Pavan Kumar Maddali, a vice president at Hyderabad, India-based Satyam Computer Services Ltd. "No vendor needs to have a 'Why India?' slide in their PowerPoint presentations any longer."

Even so, "Indian companies are still positioned primarily as a cost-efficiency play" and not as upstream consultants, says Debashish Sinha, an analyst at Gartner Inc. "Though the top-tier companies are spending a significant amount on branding and marketing, they still don't have the same [name recognition] as the U.S. majors do," he adds.

Satyam and other Indian IT services companies have enjoyed tremendous growth in recent years by delivering cheap labor and quality work. The National Association of Software and Services Companies (Nasscom), India's software trade association, projects that the country's IT services industry will grow nearly 28% this year to more than $12 billion in revenue, at current exchange rates. More than 70% of that revenue will come from U.S. companies, with some contracts exceeding $40 million, according to Nasscom.

Major Indian vendors such as Tata Consultancy Services (TCS), Wipro Ltd. and Infosys Technologies Ltd. routinely sell to Fortune 500 companies, and they are now able to begin competing with IT services giants such as IBM, Electronic Data Systems Corp. and Accenture Ltd.

Despite rising costs and increased competition, India's low-cost labor pool, which has fueled much of this growth, will continue to be a magnet for U.S. companies desperate to shed costs in a down economy, Sinha says.

U.S. firms that outsource to Indian vendors can typically reduce project costs by 50% to 70% compared with doing it at home, says Jim Honerkamp, CIO at Clopay Corp., a $1 billion, Mason, Ohio-based manufacturer of commercial doors.

For less than 30% of what it would pay in the U.S., Clopay is getting Hyderabad-based Sierra Atlantic Inc. to develop and maintain its Oracle Corp. environment. Even projects that require staff to be located at Clopay's U.S. facilities are about 50% cheaper, under the fixed-price contract that Clopay has negotiated with Sierra.

Outsourcing to Sierra has allowed Clopay to double the resources it can bring to bear on a project, even as the number of internal IT employees at the company has dwindled from 95 to 35 over the past couple of years, according to Honerkamp.

"We've been asked to do more with less," says Honerkamp, explaining that Clopay's management team has asked him to reduce his budget—or at the very least keep it flat year over year.

"At the same time, our application portfolio has been increasing. The only way to look at this was through an offshore solution," Honerkamp says.

But cost isn't the only reason why outsourcing to Indian companies is an attractive option, insist users and analysts. Companies in countries such as Russia and China have begun offering better rates than Indian companies.

The difference lies in the scalability of major Indian vendors, their strong focus on quality and their experience delivering a wide range of services, says John Blanco, senior vice president at Cablevision Systems Corp. in Bethpage, N.Y.

When it comes to software development and process methodologies, all top-tier Indian vendors are certified at CMM Level 5, which is the highest level on Carnegie Mellon University's Capability Maturity Model. Major Indian vendors have also developed more of a global services delivery capability than their counterparts in other countries.

A $900 million company, Wipro, for instance, has more than 18,000 employees and operates software development centers in the U.S., Canada, the U.K., Germany and Japan. India's largest exporter, $1 billion TCS, employs more than 24,000 people and has nine development centers outside India, including one in China.

India's workforce also offers the largest pool of technical skills in the world, and the country's universities add 180,000 engineering graduates to its ranks annually.

Indian companies started by maintaining legacy applications and writing code for small projects, and they have steadily moved up the value chain into areas such as systems integration, network and infrastructure management and system planning and design work.

"I'm a complete nonbeliever that other countries can do this as well as India today," says Vivek Paul, chairman of Bangalore-based Wipro. "Anyone can set up a low-cost 200-person center in Uganda. The difference is in the investment in quality processes and global delivery capabilities" that Indian firms offer, he adds.

Such attributes were crucial to Cablevision's decision to select two Indian vendors—from an original field of 50 offshore companies in six countries—for an offshore pilot project.

The goal is to eventually use Indian vendors as strategic IT partners, both to augment internal IT development capabilities and to help Cablevision plan, design and implement new projects, Blanco says.

"We're not looking for just the lowest dollar [cost]. We are looking for vendors that will help us mature technically and from a process standpoint" as well, Blanco says.

New York-based financial services giant Lehman Brothers Holdings Inc. has begun strategic relationships with Wipro and TCS after an evaluation exercise in which many offshore vendors were ranked using Lehman's 15-criteria evaluation model.

"India was in a quadrant by itself" in terms of the labor pool, quality levels, process methods and government support for IT initiatives, says Peter Nag, vice president and global program management officer at Lehman.

Under its contracts with Wipro and TCS, Lehman has begun outsourcing several of its applications to India, according to Nag. "Cost is one of the expected benefits but not the primary reason," he says.

For all their success, one area where Indian companies still need to build their capabilities is in upstream IT consulting services, says Rusi Brij, the Jamesburg, N.J.-based CEO of Hexaware Technologies, an offshore software development company based in Mumbai.

Indian companies are strong in software development and maintenance but not so strong at understanding the business needs behind IT projects, Brij says. "Indian vendors typically don't see business users as a client; they see the IT organization as their client," he says.

Now with U.S. services companies such as EDS, Accenture and IBM beginning to expand their operations in India, vendors there are scrambling to acquire upstream IT consulting capabilities of their own.

Wipro last year boosted its energy and utility practice by acquiring the global energy practice of American Management Systems Inc. for $26 million. And HCL Technologies Ltd. in Uttar Pradesh has set up a joint venture with Answerthink Inc., a Miami-based business consultancy.

In the long term, there are some clouds on India's horizon.

While the top five Indian companies have been galloping along at growth rates in excess of 25% per year, the vast majority of smaller vendors are struggling along at a much slower pace. The trend could result in a consolidation of the midtier, predicts Gartner's Sinha.

Meanwhile, the growing presence of IBM, EDS and Accenture is putting the squeeze on pure-play Indian vendors. The U.S. companies not only have the ability to lure the best talent away from the Indian majors; they also have deeper pockets and can undercut Indian prices, says Brij. The presence of these companies will also have the effect of increasing salaries across the board, says Satyam's Maddali.

In the short term, the increased competition could mean better prices for U.S. customers. But over the long term, continued pressure on margins could begin to affect service delivery, says Sinha.

On Top of The World
Survey respondents say they’re currently outsourcing IT work to the following countries:
India 38%
China 6%
Mexico 5%
Ireland 5%
Canada 5%
Malaysia 4%
Philippines 4%
Russia 4%
Singapore 4%
Base: Survey of 252 corporate IT managers in the U.S.; multiple responses allowed

Source: Computerworld and InterUnity Group Inc., Concord, Mass., April and May 2003

Germany Turns to Outsourcing

2004-07-23T10:44:00.000-04:00

Germany Turns to Outsourcing

Germany Turns to Outsourcing
Though many German companies are finding it hard to operate due to shrinking margins and slow growth, many offshoring companies providing their services are witnessing a steady growth primarily due to an increasing interest by German companies in sending their non-core activities to offshore locations.

According to Debjit Chaudhuri, Head German Division, Infosys Technologies, an Indian software and IT service provider, the company is aggressively ramping up its operations in the country as more companies are looking at the option of outsourcing. The company’s German clients include Adidas and Siemens.

Chaudhuri points out that with its inflexible labor market, high production costs and feisty trade unions, Germany is ripe for outsourcing, or offshoring, thousands of jobs to low-wage countries such as India.

Recently the subject had become a hot-button political issue in a country partly because of countries like Poland and the Czech Republic, where labor costs are considerably lower, joining the European Union.

According to Andrew Parker, an analyst with Forrester, Germany has been shielded from the phenomenon due to its strict labor laws and conservative corporate culture. The country also has a much tighter laws about termination of employees and handing over employees to third parties. Language, too, has been a problem for some offshore operations such as call centres.

This has led some German firms to come up with a mixed approach towards outsourcing. Basic programming or other back-office tasks are offshored to India, but other aspects of the business are dealt with at 'near shore' operations in eastern Europe, where there are more German speakers.

The political debate surrounding outsourcing is extremely heated. German Chancellor, Gerhard Schroeder, has even branded efforts to shift jobs abroad as 'unpatriotic'. But analysts expect the EU's eastward expansion to encourage more German companies to pursue outsourcing.

Reported by The Strait Times.

Indian Animation Industry Revenues to Reach $15Bn by 2008 - Survey

2004-07-12T13:55:00.000-04:00

Monday, July 12, 2004

Indian Animation Industry Revenues to Reach $15Bn by 2008 - Survey

A recent study conducted by Andersen Consulting states that the Indian animation industry is expected to reach USD 15 billion by 2008.

Chetan S, Director-Business Development, Animation Training School, pegs the Indian animation industry at INR 550 million and expects a 30 percent annual growth for the next three years. He reckons that the country has emerged as a destination for outsourcing assignments from global studios such as Walt Disney Pictures and Cartoon Network. Although most Indian production houses still work on low-end projects, some of the top companies are slowly moving up the value chain.

A study by NASSCOM, a body of Indian IT service providers, forecasts that the global animation market to would generate revenues worth USD 50 billion to USD 70 billion by 2005. Animation production from Indian producers is expected to go up from USD 0.6 billion in 2001 to USD 1.5 billion by 2005.

However, the corporate view is a little different. According to SS Dahiya, Chairman and MD, Compudyne Winfosystems, not much work is happening on the 3D animation front in India, with shortage of requisitely skilled animators, acting as one of the major hurdles.

Despite the relative shortage, the cost of animation production in India is the lowest compared to destinations like Canada, Korea, Taiwan and Philippines. The cost of production of a half an hour animated programmed in the US is around USD 250,000 to USD 400,000. In Korea and Taiwan it is around USD 110,000 to USD 120,000 while in India it would be just around USD 60,000.

Reported by The Financial Express