India is increasingly becoming a key component in the success strategy of global companies. Be it offshoring or new sourcing models, or partnering with India companies, the India operations of global companies are not only contributing significantly to the bottom line but also giving the much needed competitive edge or their operation. How are corporations leveraging the India advantage? Is it sustainable?

Abstract

The discussion here gives a deeper understanding of India as an offshore destination and why it is on the strategic plans of organizations? The distinguished panelists shared their experiences on how they have leveraged the India advantage. What are the real challenges that they faced and benefits that they derived while offshoring their operations to India? Apart from cost advantage, what are those factors that are forcing companies across the globe to offshore their work to India? Why the maturing Indian IT industry is still one of the most preferred choices for offshoring?

Discussion

Bhawani Shankar: We are going to talk about how India plays a major role in building competitive edge for you. The first panelist Jaymin Patel is the President of GTech Corporation. GTech is the company in the gaming industry, specifically lottery gamming. Second panelist Arun Seth is the Chairman and Managing Director for BT for India. Third panelist Sean Randolph is the President and CEO of Bay Area Economic Forum. Fourth panelist Will Vancuren is VP, Applications for NCR.

People talk about the global delivery models; people talk about destinations to offshore or to companies to offshore to. So I think India has different perceptions in different minds. It can be anything ranging from some way you have great spicy foods, a great labor pool to any other thing. We are going to explore what India is in our perceptions and how we can sort of factor that into business. The second thing there was the global. Do you have to be global to make use of the offshore delivery model? For India for that matter whatever that perception is. Thirdly, of course, competitive edge which is one of the main reasons all of us are here today to discuss these issues. It is good to think back and see what this delivery model and what India as delivered of IT services has done to us or perhaps not done to us. Sean, over to you, where would you think the bay area business would have been if they had never offshored?

Sean Randolf: I think we would be in a very different place than we are in today. In many ways it was bay area companies that really broke the ice on offshoring when they had hustle so much with the Y2K fears and started to move a lot of activity to India when they couldn't find enough people to deal with the volume of work that is coming in and that had to be done. That really opened a door to a whole new world of opportunity to access lower cost services, but also to access a very large pool of talent that I think a lot of people knew existed but had never really had the incentive to take very direct advantage of. What we were seeing now the contribution of offshoring is essentially the cost of course, but it is the ability to reallocate capital to increase productivity across the range of our companies.

Arun: We have been doing some elements of offshoring since 1987 well before it became fashionable. So I am quite happy to say that large company like ours certainly did something right, when we did something in 1987. But I must confess that right till the time we had not only with the dotcom bust but we had telecom bust along with that, which really drove our offshoring. I can say with lot of certainty that we would not be in the relatively happy position we are if we haven't been doing what we do out here in India. Because as BT we probably contribute between 2-2.5% of India's IT and BPO exports, as big as that. I don't think we would be able to maintain the cost base that we have if we had not come to India. We are pretty happy that if everybody had kept their business in side in their own countries then BT would not be a global company, that what it is.

Bhawani Shankar: Tell us your experience, pros and cons where you would have been with or without India?

Jaymin: We first began offshoring work to India in 1999 and back then it was a very simply some basic part of our legacy system that was offshored. So we could save some cost and make ourselves more competitive with our legacy systems. But over the last 8-9 years we have become more and more comfortable with our relationship with HCL and we come from basically offshoring to save some money on a few areas in the business to pretty much every area about technology, whether it be product development systems integration, onsite in different countries around the world, to maintenance services where HCL people now face our customers directly and take requirements from our customers. We moved all the way along the value chain of providing those kinds of services or outsource services with HCL. So, India for us is really part of a multi sourcing strategy. We are a global business operating in 46 countries. So we use India as a strategic sourcing arm of the business. So we really view India as being one important deep talent pool within our multi sourcing strategy. Its been 9 years now and the real value that you see in working with your outsource partner, HCL hopefully is your partner, but if not other companies. It takes years to get the experience for you to feel comfortable that your partner can gain the domain expertise to work on the higher value items in the company.

William: Some what like British Telecom we were forced when the economy started to have some issues that we really needed to focus our business back to our core competencies and NCR, around our traditional financial side services in retail data warehousing and customer service, so at that time in the mid 90s we first started in India with HCL. We were probably into 14 different lines of business. So we made some strategic decisions to move certain things to India for that cost advantage which allowed our futuristic product designs to focus on newer strategy in a smaller set of markets. Through that learning in that initial relationship with HCL we really discovered great opportunity here in India as it stands today and turned the clock forward 10 to 15 years. Ten percent of our workforce, direct work force, NCR badged folks - you call captives, we call it globalization well before the term offshoring was in vogue - are over here in India. So we used the country very strategically to set up call centers, R&D centers in the case of IT both a captive centers as well as we continue to outsource the technology support to HCL. So for us it is not just labor, what NCR really focus on core business and the cost take out in infrastructure was a major contributor to our profit growth over the past 5 years. Because the revenue was pretty much flat, top line and for lot of reasons we discussed already on the panel. So it became very strategic for us to move certain work functions into the captive model.

You asked the question, where we would be without India or we would be with out offshoring.

We would be less profitable I am sure if we'd still be a viable business from the IT job role perspective, we would be less focused. Because before we made these decisions, we were everything to everybody, very reactive. Now that we've created this model with offshore we are much more focused in the job roles we take on as far as partnering. Our Portfolio Management Process has become very matured as a result we were able to focus on the customer.

Bhawani Shankar: So better focus on core business as outsource. A thought that struck me which is a kind of more related with audience we have here. Clearly we have been through several perspectives here in terms of offshoring in India and also phases of maturity of use of India or the offshore model. Is there any one in the audience, who has come to the conference, who hasn't offshored to India before? Is there any one who has only one offshore supplier? So if we instead of look at phasing and maturity of the relationship, Jaymin, Do you think there has been a change? Clearly there has been a business change on your side. But from the supplier perspective has there been a change in India? Do you see changes that are either positive or negative? How has that both on the client and on the supplier side? How have both progressed over the lifecycle of the maturity?

Jaymin: Over the last 9 years, there has been many changes in the relationship and we have become more and more comfortable with HCL's overall capabilities to deliver a wide range of services to GTech. So, we have observed HCL become stronger and stronger in different engineering areas of our business and as we saw that experience grow within HCL, we became more and more comfortable giving them what I call our crown jewels, giving them our Research and Development activities, allowing HCL to work more directly with our customers. But it took some time for us to gain the confidence that our HCL account team had gained the requisite domain experience and knowledge of our business to be able to take that kind of work on.

Bhawani Shankar: Arun, do you think you have to be global? The second loaded word in the theme here today was global. How do global companies gain a global competitive edge? How much global do you have to be? Can you be small? Do you have to be big? Do you have to be expensive?

Arun: Let us have the business case we did with HCL four or five years ago. My CFO is not satisfied with just having done something nice savings four or five years ago. He wants it every six months now, may be every quarter. So there is a new challenge, because people like us have new competition coming from all over. I am sure, in every industry there is some disruptor coming from somewhere. So what was the nice comfortable cozy world five or ten years ago, is no longer cozy and comfortable. So, we got to be thinking faster and what worked well in the past now with Indian companies or with BT in India or GTech in India, I think, they got to be different way in doing stuff which I hope that we will be able to debate around here. If I can define what we are looking for in the future from our partners view, we probably will want lesser partners than the numbers we have today. Because you rightly said with domain knowledge and so and so forth, it is impossible to do with increasing the number of partners. So you got to get down and work with the few partners who understand your business and that's what we intend to do, work with fewer partners as we go down the path. And work with different models, previously what would worked was nice; you know cost per hour, cost per month, and cost per year, which would be called input based costing. So where we would happily pay something with out worrying about what is the result came out. We want now partners who work with us on a risk share. "Some pain and some gain". And to me those companies from India which will be willing to take those risks and be able to deliver to companies like us on a global basis will be the ones that companies like us would want to work with. I think company need to be of a certain size to be able to take the advantage of India because there is a hidden cost, when companies like us offshore there is a internal cost of managing, just sending people or transition and all those are hidden cost. Some times I suspect that if we were to put the real cost of offshoring in to our business cases, the numbers may not look that good. HCL is a good example for us at least, because you people bought a center of ours and put up a nearshore center in Belfast for us, which has worked very well. So companies like us require nearshore, it is not just pure off offshore. You need to be nearshore to be able to work because if you want to speed to market, you need to be closer to where our markets are. It worked very well then.

Bhawani Shankar: I think there are two issues. One is cost, cost both of management and also cost transparency per se. Which is how do you measure the value what you get out of India or supplier partnership whatever? I think the other thing is having tasted offshore a little bit, what do you do in phase 2? Cost of management, transparency, any ideas on how you management that? Do you measure that at NCR?

William: I think it is a good takeaway from the globalization question, that cost is the right model to determine where you want to be a viable business. You want to be in a 100 countries, 30 countries, depends on how profitable you want be and how much market you want to take. We probably do business in over 100 countries; only 30 of those countries are large enough that have an entitlement to run 4 Billion infrastructure. So we make decisions on whether we go to a distributor model whatever based on the size and complexity of that country. Having said that second part of the hidden question around that would be of that globalization, where you need to be in terms your back office, your IT support are going to stay. We are already there two countries, the US, which is our head quarters, and India. And that's where 100% of our IT population resides. 60% is in India and 40% is in the US. We don't need feet on the street in any of those other countries.

Bhawani Shankar: I am just curious to see if there is any one who has data points, ideas on cost, where some of you might have measured cost, cost benefits, either on yearly basis or kind of cost of entry vs. cost that you get out of a period, any ideas? Any volunteers for how you manage this and how you measure this?

Audience: I am Godfrey Pinto from GTech and we measured this initially for one of our point-of-sale terminal application that we transferred and that it came up with about 40% to 45% cost savings. We did a full analysis on that in that respect, that was a sort of a model that we used. We also used it when we transferred service from some of our Asia Pacific areas to India and we were able to really cut our technology centers down. It came down to 6 centers from about 32 centers delivering services down to 6 and we had a tremendous cost savings that time too. Especially for the Asia Pacific area, which we now run and support all out of, in a sort of a front office, back office model all out of India, out of Chennai.

Audience: I am Chris Jones from Coriander Consulting. I have worked on both sides of the fence. Most companies do a traditional business case and you get your savings 40% or 60% or whatever. Most clients don't factor in, you were saying, all of the hidden stuff. So you got the hidden stuff of management as extra management, then you got the extra communications and those things you could find to 10%. So over and above, the communication charges which you already taken in to business case but in addition to that what is also not factored in is your internal discussion in terms of your SLAs, your requirement definitions for projects and if you have done an arguments in terms of what is a business as usual, which are now doing better, because we weren't doing it accurately enough before or is it additional or not. So depending on how you add up each of those depends on whether or not you come up with a figure of 10, 20 percent or whatever.

Bhawani Shankar: I think we are slowly inching our way towards, in this phase 2 how exactly do we bring about real value. We tasted the labor arbitrage got our 40% and people like Coriander Consulting help us in mitigating some of the internal costs. Value centricity is concept very close to HCL's heart. Sean, in your experience you deal with number of companies and you are kind of at an arms length and have a fairly independent view on what value is? So in that context what are your views on in this phase 2 offshoring? How are we going to get away from a cost focus and make use of India better?

Sean Randolph: I think when offshoring really began 5-6 years ago in earnest there was something of a wholesale rush into it as if it was a panacea for a whole range of business problems. Of course it is for some and quite a few companies had got in, realized it was much more complicated than they thought because of the hidden costs and long distance management in these kinds of relationships. So we've seen some pulling back and some companies suggested it didn't work out for them and they brought business back home, but in the long run that's a natural sorting out because it brought them to the point of saying so what is our strategic position here. Are we offshoring for truly cost purposes or strategic purposes? There is enough analysis out there that we know that those companies that have offshored for the purposes of cost but cost plus what India can bring to certain strategic objective have actually been more effective at lowering overall cost than those who went there simply aiming for a cost threshold. So we know that value added is actually effective in both strategic terms and also in cost terms. In terms of the size of companies that can do it whether this holds true or not over the long term we are finding out that a lot of the venture companies in Silicon Valley are telling their new investees, what's your global strategy, what is your China strategy, what is your India strategy now. Five or Six years ago you would have had to be a fairly mature medium sized firm before you could even think about a global strategy. Now when you are getting your initial amount of funding you are being asked what is your global strategy? I think this is factoring in at a much earlier stage than it ever has in the past. In terms of the value proposition from India, many companies from diverse industries have not only reduced their cost but also enjoyed financial gains by offshoring to India. Considering the deep talent pool in India, many people say India as a growing market has tremendous potential for the future. But there is a question of how India fits into the companies' global chain. Tech companies will be looking at India in a very discrete area of cost savings in the market absolutely. But how does India relate to their centers in Ireland or in Israel or in Shanghai. What value does that bring to the global enterprise?

Bhawani Shankar: How do you start off with a relationship which is defined on a few reams of paper if you will contract whatever? How do you move out of those bounds and look beyond to exploit this thing so that we call India better? How do you find more resources idea, etc for innovation?

Jaymin: It's a fairly complex process. But there is a simple answer. First of all I think it starts with the management team of a company helping the employees understand that we need to strengthen our partnership with HCL and other companies so that we can become more competitive. Initially, make the employees realize that organizations like HCL could become a competitive weapon for the company and make them more profitable, make them faster in certain markets. Once this is done, it is important to make sure that you have a clear understanding of the relationship so that you can really open the company's arms and invite your partner in. Invite your partner into your strategic discussions about your technology path of the future; discuss areas to be revamped, quality of the resources etc. So the entire organization has to understand that this is a critical necessity for them to remain competitive and drive the business forward.

Bhawani Shankar: Arun and Bill, in the UK, for instance, there are companies that actually use offshoring as a disincentive. So Natwest, for instance, is a major big three bank in the UK that claims to not offshore and thereby attract more customers saying we do not have any call centers outside the UK. So how do you weigh those concerns both internally and externally? How do you present offshore to your stakeholders, your share holders, your audiences, your customers, your industrial zones? How that challenges are handled?

Arun: It is certainly a big issue. While taking a decision on offshoring, we are very careful and we take our unions and employees along with us. It is not always necessary that everybody likes it. But it takes time. We've just got to be careful about it. Regarding Natwest, that is making a virtue out of something which is fine. But clearly for a company like ours that's not a sustainable model. As you heard on the panel saying if you are a very local bank, just one or a local company, you can certainly do that. And that's a perfectly valid strategy - that if you can live with a higher cost. But you will end up with maybe a lower market share or whatever it may be. But for companies like us we have taken a conscious and steady decision that we will use talent from across the world and not just India.

Bhawani Shankar: Specifically, how do you handle sort of confidentiality, security related issues that might arise?

Arun: In UK, there are the UK laws and EU data protection laws which are fairly tight. In India, IT law does not comply with the EU law today. So we have to resort to what is called by contract for the time being. So with any provider through contract we protect ourselves. But the Indian government is right now creating some amendments in the IT act which will create lot more protection especially if there is data piracy or data leakage. There has been pretty active work by Nasscom and by the police authorities to actually quickly bring the guilty to book and being able to do that. And recently I think it was in the papers that something called the Data Security Council of India has been set up to create the best practices framework in the data security.

William: That is relevant for NCR. We have a quite bit of our R&D product development that occurs in Scotland, our ATM business, in particular, the core engineering product design. So round about a few years ago, when the opportunities were there to lower cost manufacturing regions there was certainly an issue. We were able to overcome that, in fact, we got our ATM manufacturing happening in a large way here in Pondicherry. Now we are moving to Budapest as well for central Eastern Europe. I think one of the ways we were able to overcome that was to present a bigger picture of survival for the company that they can relate to, rich history that they could and in fact keep the initial break in of manufacturing close to the product development. So we still kept the smaller or the more complex piece of manufacturing collocated with product development in Scotland. The other example is I was challenged by some of our internal management to take a look at Ireland as Ireland has a tax free zone. But the reality is with regard to software engineers per capita, Ireland can't compete with India.

Bhawani Shankar: So in that whole question of choice of offshore destinations, Sean you mentioned an interesting thing there about offshore or an India or a China getting embedded in business plans. Any views from the Bay area perspective?

Sean Randolph: Yah, there is big debate. It is actually not about India versus China but it is pretty India and China. There is an immense fascination but focus on both India and China right now in the US because obviously of their population, the educated work force, the tremendous movement of services in the direction of India, the tremendous movement of manufacturing in the direction of China, and their sustained growth rates over the last 4 to 5 years. The question then becomes how we in the US or California Silicon Valley fit into that picture. Some years ago, the apprehension of offshoring led to many legislatures throughout US, often driven by the labor movement, restricting offshoring. We have in fact seen that all of the jobs have not flown out and we have historically low unemployment rates having maximum offshoring rates. Whether offshoring significantly affects wage levels, in the middle tier the evidence says no. So how do we fit in as an economy, as a country into where both India and China are increasingly significant as players? It is really important to know how value is added and created at both ends of the process. It is a win-win kind of thing. How different India is from China? Obviously they are vastly different from each other but there is an understanding that whether it is China or India together or individually, they are both going to have tremendous impacts on us. China is based on manufacturing models, with India it is IT, more of service kind of models. I think the R&D is maybe up for grabs with tech R&D going into China and IT related R&D going into India. IBM has become a localized company all around the world, many brands have as well. Part of the globalization strategy of the Indian companies is to also look into the communities in which they are selling their services and establish a local presence and identity. I think this is maybe the next wave as Indian companies globalize.

Bhawani Shankar: Earlier there was far more nervousness about India and the offshore model. Today an Indian accent in the room actually gives me a lot more comfort. I want take the views on the maturing of that model, especially in manufacturing. Jaymin as you are from a company that relies heavily on R&D in engineering, how do you balance India maybe with another location?

Jaymin: We have moved our manufacturing of our basic point of sales terminal for gaming to China. India was not very much of a choice for us because we felt that manufacturing in China was more advanced. I don't think the same way about product development or R&D. I think that we would likely move to India. We have a multi sourcing approach in our business where we tend to move work to many countries around the world like Poland and now Serbia. Our research and development activities will probably be split between India, Poland, and Serbia with some kept back in the States. The more higher level architecture and engineering will remain in the States.

Bhawani Shankar: Arun, BT doesn't manufacture. Is it actually looking at China as an alternate software services location?

Arun: India is where we started from. China, Hungary and Latin America are where our customers are and we want to be there. We got to have the local input coming in from all our customers what they require, and it is different. One of the things we are investing in is an open innovation platform. We have created a whole innovated system around this including in India where we pick up the best ideas and we offer our platform. In India today there are lots of interesting service companies coming up, product companies. HCL and big companies are all essentially service companies and your clients are product companies. There are large number of companies which my colleagues are working on from across the world and we think those are new services, who knows the next Google might be somewhere in India.

Audience: My name is Manish Shah. I work for Information Resources based in Chicago. I have a question for you. The notion of time to market and follow the sun support models, have they matured enough to actually apply to research and development? Do you actually do any follow the sun R&D to resolve your time to market problems?

Jaymin: We have a great desire to get products to market very, very fast, and we set very aggressive laws internally. We have found in many instances that using HCL for product development from the top to the bottom of the entire project speeds up time to market as they have a group of people who are completely focused on delivering that piece of new product for us. In many cases, we develop products that will go to our customer side within the next couple of quarters. So that forces you to have a very specific project methodology to define the product, develop it and get it to customer side very quickly. What we have found thereafter is that the entire lifecycle of product management tends to be offshored or moved to HCL. One stage is to develop the product, they have intimate knowledge of the product and they can then build additional modules and applications. So the maintenance and support of that product will typically move to HCL once it's come live.

Audience: One issue that I didn't hear addressed yet regarding India perhaps versus other countries is the question of whether India's infrastructure can sustain the growth that it's seeing particularly in terms of roads, airports, utilities and power?

Sean Randolph: If you travel to India and China you see it immediately when you get off the plane. If you are landing in Beijing or Shanghai, and you are landing in Mumbai or Delhi you are in different worlds. You take the Maglev train or you fight traffic in Mumbai. It may be one reason why manufacturing investment is not as strong here as it is in China they have invested massively and their ability to move things got a lot better. I think the key issue is the educational infrastructure. Companies will put up with horrible infrastructure as long as they are getting what they need in terms of the cost advantage, especially the talent. They are coming for the depth and breadth of the pools of talent that are available and if India generates the right quality and quantity of talent then companies will gravitate more toward India. I think it's the physical infrastructure but I think even more strategically it is the educational infrastructure for the long term.

Audience: I am working for SAP, we came to Bangalore to support our growth as it was not possible to hire enough talent outside or inside Germany or inside the US.

Bhawani Shankar: Just imagine, I am the Prime Minister of India. I am granting you three wishes. What are those three things that you want to change about this place that will make you, your job at SAP better?

Audience: When it comes down specifically to Bangalore I would say first, traffic infrastructure, second traffic infrastructure, and third traffic infrastructure.

Bhawani Shankar: Arun, three top things that you would definitely want to change.

Arun: What we are looking from companies like you is the ability to take risks in terms of the kind of commercial models that you have been doing and HCL is very aggressive in that particular space. The second piece is that companies like us are moving and transforming like every single company here is transforming which means you are transforming your business process. The IT and the business process are deeply interlinked. Though in traditional companies like us the two are completely poles apart and don't talk to each other at times. People like you should be looking at us as a combination of operations and IT together and if you were to look at within your own company and come to us with proposals across the piece you will find that you will be able to actually control your destiny and then we will be able to take more risk and the gain share model will actually work. You need to do that. And the last thing I would say is continue challenging us because sometimes people don't want to change but people like you challenge us and we will change.

Bhawani Shankar: I will come to you Sean in a minute. Bill your two minutes with the Prime Minister.

William: Yes just a couple of things. I think Shiv Nadar defined aggression this morning as risk taking. He said they were synonymous, risk taking and aggression. So I would say not to the HCL account team but more to the actual worker level within India that the culture wants to aggressively take the work. I think MNCs are willing to give more work to India as the profile of the worker is aggressive and willing to take work. The second thing I would tell the Prime Minister is stop thinking like an IT exporter and start thinking like a consumer of technology because your market is maturing so fast before your very eyes that concepts like soft service that will be very beneficial for NCR when India becomes a mass consumer of IT.

Bhawani Shankar: So Sean you have any view, you know, you meeting some one in office and the public policy view.

Sean Randolph: I think if I was talking to the Prime Minister I would say one is physical infrastructure investment, second education infrastructure investment; I would also say that somehow India would do well to nurture a stronger environment entrepreneurship really meeting risk taking. I think really there is a level of commercial risk taking of course that it's not the same kind of cultural risk you find in Silicon Valley and one of the factors in that maybe it's really hard to start the business here. It takes vastly longer for an entrepreneur coming out of school or anywhere else to start the business that it does in Silicon Valley.