Offshoring enters yet another new stage of maturity...
Market predictions of $200bn, a shift in focus from US to Europe and more. Mark Kobayashi-Hillary takes the pulse of the Indian IT services market at the recent Nasscom conference in Mumbai.
I'm a frequent visitor to India and I've watched the IT services outsourcing industry there grow at such a frenetic pace that it's sometimes hard to pin down exactly what is going on; in the manner of the Heisenberg Uncertainty Principle, as soon as you try to measure something, it changes.
So to catch up on events I visited the annual love-in of Indian technology companies earlier this month in Mumbai, run by Nasscom, the National Association of Software and Service Companies. The organisation represents just about the entire export-oriented IT industry in India and its annual conference each February is like a shrine to the concept of outsourcing and good globalisation.
As my taxi took me from the airport to my hotel, I glanced at the local newspaper. Raging mobs were in the process of torching gift shops that had the nerve to sell Valentine's cards - in protest at a 'western' custom being adopted in India. Page after page of newsprint was devoted to the beautiful people, with every party in Mumbai documented - down to the dress worn by the last Z-list celebrity. Funniest of all, the local police have started demanding their usual bribes be paid in office essentials, such as A4 writing pads and paper clips, because there is a state-wide shortage of stationery.
In this kind of environment, it's sometimes a surprise that India has grown into the international IT superpower it can now genuinely claim to be. A few years ago when Nasscom predicted demand for Indian IT services would be worth $60bn per year by 2010, many scoffed at their audacity. Last Friday the President of India himself, Dr APJ Kalam, tore up those projections and stated that demand would be more like $200bn - and he managed to use PowerPoint without pleading for help, which is more than most politicians can claim.
Even more of a surprise was that the number-one target for Indian service companies is no longer the US; the new pastures for offshoring lie in Europe.
As N Chandrasekaran, head of global Operations at Tata Consultancy Services (TCS), the largest Indian IT services group, explained during a Q&A session at the Nasscom conference: "Offshoring is now an essential business tool the European Union nations must use to become the most competitive knowledge-based economy by 2010."
He went on to say: "Working with Indian expertise in this market allows the EU to fuel industrial growth and remove historical cost structures. In 2004, 47 of the largest global outsourcing deals were from Europe - this is now increasing, making Europe the most important source of business for any global IT supplier."
Dominique Raviart, senior analyst at Ovum, speaking at the same event, claimed that many Indian companies fail to understand the needs of European IT buyers. He said: "The view of many companies in Europe is that Indian technology players only offer us a time and materials service, they don't offer very flexible contracts, and they will lose their cost advantage over time anyway." Raviart counselled his Indian audience to not lose sight of their low-cost/high-quality advantage in the global marketplace but to work on addressing the doubts.
The issue of skyrocketing costs in India is one that many in the industry see as being of major importance. Nasscom has proposed the creation of new IT-oriented townships to avoid the infrastructure problems of cities such as Bangalore, now groaning at the seams with traffic.
There are many European nations from the recent accession countries where key indicators, such as wage costs, are below half of those in the UK. Wouldn't it make more sense for Europeans to work with fellow Europeans - especially if a UK company outsourcing work to Prague or Krakow could reduce costs by half without the headache of a 10-hour flight to India every time a problem crops up?
Simon Fanning, the strategic sourcing programme director of Deutsche Bank, warned at the Nasscom conference that EU regulations will eventually make the eastern region of the Union less competitive anyway: "We may feel we have a more flexible environment but workers' councils are even coming to the UK. Eastern Europe as a region will be subject to increased labour legislation over the next five years, meaning it will be harder to maintain the existing levels of wage arbitrage within Europe."
David Leigh, commercial and strategy director of British IT services group Xansa, believes the multiple governments of Europe will at some point all need to consider offshoring, driving an immense amount of IT work to remote locations such as India. He cited the results of the Gershon review into civil service efficiency in the UK, which claimed some £40bn could be saved through various efficiencies. He told the conference: "We should not be afraid to deal with the implications of offshoring head on. India is a net investor into the UK and is eighth in the league table of nations directly investing money into Britain."
Arvind Thakur, CEO of NIIT Technologies, acknowledged that his company already makes far more from the UK than the US, or any other region. He said: "We gain more revenue from Europe, and so we have a greater focus there. But what is interesting is that if you add the 'C' to IT, making it ICT, then the industry in Europe is bigger than the US anyway."
The low-cost and high-quality concept rang true across the entire conference, though many tried to blur the debate with additional claims of creativity, innovation and other good things. In fact, the keynote speaker opening this conference was New York Times columnist Thomas Friedman, all-round globalisation guru and author of The World is Flat, so India is learning about slick presentation.
There are some competences where India is world-beating, and IT is becoming one of those. I was reminded of this once more as I recognised Bollywood legend Anupam Kher - anonymous in the mainly British crowd - walking alongside me as I boarded my flight to London. My local cinema already devotes several screens to Hindi films; culture has been offshored for centuries and long may it continue.
Mark Kobayashi-Hillary is the author of 'Outsourcing to India: The Offshore Advantage' (Springer) and a board member of the National Outsourcing Association.