What We Can Learn From High Value Indian Outsourcers
or the past decade, Indian outsourcing firms have talked about ‘moving up the value chain’ as a way of enhancing their service offerings, protecting their outsourcing dominance and increasing their opportunities for profitability. These long-term moves have important implications for client firms, since they imply a shift in how client firms and business leaders engage with these outsourcers. While Indian outsourcers have prepared for this shift, it seems that many business leaders on the client side have not. Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work, and how to prepare to leverage high-value outsourcing opportunities for their firms.
The value chain rhetoric and reality
The last decade has brought enormous changes to the Indian outsourcing industry. The high corporate IT spending of the late 90’s, fuelled by global investments in hardware and software to cope with Y2K issues, and later the dot.com bubble, created important conditions for Indian outsourcers to thrive. But the development of the outsourcing services industry initially focussed on low cost, high quality labour. This strategy has since become unsustainable in India, as the inevitable pressure from alternative low-cost, high-quality labour markets such as Russia, the Philippines and China increases. With nearly 6 percent of India’s GDP accounted for by this industry, the pressure is on to change strategy.
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Concurrent with their successful growth over the last decade, Indian vendors like Tata, Wipro and TCS, aware of the long-term problem of relying solely on a low cost/high quality advantage, have sought to move into higher value-added work as a solution. For at least the last 10 years, an almost universal theme in the Indian marketplace has been the crucial need for vendors to “move up the value chain.” So, simultaneously with building process maturity in their outsourcing practices, the last decade has also seen, to varying degrees, vendors who have sought to move from low value-add services like software maintenance or call centres, to increasingly higher value-added services such as systems integration, product development, R&D, market entry and consulting services. Such services enable vendors to take on increasingly partnership-like, strategic roles with their clients instead of being seen as mere vendors.
The rhetoric of moving up the value chain has been persuasive as well as prolific. But the reality bears scrutiny. What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift? Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that “moving up the value chain” means different things to different participants in India. Second, Indian outsourcing firms generally have extremely sophisticated knowledge-capture, -sharing and -cultivation activities. These capabilities enable creativity and create strong a connection between the sales people and IT service core of their businesses, which in turn creates the internal capabilities to provide high-value service. Third, IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves.
1. The true meaning of “Moving Up the Value Chain”
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers. For some, it means an emphasis on the vendor’s internal value chain (undertaking process or product changes, which improves the key metric, or ‘the revenue per employee,’ by decreasing headcount costs. (This is a move towards non-linear growth). Implementation of mature processes like the Capabilities Maturity Model, along with internal process re-engineering, are some of the models for accomplishing this move, which means keeping the same revenue base but decreasing employee head count to perform the same level of service. This is a ‘do more with less’ strategy that focuses on employees. Vish Iyer, head of Asia-Pacific Operations of Tata Consultancy Services, says that the goal of a non-linear growth model is to “leverage our intellectual property, not our head count.”
For other outsourcers, moving up the value chain means a focus on the external value chain, thus creating knowledge-based, high-value, complex offerings from professional services. In short, this means getting paid for solutions instead of getting paid for people – a revenue focus. This is in contrast to the historical focus of performing repeatable, highly mature, outsourced services across a variety of industries, services that emphasized replicating and refining best practices.
The effort to move up the value chain by undertaking more sophisticated, more deeply strategically embedded, complex offerings implies the need for a totally different set of internal capabilities in outsourcers. What is crucial for success solution definition and creation includes capabilities like innovating for each project, developing an internal expertise and strong processes for learning new capabilities, creating tight linkages within the outsourcer between sales and service professionals, and ensuring tightly woven external linkages with the business leaders on the client side, rather than the IT leaders, as has been typical. Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a ‘technology company’ to a solution provider. S. D. Shibulal, the new CEO of Infosys states that: “I clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporation”.
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