End of outsourcing as we know it

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.
Written by Swati Prasad, Contributor

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.

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