IT outsourcing vendors run for cover

"In what could be an important decision for the IT outsourcing industry and its customers, a London court recently ruled that EDS (now division of HP) must pay damages to a former outsourcing customer for failing to live up to its sales pitch.

British Sky Broadcasting (BskyB) had signed a £48 million outsourcing contract with EDS to build a customer service system in 2000, but terminated the deal early in 2002 after what it said was "woeful" performance by the IT service provider. SkyB alleged deceit, negligent misrepresentation and breach of contract by EDS.

Although the total costs and damages will be determined at a later date, BskyB said it expects EDS will be liable to pay at least £200 million—more than four times the amount of the original contract."

Enough India's famed IT vendors? Now don't go promise the moon and hope customers would tolerate project failures like before. Though the U.K. court ruling was decided largely on the basis of facts from one person's statements as opposed to systematic failings of the outsourcer or outsourcing vendors as a whole, dissatisfied outsourcing customers may go digging through notes from the pre-contract courtship phase of their relationships to see if arguments around fraud can be made.

Accenture as Detroit parts supplier

So we hear Chrysler suing Accenture for failure to deliver on $900 million in promised savings from a low-cost country sourcing initiative. We know Accenture more as a IT outsourcer and not anywhere near a supply chain strategist. Is there something called vendor due diligence or is it all about Detroit firms losing their minds over perpetually falling fortunes? According to the article, "Chrysler paid at least $7.7 million to Accenture for help buying parts in low-cost countries such as China and India. Chrysler thought doing so would save $900 million. Instead, Chrysler saw virtually no savings, court documents say."

Does anyone know what else Accenture is into? Fixing perils of globalization? Saving a crestfallen financial world up next?

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Indian IT outsourcing vendors better watch out - might as well get into these new `horizontals' ;-)

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Annuity contracts - are they safer outsourcing bets?

Visible effect of slowdown or even recession proofing – India’s IT sector focusing on smaller clients (shedding their dependence on large contracts) and craving for annuity type (plain vanilla BPO) contracts.

“Indian IT firms would have been better off garnering more large traditional outsourcing type contracts. These would have provided annuity type revenue and therefore more resilience during a recession,”

explains Siddharth Pai, Partner and Managing Director, TPI India, an outsourcing consultancy.

Oh, really? Now that even the large banks write down billions of dollars in losses, how can an outsourcing vendor ensure a steady stream of revenues since the solvency of the client itself is questioned? And then the bigger question – hedging outcomes of IT vendors themselves against their receivables in foreign currency and the derivative bets and mark-to-market (MTM) thunderbolts. WIPRO getting hit by a Rs.934 crore ($250 million) whirlwind. TCS, Infosys, Satyam, HCL Tech have all borne the brunt as well.

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Mixed future for Indian outsourcing

The general feeling amongst the IT and BPO industry is that growth may slowdown but will not stop altogether.

Reflecting gentle buoyancy amidst widespread gloom, Adventity, the BPO/KPO outfit which presently has seven centers in India, plans to foray into two Tier II cities over the next 8-12 months with an investment of 2.5 million dollars each.

TCS, a major IT outsourcing vendor has recently inked a multi-year contract with Chrysler.

Smartly outwitting the local vendors that are focused westwards, IBM is experiencing “strong double-digit growth” in India, with the SMB segment generating about $500 million in revenue, accounting for half of its top line - making India the fastest-growing SMB market globally for IBM. Though its marquee clients include Bharti Airtel, DLF and Idea Cellular, it is keen on projecting an image that it is not just focused on serving large Indian companies.

So it’s not totally hopeless for India’s IT vendors. But gone are the days of 45% growth and labor arbitrage. Now it’s time they move on to VAS, improved efficiency, get far less dollar dependent and think of geographic spread of services to save their margins going forward. It’s time they start challenging IT architecture orthodoxies and begin to bet on everything – virtualization, change management, data centers and utility computing. But they better be quick before nimble startups upstage them.

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Way to go, Satyam!

Readers of this blog must be pretty much used to my beating up India’s SWITCH (Satyam, Wipro, Infosys, TCS, Cognizant and HCL Tech) outsourcing vendors. Aligning IT with business strategy has, once again, become a top issue for companies worldwide. Despite the SLA requirements that IT outsourcing vendors will help clients develop IT strategies that deliver measurable business outcomes, clients don’t get to see much on the ground in terms of process/productivity improvements or LOB consulting insights.

But there seems to be a subtle shift happening. Or it could well be the beginning.

Hyderabad-based IT outsourcing vendor Satyam has signed up with Central Institute of Plastics Engineering and Technology (CIPET), an autonomous training and application research institute under the ministry of chemicals and fertilizers, for developing new engineering plastic materials through an industry-institute collaborative approach. The collaboration is part of Satyam's strategic initiative of developing a global ecosystem of alliances to provide total engineering solutions to its customers.

This is getting closer to the “end-to-end” services that most vendors profess they offer. Vendors should complement their rich portfolio of assets and processes with new services that provide greater insight into business performance. This is becoming particularly important as companies face new challenges in a variety of areas. IT vendors’ longevity depends on the quantum of load they take off the back of clients and upon themselves, acquiring capabilities on the run. In that we get new vendor efficiency metric – a combination of speed and magnitude of such offtake that ends with faster and effective post-process delivery with visible productivity improvements the client by itself couldn’t have hoped to achieve.

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Did you say `trained personnel'...?

Look who’s inviting India’s IT and BPO moghuls. Beachy Sri Lanka. They are calling Indian ITES and BPO companies to invest in the island nation claiming that the country would provide competitive edge with its large talent pool of trained personnel available at lower costs.

Here’s what its minister for export development and international trade G L Peiris has to say at a FICCI conference in Chennai. “Indian companies can invest in Sri Lanka to oursource their projects here. We have a large talent pool of trained personnel avilable at lower costs. Outsouring of projects here will significantly help Indian companies reduce operational costs as well as offset the effect of rupee appreciation against the dollar”.

Hey, wait a minute. Did he say a large talent pool of `trained’ personnel…? Parse the word `training' and see where he allots real estate for your BPO. If it is in Jaffna or Mullaitheevu, you’ll save money on security guards. The word `training’ means something entirely different there. In that part of Sri Lanka, they train differently. At age 3, you handle a pistol. At 6, you know how to hurl a grenade. At 7, you launch a missile from your shoulder. Every call center guy you hire could as well be your security guard. The upside…? You can give those `other’ guys a run for their money if they ever try to blow you up.

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Losing sight of domestic business...

Yeah, flat world indeed… Here. IBM eating straight off Indian IT vendors’ plate, snatching it right from under their nose.

Vodafone Essar has signed an IT outsourcing agreement with IBM India. Deal size is rumored to be about $600 M. Under the five-year agreement, IBM India will assume responsibility for the management of all Vodafone Essar's IT operations with the exception of network service platforms. IBM India will also manage internal IT services for Vodafone Essar like data centre operations and the help desk while supporting key areas like security and change programs.

I wonder why Indian IT vendors like Infosys, TCS, Wipro and Satyam didn’t get this business. In these bad times for the $$, revenues in any other currency should be most welcome - it acts as a zero cost natural hedge against the falling dollar and protects margins to some degree. Still haunted by that margin fixation…? Or is it that Vodafone India has lost its western flavor after acquiring Hutch Essar…?

While Indian IT vendors are crowing about falling $$, global IT majors like IBM are cornering larger share of India’s growing domestic IT budgets. Smart, isn’t it…? Deals like this act as a natural hedge against the fast decaying dollar and ups the ante against India’s IT majors that still keep gazing westward.

But with one difference. They also do this. The thoroughbred that IBM is, it also plans to increase its investments in its two software laboratories in Pune and Bangalore as part of its $1.5 billion security initiative in 2008, announced on November 1. Fuelled by recent security business acquisitions (including Internet Security Systems — now IBM-ISS), and more than 18 months in development, the IBM security initiative is the largest-ever undertaken in the IT industry. In comparison, the R&D spends of India’s IT vendors are mostly on project specific training for setting up labs etc., before client visits (masked as R&D). Now you know why that looks like a rounding error to me…:)

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[Update : Industry estimates peg the turnovers of MNCs like Dell, Intel, Microsoft and IBM at well over the half-billion dollar mark. Firms, like Cisco, are said to have crossed the billion-dollar mark in domestic sales in 2006-07, and for a player like HP India, it is estimated in excess of $2.5 billion. ]

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Farmed out sourcing or Farmed Outsourcing ?

I had this dilemma while titling this post. Should I call it “farmed out sourcing” or “farmed outsourcing?”

I was reading this article in Business Week that raved over a new model of outsourcing adopted by Anantara Solutions of Bangalore. To battle the rising wage costs / attrition / shrinking numbers of employable engineering talent in India, Anantara has adopted a truly global model of breaking up and farming out pieces of work to any corner in the world that has the requisite supply of qualified talent at affordable economics – that once India had. Even as it just has 40 employees on its rolls, it has an ecosystem of 25 other companies including Russia, China or Singapore, with a total of 2,500 employees that are specialists in everything from Java coding to software testing. Resultant cost savings are huge in this break up, farm out, re-integrate and deliver model. Rather than having huge fixed costs, like TCS, Infosys, and Wipro, Anantara pays for value received--and billed to clients. That is incredible leverage.

This trend of farming out sourcing, is indeed the kind of innovation that would sustain the fortunes of India’s IT vendors in the long term. This may partly compensate for their own inability to develop deep domain expertise in client businesses (to take on global majors IBM, Accenture and EDS that have begun their dance on home turf) besides near absent investments in its own R&D (that explains the fat margins) to develop patented innovations in on-demand product suites that delight many an existing and potential client spectrum.

I like the BW expression “disrupting the disruptors” ! It also means importing competition to India’s overhyped bulk of downright mediocre IT talent that got away with fatter pay packets just because of excessive demand. Indian workforce needs a few hits like this badly, just to regain the semblance of modesty that they were once famous for, but long forgotten.

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