Offshore 3.0 – Beyond cost, for sure?
by Manish Khandelwal is a sourcing expert at PA Consulting Group
Wednesday, March 13, 2013
“These are challenging times and that has restricted our industry growth rate to 10%. We expect to do better next year”. You will be excused if you think there is something fundamentally wrong with this statement. In the current economic environment, there are many industries that would love to have any growth. Then what’s the fuss?
There are not many that will sound apologetic about 10% growth, but as the Indian IT industry has been used to growing at over 20%, the leading Indian IT industry body NASSCOM was defending this “meagre” growth at its flagship event, held in Mumbai in February.
These are certainly curious times for Indian IT service providers. The offshore industry has been a well-documented story of phenomenal success that has taken the industry from $10 billion to $100 billion in the space of ten years. However, it appears that it is becoming clear to the industry players that the journey from here on will not be built on traditional services alone. Although the cost and quality story will remain the fundamental tenet, it will need to be augmented by a combination of other factors.
If Offshore 1.0 was about bodies and Offshore 2.0 was about scale, Offshore 3.0 needs some new tricks up its sleeve. So, what are these?
Efficiency, expansion, products and a conscious move up the value chain will be the four key pillars of future success.
Industry has had a linear growth trajectory with many players finding it difficult to attain significant growth in terms of revenues and profits per employee. As the fight for talent intensifies, efficiency of service delivery will emerge as a key focus. While increasing utilisation is important, increasing and maintaining consistent productivity will gain more focus and attention. As most deals now are fixed price, industry stands to gain substantially by improving its efficiency.
Since the industry’s inception, the USA has remained the dominant market for Indian service providers. Conscious efforts by the suppliers over last few years to grow the clients in Europe and Asia Pacific has led to much needed re-balancing of the portfolio. However, the economic challenges in Europe means that the providers will need to invest in expanding their footprint out of traditional western markets and domestic growth is expected to play a big role. This was the first year that the domestic growth rate was higher than the export growth rate, a sign of times to come.
The Indian IT industry has virtually ignored the products and has solely focused on services. This cannot remain the case if the industry has to meet its growth aspirations. Products are the vehicle of non-linear growth, something that industry so desperately wants. Improvements in cloud and mobile technologies mean that infrastructure is now available to be exploited by the product companies. Platform and IP based solutions, with a product centric approach will play a bigger role going forward. Pure play product companies and providers that exploit their relationships with their key customers to develop industry leading platforms stand a chance to gain.
Moving up the value chain
Last but not the least, moving up the value chain will be key to future growth. The offshore industry recognises that it will need to gain the status of the business partner, rather than remaining to be seen as a service provider. Such a shift will open the doors to large scale transformational opportunities. However, brands are difficult to build and equally difficult to re-position. Industry has some way to go before it is seen in the boardrooms as a business partner. Indian players are acutely aware of it and have been investing in domain and consulting skills with mixed success. These efforts will need to be redoubled, but if successful, Indian companies will be in a great place to offer “right sourcing” value propositions to its clients.
One thing is certain, industry remains in an envious position, where it is busy dealing with pains of growth rather than perils of stagnation. Not many can say that in today’s world. And that is reason enough for the offshore industry to remain deservedly excited and optimistic about the future.