The economic slowdown has resulted in increasing number of US-based companies now outsourcing their offshore R&D related work to third-party service providers in China, who charge lower billing rates. This has impacted the Indian outsourcing market adversely.

While the Indian R&D offshore outsourcing market is projected to grow at 14-16% in 2009, the Chinese market is expected to outshine India with a 30-35% during the recession period.

Even though China is only about 1/3rd of the total Indian R&D offshore outsourcing market in size, it has a relatively faster growth ratio than India. This is basically due to the capabilities of China in the manufacturing R&D and also lower billing rates.

In fact, India’s R&D offshore outsourcing market, which is estimated at $43.5 billion, experienced a 21% growth in 2008, while the China market, estimated at $9.5 billion, grew at a phenomenal 46% during the same period. It is primarily due the rupee fluctuations; the appreciation, followed by the depreciation, has largely impacted this market.

Talking to CXOtoday, Praveen Bhadada, engagement manager at Zinnov Management Consultancy, said, “The upswing in the number of US-based companies trying to offshore their R&D related work to third party service providers in China, among other factors, has resulted in this trend.”

The billing rates of the service providers in China are relatively lower compared to India. While Indian IT firms charge $24 per hour for new product development, Chinese firms charge $21 per hour for the same work. The billing rates for Indian IT firms are higher owing to factors such as better quality, IP protection and timely delivery. “But in the present economic recession scenario, both vendors and customers are looking to optimize on the billing rates,” said Bhadada.

In 2005, outsourced work to China amounted to $408 million, of which US had a 52% share. In 2008, China outsourcing R&D related work amounted to $1,287 million and US share amounted to 64%.  Similarly, Europe and Japan have also contributed to the major share of outsourcing work to China.
Another reason is Indian service providers do not offer a broad array of R&D services as opposed to their Chinese competitors and their focus is primarily on IT services. In fact, the total Indian service providers R&D headcount numbers to 110,000 with about 130 pure Indian players while the number in China is estimated at 39,000 to 45,000 with about 250-plus local service provider companies.

As per a Zinnov report, Indian service providers in China have not been able to scale up their R&D operations in spite of having ambitious ramp-up plans since inception. Also, all the major Indian IT players like TCS, Infosys, Satyam and Wipro have failed to reach the targets and also failed to make any inroads in China. Indian firms were to grow their headcount by 25% annually, but none have managed to do so.

India has been the preferred outsourcing destination for so long that we have begun to think that no one can catch up with us. This is a delusion that we need to snap out of fast, said Mike Lafford, group VP of Gartner Research.

China is one country that India-based service providers have to keep looking over their shoulders for, especially when it comes to commodity-based services, he further said. But the competition is not only from China, but from a host of other third-world countries that are slowly emerging as preferred outsourcing destinations.

“When you look at countries like Vietnam, Thailand, etc., where they compete with India is on the pricing front. This is important especially in the current times,” said Lafford.

But the difficulties are not only from our Asian neighbours. “Countries in Latin America and others like South Africa and Brazil are slowly emerging as outsourcing destinations. Currently, they are catering to organizations based internally, but they could start competing with India and China in the future,” said Lafford.

Plus there are also countries in Eastern Europe that are improving on the outsourcing front. Where these new emerging centers benefit from, according to Lafford, is that organizations that are outsourcing for the first time do not want to move far away from their region. Culture and language are also critical issues.
Speaking of China, Laffard said that though language and culture is a big hurdle for Chinese companies, where they have an edge is that they can learn from the mistakes made by their Indian counterparts and avoid them. So the way is somewhat eased for them.

However, Lafford does say that these new countries will find it hard to compete with the likes of India and China on the skills front. Where they could win is on the culture, language, geography, and most importantly, pricing front.

So what can Indian IT service providers do to maintain their dominance? Many things, according to Lafford. Firstly, they need to establish relationships with countries in geographies other than the US and the other traditional regions. Secondly, language is still a problem in India and Indian service providers need to rectify it immediately. Though English-speaking regions seem to prefer India right now, if we want to tap non-English speaking geographies like Africa, South America, Eastern Europe, etc., then language and culture will play a major role.

The global economic meltdown can be viewed as a treasure trove of opportunity, if the approach is right. “We have seen companies that never outsourced, considering outsourcing due to the unstable scenario. Insourcing is another huge opportunity and this is seeing growth currently. However, service providers shy from this due to the lower business margins.” Lafford also said that the momentum of outsourcing is such that it might slowdown, but never stop completely.

With the global recession impacting IT companies, Indian software firms are eying the huge aerospace and defense (A&D) market as airplane makers and Defense companies look to control costs by outsourcing design and management systems.

Research firm Frost & Sullivan estimates the Indian Defense market to touch $36 billion by 2013 and companies in India are expected to get offset orders worth nearly $4 billion through 2011.

Sensing this potential, companies such as IBM, Wipro and HCL are working on IT implementation contracts. The offset program is expected to open up new opportunities for these IT vendors for A&D contract worth over Rs 300 crore.

Talking to CXOtoday, Anup Vittal, Industry Leader-Aerospace & Defense of IBM India, said, “With A&D OEMs and tiered suppliers increasingly outsourcing IT and engineering services, there is a very large window of opportunity created for software (IT) companies. A&D companies are increasingly being asked to demonstrate product development agility, human capital management, improve upon service offerings in the aftermarket space and enable enterprise cost effectiveness.”

“All of these capabilities can be developed by partnering with established software organizations that are capable of driving innovation and improvements. This, in turn, makes it a very lucrative market for software companies to exhibit their expertise,” said Vittal.

IBM is bullish about the A&D market in India and sees a huge potential to earn up to $5 billion from these sectors in India over a 10-year period. Additionally, as a qualified A&D offsets partner in India, IBM is well-poised for significant growth in this region, as companies in India are expected to get offset orders worth nearly $4 billion through 2011.

Similarly, Wipro offers application development and maintenance and enterprise business integration. It also has the expertise to offer IT services for the maintenance, repair and overhaul (MRO) of civilian aircraft, and is already offering these services to some of its clients.

HCL’s main area of expertise in A&D sector are avionics, aero structures and mechanical engineering services for aero engines and addresses the aerospace industry’s key points.

Karun Khanna, director of Alpha Design Technologies, said, “Looking at the huge demand for software in the A&D sector, most of the IT software players are all now eying a large share in this sector. Since they all have high domain knowledge, it will give this sector the much-needed boost.”

India’s opening up of the Defense sector to foreign direct investment, the ongoing modernization plan of its Armed Forces and enormous new opportunities in the civil aviation sector have opened innumerable new avenues.

The study, ‘R&D Globalization - A China Perspective’, by Zinnov Management Consulting revealed that China as of today is home to about 920 MNCs who have established 1,100 R&D centers, while the numbers for India are significantly lower at 671 MNCs with 680 centers. Not all the R&D is limited to software alone, but also includes manufacturing, oil & gas, and chemicals, among other industries.

The report highlights the fact that companies are realigning their global strategies in the wake of the recent US meltdown and countries like India and China still continue to hold strong growth prospects as offshoring destinations.

Pari Natarajan, chief executive officer, Zinnov Management Consulting, said, “With the changed global scenario, offshoring is undoubtedly showcasing an aggressive growth trend and some key drivers that are helping increase offshoring to China are reasons like the increased government support, along with huge availability of local workforce, the domestic market opportunities, and last but not the least cost arbitrage.”

“Top Indian offshore business destinations today are facing tough competition from cities like Shanghai and Beijing as favored offshoring destinations and hence it’s time for India to look into various aspects that can further strengthen the R&D landscape in India,” said Natarajan.

Though offshoring to China began in the early ’90s, the momentum started picking up only in mid-2000. The local government in China, in fact, has been very active in promoting R&D activities by offering a multitude of incentives.

Additionally, a huge base of installed as well as fresh talent pool suitable for working in R&D space, along with enormous domestic market opportunity, are some of the favorable factors. The report states that even though the cost advantage has come down over the last five years, the total cost of running a centre in China is still 65 to 70 percent cheaper than in the US.

“MNCs based out of the US and Europe are the biggest R&D investors in China till date, whereas cities like Shanghai and Beijing collectively account for more than half of the R&D establishments. These global firms have established large R&D centres in China with 53% of them having more than 150 R&D personnel at these centres,” said Praveen Bhadada, engagement manager, Zinnov Management Consulting.

“There is a definite desire among Chinese centers to grow fast and the leadership teams at these centers have been aggressively in touch with their headquarters to get more work, both in terms of quality and quantity. Indian centers, in due course of time, are most likely to face tough competition from their Chinese counterparts and hence it’s time for us to look into matters that can strengthen the R&D landscape in India,” said Bhadada.

The report very promptly shows that the Indian centers are much ahead on the overall maturity curve, with all requisite processes in place and better talent; they are indeed well-positioned to take up more work in the overall R&D value chain as compared to China. And at the end of it all, both India and China do not account for more than 10 to 15% of the total R&D for most of the companies and the future will witness more work being offshored to both these locations.

The abbreviate BPO stands for Business Process Outsourcing. It is the outsourcing of certain types of work like customer servicing, payroll processing, maintaining accounts, etc. Say for instance if a company is in the business of designing Aircraft engines; by delegating the work of payroll process, employee benefits, etc, to a service provider who specializes in that kind of work,the company could concentrate on its main job; that of designing aircraft engines. This would reduce the expenditure for the company as the wages it has to pay for the personnel doing these types of work in their countries will be much higher than what it pays for the outsourcing work. Opportunities for You: Virtually every work process has been computerized with user friendly software and one need not be technically qualified to process a task that is technical in nature. If you can follow a set of instruction and have the ability to learn, companies will hire you. It is this advantage which the BPO industry provides for a non technical graduate or even for someone who is an undergraduate. If you can speak reasonably good English, are willing to learn new skills and adjust to a new working environment then surely you have a place in this industry.

Benefits you can enjoy: Even if you are a novice, you can expect a minimum amount of Rs 8000 per month, plus other benefits like

· Free transport and canteen facilities

· Opportunities to learn new skills

· Company’s sponsorship for higher studies etc.

· Regular increments, performance based incentives and promotions.

There certainly hasn’t been much positive news on the IT job front lately. Earlier this month, we shared reports that the computer sector became one of the top three industries eliminating workers in January. If there was a glimmer of hope in that figure, it was a San Francisco Chronicle reporter’s contention that some of those cuts would come through attrition rather than workers actually getting pink slips.

That’s exactly what is happening , reports InfoWorld, in an article republished on CIO.com . When tech vendors like Microsoft and Sun announce sweeping job reductions, they include currently vacant jobs that will remain unfilled and planned positions for which folks won’t be hired. It’s a common bit of “smoke and mirrors,” says Forrester Research analyst Natalie Petouhoff, a way for companies to signal to their shareholders that they realize the need to cut costs.

Such announcements also typically reflect a worst-case scenario of the number of jobs a company thinks it may end up needing to shed. While Microsoft last month said it would cut 5,000 jobs over the next 18 months, so far it has laid off 1,400 employees. It could make up the difference “simply by not hiring in certain divisions,” Gartner analyst Neil MacDonald tells InfoWorld.

It was a similar story when Yahoo announced sweeping job cuts in October, wrote Kara Swisher on All Things Digital . At that time, the company indicated it might have to eliminate up to 3,500 of its 15,000 employees. But Swisher wrote that industry observers expect the final tally to be about half that number.

I don’t want to paint an overly positive picture. There’s no question that tech companies are cutting jobs in numbers not seen in years . Still, some companies may look at history and try to trim costs elsewhere instead of simply eliminating jobs in a bid to win Wall Street’s fickle favor. A recent BNET item highlighted a Bain & Co. study that showed laying off employees often hurts , rather than helps, a company’s financial performance. Of the S&P 500 companies that laid off workers in 2000-2001, those that laid off more than 10 percent of their work forces saw their stock prices drop by 38 percent. Companies that laid off fewer employees fared better, with their stock prices remaining essentially flat.

That’s what Cissy Pau, principal consultant for Clear HR Consulting, told me when I interviewed her in December for a story about how some companies are looking at alternatives such as shorter work weeks and pay cuts to avoid sweeping layoffs. She said:

Layoffs without any kind of corporate restructuring or efficiency improvement won’t provide the long-term results you want. If you say “I need to cut the budget by $10 million” and lay off $10 million worth of people, how are you going to deal with the work? What about the expertise you’ll lose? What about the stress of the people who remain? It’s not a permanent solution. The corporate reorganization has to go hand in hand (with layoffs) or else you’re just going to find yourself doing more layoffs

The Top 8 Global Outsourcing Cities includes as many as six Indian cities led by Bangalore, Chennai, Delhi National Capital Region, Hyderabad, Mumbai and Pune. Dublin Ireland and Makati City The Philippines are the other two cities in the list, according to a study by Cyber Medias Global Services and investment advisory firm Tholons. Indias representation in the top 50 Emerging Global Outsourcing cities has grown to four, from last years three, with the addition of Jaipur to the list at No 31.

The other three cities in the list include Kolkata at No 6, Chandigarh at No 12 and Coimbatore at No 17.
Cebu City The Philippines, Shanghai China and Beijing China lead the list of emerging global outsourcing cities.

The Top 50 Emerging Global Outsourcing Cities 2008 list has nine entrants  Quezon City, Toronto, Rio de Janeiro, Mexico City, Jaipur, Singapore City, Chengdu, Guadalajara and Mandaluyong City.

Six Chinese cities are a part of the top 50 emerging cities for global outsourcing list, compared to Indias four.

These are Shanghai, Beijing, Shenzhen, Dalian, Guangzhou and Chengdu.

Of the top 50 cities, 19 are from Asia and 13 from Central and Eastern Europe. Besides tier1 Asian cities, outsourcing centers are being set up in many tier2 and tier3 cities.

As per CyberMedia publication Global Services, the top entries from Asia are Cebu City, Shanghai, Beijing, Ho Chi Minh City, Kolkata and Shenzhen.

The top ranking entries from Central and Eastern Europe include Krakow Poland, Prague Czech Republic, and Budapest Hungary.

To set up an outsourcing center the choice of the right city has become more important than the choice of the country, the study says.

Attributes of a city like available resources quality and type of work force, cost, available infrastructure, and its longterm potential in fulfilling demand for specific services determine its attractiveness as an outsourcing centre.

While Bangalore, Krakow, Makati City and Shanghai are the established centers for finance and accounting, Cebu City, Colombo and Pune are the emerging centers of excellence for this function.

Similarly Shanghai, Dublin and Bangalore are currently the leading centers for research and development and Beijng, Chennai and Prague have been identified as the new emerging centers for R&D services in 2008.

Interestingly, there is a tradeoff between cost benefit and complexity of services offered by a city. In many cases, an offshore location with lower costs, also processes less complex services and viceversa.

For instance, offshore cities such as St Petersburg, Shanghai, Bangalore, Makati City, Ho Chi Minh City and Delhi National Capital Region provide highend, complex functions but not necessarily at a lower cost.

Similarly, it is possible to get less complex work done at onshore locations such as San Antonio and Glasgow at lower price.

While the focus of the study was to identify the top 50 emerging cities, it also listed the top global outsourcing cities.

The Top 8 Global Outsourcing Cities includes a few new members , Chennai India, Hyderabad India, Makati City The Philippines and Pune India.

As expected, Indian cities dominate the list once again.

The IT R&D offshoring market in India is expected to record a CAGR of 23% to touch $21.4 billion by 2012, according to a study done by Zinnov, a consulting firm. Zinnov said there are around 600 MNC captive centres in India and for 2008, the total revenue is expected to touch $9.4 billion with $5.8 billion going to come from the MNC captive centres rest from the third-party vendors.

Zinnov CEO Pari Natarajan said, despite this growth in the R&D offshoring market in India there is a dearth of required talent pool. For example, it is estimated that there are only 800 IT product managers in the country. At the same time, the salary costs of these professionals are also increasing questioning the business viability of these captives.

Mr Natarajan said, salaries constitute around 70-75% of an R&D companys operations and this was also impacting the productivity of these companies.

He said, MNC firms in the revenue range of $100-200 million are the most hard hit in getting the right quality people. This growth in R&D offshoring is primarily driven by the MNCs captives, though at the same it is also seeing the increasing presence of third party vendors, especially the Indian players.

“Outsourcing of processes by global banks and financial sectors will now become vivid to reduce costs,” said Peter Redshaw, VP-Research, Gartner, at the ongoing Nasscom meet in Mumbai. “The matured IT sector and business processes will make India one of the viable destinations for outsourcing banking processes. Until now financial institutions were wary to outsource processes outside their geography,” he added.

Predominantly focusing on expansion strategies, banks and financial institutions in the matured economy have undermined the importance of calculating the operations cost, Redshaw said, adding they will now need to shore operations to the growing economies (India and China ).

Many in the industry have adopted cloud computing model. But due to the inherent disadvantages of cloud model such as exposing the services to the vendor and lack of clear nomenclature and authoritative consortium, banking and financial institutions will need to entirely outsource IT services to reduce cost, Redshaw said.

Raja M.Mitra, senior consultant at World Bank, too, sees countries like India, having track record of proven IT services with large pool of talents, in a better position to bag IT services compared to rest of the world.

Apart from the BPO segment, system integrators in India (which is substantially large, India being a service segment in IT to the world) will also benefit from the present economic scenario.

Peter Coffee, director (platform research) of Salesforce.org said that though expansions in IT are under hold at present, IT investments will now focus towards integrating systems to give customers benefits of interoperability, bringing more business to IT integrators.

Together, the Indian IT sector, with mature process models, services and integration, will bring more value and shoulder international customers to reduce operational costs.

What is the biggest mistake I see in new IT outsourcing deals? My answer is simple and direct: the failure to provide continuity from contract conception to execution.

Remember the movie “Charlie Wilson’s War”? There is a scene where Charlie is sitting with his contemporaries asking for additional black funding to help Afghanistan rebuild after the Soviet occupation and successful U.S. covert operation there. Well, the answer was that nobody cared enough to follow through and insure Afghanistan wasn’t a problem in the future.

It reminds me of the outsourcing selection and contracting process. We have expensive legal help, executive help, outside advisors, a virtual village when we are building the deal, only to oftentimes hand it off to a separate group of practitioners and governance professionals who simply do not fully appreciate what was contracted. What’s even more amazing to me is that sometimes you will see the purchaser do the same thing!

This can be avoided by building a “contract continuity” plan that helps to insure the spirit, terms, and goals of the deal are fully executed by both parties when the deal is done.

Here are some key areas to look at in your “contract continuity” planning process:

1. There should be no less than one executive/manager from teams, the provider, and the purchaser who will participate in the execution of the contract operationally and who are also central participants in negotiating the actual deal.

   These people will represent not only the written contract for interpretation, but will also be tasked with keeping the spirit of the deal alive as well as keeping in mind goals and objectives as defined by the contracting teams.

2. The provider will ultimately pick an account manager – this person should be involved in contract negotiations from the beginning. The selection of this person is key, and every effort should be made not to let that person transition away from the account.
3. Plan for “operationalizing” the contract – the process for planning how the relationship will be administered. This top to bottom planning process should cover all points from the organization of your retained team to how a work order will be processed and executed.
4. Progress to goal reporting should be considered from day one of the contract. There should be a standing agenda item for all governance meetings for both the provider and the purchaser to review the original goals of the contract, and the progress against those goals.

   Staying in touch with your original goals often in the governance process will either validate your success or give you a pivot point from which to change plan and direction.

These are a few suggestions to get you thinking about how challenging of a task it is to make a contract operational.

The fact is, the effort you expend in the critical first months of the contract maintaining the continuity of the original deal will pay dividends for the life of the deal.

Source: outsourcingleadership