End of outsourcing as we know it

End of outsourcing as we know it

Summary: Infosys, once the bellwhether of Indian IT, has seen a slew of senior level exits. The reasons behind these exits and lower growth at Infosys may be plenty, but it also points to the changing paradigms of outsourcing.

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TOPICS: Outsourcing, India
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Within three months after the departure of its COO Ritesh Idnani, Infosys BPO has seen a slew of top talent heading for the exit.

As per new reports, Amit Kothiyal, head of multiple industry verticals at Infosys BPO, Michael Wong, the head of China operations, and Ayan Chakraborty, country manager in the Philippines, have all quit and are currently serving out their notice period.

Earlier this week, parent Infosys saw the U.S. head of its financial services practice, Shaji Farooq, poached by rival Wipro.

According to Swami Swaminathan, CEO at Infosys BPO, "this is not a trend" and not a cause of concern.

But surely, such high-level exits within three months can't be taken lightly. And if some industry sources are to be believed, there may be more exits in the near future.

Infosys BPO has been performing better than the parent. Its revenue grew 22 percent in the quarter, ended June, to US$494.5 million. It also gave an average 8 percent pay hikes to its employees, unlike the parent company which cited lack of visibility in near-term growth to freeze salaries this year.

There may be several reasons behind the discontent among Infosys and Infosys BPO employees. First, Infosys is going through a restructuring exercise (changing strategy from Infosys 2.0 to Infosys 3.0). Second, the company may still be coming to terms with the change in leadership with the co-founder Narayana Murthy retiring, and Nandan Nilekani taking on a bigger role as the chairman of the Unique Identification Authority of India. Infosys has been underperforming the industry for at least a year now.

Third, Infosys is known to charge a higher rate in the industry for even plain-vanilla jobs. So this may have led to contracts going out of its hand.

But the most important reason is the economic uncertainty, which is impacting the IT spending decisions of companies across the world. As a result, IT firms have no option but to redefine their offerings, as they look to offer clients more transformational solutions.

Infosys, which is sitting on cash of over US$3 billion, has met criticism from investors and analysts. Competitors Tata Consultancy Services and Wipro have boosted their businesses with multiple acquisitions. Yesterday, a news report said Infosys Technologies also is scouting for acquisitions to grow its products and platform business, which it expects to contribute one-third of its revenues in the next five to seven years. At present, the segment contributes a little over 6 percent to revenues.

"We are looking at building IP assets and we will also partner with our clients to co-create (assets) as this will be crucial. We will also look at acquisitions...to convert it to products and platforms," Infosys CEO and managing director S.D Shibulal said in Bangalore, at Infosys Innovation Day.

"We are looking for assets which will help our clients transform their business. For example, We may make a small US$20 million acquisition, but have the potential to bring in business worth US$200 million," said Sanjay Purohit, Infosys' senior vice president and global head of products, platforms and solutions.

According to a report brought out by KPMG, titled "The Death of Outsourcing", there is a revolution taking shape in the business services industry, one that disregards the traditional shared services and outsourcing paradigms, and centers the design of support services on the needs and priorities of the enterprise as a whole.

I quote a few paragraphs from this report that best describe the change taking place in the outsourcing industry:

"Since the IT outsourcing mega-deals of the 1990s and through the expansion of offshoring and business process outsourcing in the 2000s, companies have consistently sought ways to use sourcing strategies to reduce the cost of back office services.

When part of a comprehensive strategy, outsourcing has proven to be a transformation catalyst that has helped companies implement new processes and technologies, reduce costs, access a global talent pool, and change their overall business through the use of partners.

But today, the average deal size is smaller, performance expectations are higher and many providers are delivering more complex services with greater industry knowledge and business acumen. While cost is still key, success in a mature relationship is more often determined by its contribution to the business than by cost savings alone.

Shared services has also steadily evolved from the days of simple accounts payable and data entry processing. In many companies it has moved up the value chain to provide a wider range of more complex services and, as a result, established an internal brand. Indeed, multi-functional captive delivery centers are an example of the success of the global shared services concept. Many organizations have monetized the asset and sold off their captives to become commercial service providers with specialties in an industry and function.

In the past five years, a number of significant changes have begun to transform the traditional underpinnings of business service delivery in the Western world. For example, cloud technology and social media are ubiquitous. They are changing not only how we connect with family members or store music, but also how we do business, collect data and deliver technology. These are more than new technologies; they represent a change in behavior in how the customer and business agree to interact, share information and conduct trade.

Perhaps as significant a change is who the customer is. The traditional low cost arbitrage markets have been India, China and other parts of Asia. However, the success of outsourcing and global manufacturing has spawned a rapidly growing middle class in these regions, which is both increasing the cost of labor and broadening the potential customer base for many companies.

As this success causes the benefits of labor arbitrage to disappear, how do organizations effectively serve new markets, and where is the next level of back office savings?

As most companies would opt for a few hundred million new consumers over 20 percent additional savings on IT and finance and accounting, the competitive advantage will go to those that can both connect with new customers and do business effectively in these new markets with lower costs, better data and market insights, and operational flexibility."

The answers in the ever-changing world of outsourcing will not be simple. But winners will be those who adapt to the changes faster than the others.

I hope it's not too little, too late, in the case of Infosys.

Topics: Outsourcing, India

Swati Prasad

About Swati Prasad

Swati Prasad is a New Delhi-based freelance journalist who spent much of the mid-1990s and 2000s covering brick-and-mortar industries for some of India's leading publications. Seven years back when she took to freelancing, India was at the peak of its "outsourcing hub" glory and the world of Indian IT, telecom and Internet fascinated her. A self-proclaimed technophobic, Swati loves to report on anything that's remotely alien to her--be it cloud computing, telecom, BPOs, social media, e-government or software and hardware, and also how high-tech sectors impact the Indian economy.

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34 comments
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  • Good riddance

    "End of outsourcing as we know it"

    Good riddance. Won't be shedding any tears. No thanks for killing all of our jobs.
    CobraA1
    • Couldn't happen to a nicer bunch of folks...

      Don't let the door hit you in the ass on the way out!
      bciesil@...
    • The Indians didn't do that

      American corporate executives did. Indians should be trying to better situations just like anyone else. But it's no surprise that Indian offshorers have picked up some bad habits from their western patrons.
      John L. Ries
      • It would sure be nice...

        ...if I could correct typos in my posts.

        Since is now no restriction on replies, there's no longer a need for one on edits... honest.
        John L. Ries
      • Stop the lies

        It was India's NASSCOM who started all the cost-cutting and shoving cheap labor onto US soil. Before that America was booming and US execs were quite happy to pay high salaries. Oh, and many of the Execs you mentioned, are themselves Indians. For example Citibank and Pepsi. Not to mention lots of others.
        Wakjob
      • Robbers

        According to Dr. Gene Nelson, PhD, India has stole approximately $10 TRILLION from American tech workers. Why are millions of these thieves still on US soil working in US jobs while 30 million Americans are ot of work?
        Wakjob
        • Look who's talking!

          For the same reason that millions of Americans are busy pilfering oil from other states in the world.

          Learn to share or perish.
          Nikhil K
    • Bitter Much?

      It sounds like you're more bitter about offshoring than outsourcing (the two aren't the same). Companies outsource all the time. For example, rather than having in-house couriers, my organization pays UPS, the USPS, and FedEx to deliver mail and packages. It's not exactly a radical idea. Offshoring just takes this a step further, outsourcing to another country. So what?

      While we may continue to see somewhat of a contraction in the outsourcing/offshoring movement as companies learn that certain processes should be left in-house, it's not going away completely. There are times when it just makes good business sense.

      Your cheese has been moved, and you probably need to deal with it. If your job function is one that can easily be offshored, learn a new skill.
      ParrotHead_FL
      • True enough...

        ...but it's ridiculous to expect people to support business practices that are contrary to their own interests, or to expect voters to support a domestic corporate elite that has no loyalty to the country, or to their own workers.

        You can't have it both ways.
        John L. Ries
        • Loyalty

          Generally speaking, businesses' loyalty is to their shareholders and their primary obligation is to maximize shareholder value. A business that fails to do so could face lawsuits, so outsourcing and offshoring must at least be considered as options.

          Of course, consumers could opt not to spend money with companies that offshore--which would change the equation somewhat. If enough consumers did that, then offshoring might no longer maximize shareholder value and companies would stop doing it. This is highly unlikely, though, because in the end what most consumers want is maximum product/service for minimum money. And providing that almost always requires offshoring.
          ParrotHead_FL
          • If you want "pro-business" voters...

            ...(meaning pro-corporate; we're all businesspeople), then you need to give them a reason. Likewise, if you want your employees to be loyal to you instead of having them go into pure mercenary mode, then you need to be loyal to them, even if it annoys Boone Pickens and Carl Icahn.

            Quoting the prevaling doctrine of fiduciary obligation isn't going to cut it.
            John L. Ries
      • Coldhearted much?

        "So what?"

        So people here don't have jobs. Coldhearted much?

        "it just makes good business sense."

        I don't want a world run by bean counters. I want a world run by people who care.
        CobraA1
      • "Someone Moved My Cheese"

        that book is so silly, I've even seen a cartoon that depicts the story..really juvenile and lame. Guess, what someone moved the indian cheese - right back to india. American tax payers pay the taxes to fun this country, so they have the rights to jobs. And besides, the scab workers that get brought in here are not the "best and the brightest". If countries want to hire scab workers, open up shop over there and hire all they want.
        ps Jimmy Buffet is really not very good...
        GoHomeVisa
        • Someone stole my cheese

          "Someone moved my cheese".

          Translation: "Hey American workers, go out and invent the next big industry so that we corporate greedsters can rip it off, take it over, ruin it, and suck as much $ out of it as we can. Oh, and we'll give your jobs to our enemies as well in the process".

          Americans are DONE creating jobs for others. Let all the super-geniuses in India and China invent the next new industry and give it to the world.

          IF THEY CAN.
          Wakjob
  • why not write in plain english?

    I have 3 college degrees and the amount of "biz slang &jargon" in this article makes it opaque. The content is suspicious when all you understand is the headline...too bad its written by a brahmin and not a real person.
    martinkimeldorf
    • This is the language of management

      Know your enemy...
      Owen3.141
    • Jargon

      And I thought it was just me. I have a master's from business school and also had a tough time interpreting this.
      ParrotHead_FL
    • Sign of the Times

      Well I don't have any college degrees and I had no trouble understanding it... Of course, I graduated from high school in 1972 when the diploma meant more than "showed up".
      RodsMine
      • Really?

        What high school did you go to that taught you what "multi-functional captive delivery centers" were?
        ParrotHead_FL
        • Jargon

          Indians think if they flood their speech with complete jargon it makes them look smarter. Half of them don't even know what they are saying. Half of them got the jargon out of a Hindi-English dictionary. This article is just nonsense. Indian IT has been a total failure and no one want to go near it anymore.
          Wakjob