Source:www.cio.com

The current stampede toward offshore outsourcing should come as no surprise. For months now, the business press has been regurgitating claims from offshore vendors that IT work costing $100 an hour in the United States can be done for $20 an hour in Bangalore or Beijing.

If those figures sound too good to be true, that’s because they are.

In fact, such bargain-basement labor rates tell only a fraction of the story about offshore outsourcing costs. The truth is, no one saves 80 percent by shipping IT work to India or any other country. Few can say they save even half that. As just one example, United Technologies, an acknowledged leader in developing offshore best practices, is saving just over 20 percent by outsourcing to India. (For more, read “Inside Outsourcing in India,” www.cio.com/printlinks.)

That’s still substantial savings, to be sure. But it takes years of effort and a huge up-front investment. For many companies, it simply may not be worth it. “Someone working for $10,000 a year in Hyderabad can end up costing an American company four to eight times that amount,” says Hank Zupnick, CIO of GE Real Estate. Yet all too often, companies do not make the outlays required to make offshore outsourcing work. And then they are shocked when they wind up not saving a nickel.

In this article, we will explore a new TCO — the total cost of offshoring. We will uncover all the hidden costs of outsourcing—areas in which you’ll have to invest more up front than you might think, places where things such as productivity and poor processes can eat away at potential savings, and spots where, if you’re not careful, you could wind up spending just as much as you would in the U.S. of A. (For more on how to calculate your own TCO, see the worksheet “Do the Math” on this page.)

“You can’t expect day-one or even month-six gains,” Zupnick says. “You have to look at offshore outsourcing as a long-term investment with long-term payback.”
The Cost of Selecting a Vendor

With any outsourced service, the expense of selecting a service provider can cost from .2 percent to 2 percent in addition to the annual cost of the deal. In other words, if you’re sending $10 million worth of work to India, selecting a vendor could cost you anywhere from $20,000 to $200,000 each year.

These selection costs include documenting requirements, sending out RFPs and evaluating the responses, and negotiating a contract. A project leader may be working full time on this, with others chipping in, and all of this represents an opportunity cost. And then there are the legal fees. Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship.

Vice President of Program Solutions and Management Ron Kifer spent several months on vendor selection before contracting with Bangalore, India-based Infosys to handle a whopping 90 percent of development and maintenance work for DHL Worldwide Express, a shipping company. “There’s a lot of money wrapped up in a contract this size, so it’s not something you take lightly or hurry with,” Kifer says. “There has to be a high degree of due diligence making sure that the [offshore] company can respond to your needs.”

Even when there is an existing tie between customer and offshore vendors, the expensive and lengthy step of vendor selection is a must-do for successful outsourcing. The chairman of Tata Consultancy Services (TCS), a Mumbai, India-based outsourcer, sat on the international advisory board of Textron, a manufacturing company that owns such brands as Cessna Aircraft and E-Z-GO Golf Carts, for several years. However, when David Raspallo, CIO of business unit Textron Financial, began exploring offshore outsourcing in 1999, he still spent five months doing what he calls “the usual Betty Crocker Bake-Off” with service providers Covansys, ITS, TCS and Wipro. Ultimately, he went with U.S.-based Covansys, which has three development centers in India. Selecting the vendor took 500 hours in total, involved Raspallo and three senior managers, and cost $20,000 in additional expenses.

At this stage, travel expenses enter the picture as well. A trip overseas helps CIOs get comfortable with their choice. After all, offshore vendors can send their best and brightest over for a dog and pony show, but checking out the company on its home turf provides more insight. John Dean, the CIO of Steelcase, an office furniture manufacturer, spent several thousand dollars to send one of his IT executives to Intelligroup Asia in Hyderabad, India, for a week before signing on the dotted line.

“You can read everything you want to read and ask for advice as much as you want, but you have to make it a fact-based decision,” Dean says. “So it was important to visit India to validate our thinking.”

Bottom line: Expect to spend an additional 1 percent to 10 percent on vendor selection and initial travel costs.
The Cost of Transition

The transition period is perhaps the most expensive stage of an offshore endeavor. It takes from three months to a full year to completely hand the work over to an offshore partner. If company executives aren’t aware that there will be no savings—but rather significant expenses—during this period, they are in for a nasty surprise.

Source:www.designnews.com

Experts at National Manufacturing Week today said that outsourcing of manufacturing processes continues to gain momentum, as product makers begin to turn their attention beyond China, to such countries as India and Viet Nam.

“People tell me that we’ve probably got about three years in China before their standard of living goes up,” said Richard Ligus, president of Rockford Consulting, a firm that specializes in manufacturing, distribution and supply chain strategies. “After that, they’ll probably go to India. And after that, to Viet Nam.”

Ligus joined other speakers here at a session titled “Offshore Outsourcing.”

Ligus cited U.S. Commerce Department statistics showing that import of assemblies to the United States vastly outnumbers exports, especially in printed circuit boards and motor vehicle electronics. Ninety-eight percent of circuit boards in the U.S., for example, were imported in May 2007, representing a trade imbalance of about $1.62 billion. Similarly, 79 percent of electrical and electronic vehicle assemblies were imported in May, representing a trade imbalance of about $650 million.

Speakers at the session told audience members that the cost advantages of outsourcing component assembly are largely attributable to labor costs. When all costs are considered, they said, total benefit runs between 15 percent and 45 percent. Another major advantage is that outsourcing of manufacturing and assembly of minor components enables companies to focus more effectively on their core competencies. They added that 83 percent of CEOs said they have outsourced processes, and 66 percent of those said it helped their companies be more profitable.

In a talk titled, “Strategic Outsourcing: The Good, The Bad and The Ugly,” Ligus also warned manufacturers that there are hidden costs to outsourcing. Those include inventory carrying costs, legal issues, theft, piracy, training, shipping losses, additional paperwork and loss of control.

Source:economictimes.indiatimes.com

Strengthening rupee might be a big concern for software exporters and IT stocks might be tumbling even on a rising Sensex. But, it looks like the wallets of techies would continue to bulge in the near future.

While the 12-15% growth in salaries will slow down in the long run, three key indicators - wage inflation in US and its effect on cost arbitrage, profit per employee in software companies and continuing skills shortage in India - suggest that a moderation might not be around the corner, industry watchers say.

Appreciating rupee has been eroding the margins of IT companies since the beginning of the year. Ever since the dollar breached Rs 40 mark recently, IT stocks have been dropping as investors worry about IT sector’s profit margins (on Monday IT index fell 1.77%, while Sensex went up 1.7%), as a percentage point rise in rupee could shave 40 basis points off operating margins.

IT companies get most of its revenues in dollars, but spends a significant part of it as salaries in INR. So, will salary growth moderate, or worse, come down? Not immediately, observers say.

Indian IT salaries have been growing at 14-15% a year, raising concerns about how long it can continue. But, Mr Noshir Kaka, Director, McKinsey says, “More is being made of wage inflation than anything else”. Indian IT salaries are still 15% of American IT salaries. Thus, in absolute terms, a 15% growth in India would still be lower than a 3% growth in the US. (See Table) “So, the cost arbitrage is still there,” he said.

The stark possibility of shrinking profit margins is another reason cited by pessimists. But, profit per employee has actually been going up, on the back of producity gains. For TCS, Infosys and Cognizant, per employee revenues, as well as net profits have been going up at anywhere between 2-4% during the last couple of quarters. Mr TV Mohandas Pai, Member of the Board and Director - HR, Infosys said rupee appreciation will have an impact on salaries only if it affects growth of the industry. “But so far

Source:www.pr.com

Three partners of Virtuoso Analytics, LLC, an independent, worldwide, Indian-based web-development, graphic-design & business-process-outsourcing company, are hosting half-day workshops on “Offshore IT Economics” in early October, in Miami, Atlanta, Boston, Newark & Alexandria. Generic in nature, the programs will feature a PowerPoint presentation, ‘typical scenarios’ and questions & answers. Space will be limited.

Three senior partners of a major, independent, worldwide web-development, graphic-design and business-process-outsourcing company, located here, are hosting half-day workshops on offshore IT economics in five cities on the US Eastern seaboard, in early October, according to Vicky Lavan, the Pennsylvania-based Chief Operations Officer for the company, Virtuoso Analytics, LLC.

Accompanied by Lavan, Ayanansha Acharya and Ananya Roy, principals of Virtuoso Analytic, will present the workshops in Miami, FL, on Monday, October 1st; Atlanta, GA, on October 2nd; Boston, MA, on October 3rd; Newark, NJ, on October 4th; and Alexandria, VA, on October 5th.

The program, entitled “Offshore IT Economics: Practical Logic for Today’s ‘Virtual City’ ”, will address the pros and cons of utilizing IT resources in India, Pakistan, Ukraine and any other country around the world with a large workforce of skilled, computer-proficient, English-speaking programmers, web designers, data-entry professionals and Call Center operators.

Rather than promote any one company or nation as a source of that talent, Acharya and Roy will discuss generic reasons why assigning a project to an offshore company or service bureau may make practical sense for both large and small projects, as well as personal projects, reflecting a growing trend for people who outsource services for the family or home.

“The concept of a ‘Global Village’ is not new,” Lavan explained, “but in the last two years or so, most ‘neighborhoods’ in that Village have moved dramatically closer-together. Now, the Global Village is a ‘Virtual City’, and Offshore IT companies are basically just across the street.”

Lavan (Virtuoso@usa.com) operates out of Lehigh Valley in southeastern Pennsylvania, giving Virtuoso Analytic a physical presence in the US. In addition to directing the company’s activities here in the United States, she is directly involved in client contact, project fulfillment and customer satisfaction.

She is supported by Lee Sinoff (professional-resources@usa.com), an operations, marketing & communications and project management consultant who works out of Miami.

Virtuoso Analytic, LLC employs approximately 60 people in India. The company operates four websites: www.virtuosoanalytc.com, to give the company an identify for branding purposes in the US market; www.webdesignandcare.com, to cater to design projects; www.virtuosoonline.com, to serve online bidding portals; and www.bpostaff.com, to facilitate offshore business-process outsourcing assignments.

Through those websites, the company provides a host of professional services to its clients . That includes web application development; large and/or complicated web programming projects; website design & development; interactive web design; eCommerce web design; corporate identity & logo design; brochure design; banner design; customized ‘wallpaper’; image retouching; and ‘Flash’ — design, intros, banners and websites.

Virtuoso Analytic’s business-process outsourcing (BPO) services include data entry, document conversion, web-based research and similar activities. A Wall Street Journal article, ‘Outsourcing Your Life’, published in June of this year, describes various personal projects that are now being assigned to offshore companies, including Virtuoso Online. The Journal article calls personal-outsourced-projects an emerging trend.

Why may be fairly obvious. As far as Viruoso Analytic is concerned, its hourly rates are priced competitively, and the company’s Customer Service office is located here in the US.

At each workshop, Acharya and Roy will address mechanisms, economics and client-service commitments offered by offshore IT service bureaus. They will also describe several typical offshore scenarios, and discuss the advisability of ‘globalizing’ each one — including some projects best served by vendors closer to home. And they will be available to answer questions and assess projects.

To attend the workshop in any of the five East Coast cities, contact Lavan by email. Her address is: Virtuoso@usa.com. She is also available by telephone, at (610) 574-3877. Space will be limited, and RSVPs are necessary.

In addition to hosting the workshops in the five East Coast cities, the two Virtuoso Analytic partners will also be preparing the foundation to establish an office on the East Coast, forming strategic alliances with US resources and meeting with existing and new clients.

Source:www.thehindubusinessline.com

Not having an India presence hurts. Global tech players are making up for lost time by zooming in on acquisition targets here. A snapshot of the action.

“A few years ago, companies had to explain the India Advantage to clients. Today, the first thing clients ask vendors is whether they have an India presence.”

Global information technology suppliers are on the prowl, grabbing companies that have a strong India presence.

In the last one year, eight India-centric acquisitions, especially companies with large offshore presence in India, worth over $4 billion (over Rs 16,000 crore) have happened. And, around 35,000 employees changed hands. The number could be more if sma ll companies are also taken into account.

The trend started back in 2004 with IBM’s acquisition of Daksh (an India-based BPO provider). IBM adopted a model where the merged entity not only provided offshore support to IBM’s BPO clients, but also went to market independently. Encouraged by IBM’s success story, other global players such as Capgemini, CSC and EDS acquired companies in India, says a report by Morgan Chambers, a UK-based independent sourcing firm.

The motive for acquisition is simple — the ‘India Advantage’ of labour cost and quality manpower. A few years ago, companies had to explain the India Advantage to clients. Today, the first thing clients ask vendors is whether they have an India presence, says Subu D. Subramanian, Director and Senior Vice-President, Satyam Computer Services.

There is tremendous pressure on global suppliers to expand offshore presence in India, and acquisition is one of the easierways. Global companies have realised that to remain ahead of their rivals they need to reduce costs; provide the best quality; and be reliable and innovative. Acquiring India-centric companies provides all these, he says. For instance, EDS, in one swoop, more than tripled its employees in India by acquiring Mphasis, which had around 11,000 employees. This enhanced EDS’ offshore capability, and keeping pace with its outsourcing rivals. It was a similar story with companies such as CSC and Capgemini.

Supplier maturity

Sridhar Vedala, Director, Global Sourcing, Morgan Chambers, says global suppliers, apart from Accenture and IBM, did not treat India strategically until recently. It was believed that the India Advantage might not be sustainable as other destinations would emerge that would challenge India’s dominance.

However, though many other destinations seem attractive, they have failed to offer serious competition to India. The key reason is supplier maturity. Indian suppliers are mature; offer scale and a wide range of services. Many global suppliers previously were sub-contracting to Indian suppliers, but now find these suppliers their competition. In such a scenario, they are left with no option but to expand their footprint in India, he says.
Target companies

Target companies

Several small/mid-size suppliers in India are yet to reach critical scale, making them prime targets for acquisition, by western or global providers, states the Morgan Chambers report. The Tier 1 suppliers, including Cognizant, HCL, Infosys, Satyam, TCS and Wipro, command 40-50 per cent share of the Indian offshore market. If one excludes the next set of 8-10 Indian suppliers, the Indian operations of global players such as Accenture and IBM, and the top 8-10 captive units, one is left with over 3,000 offshore providers who account for a miniscule share of the market, it says.

These players have revenues ranging from less than $1 million to $100 million and are looking at ways to grow to the next level. Some of them are exploring the sell option, optimistic of the high valuations of the Indian IT and BPO firms. Acquiring firms are looking for targets that have complementary offerings, culture fit, and, of course, the right price, says Vipul Taneja, Country Manager, India, Morgan Chambers.

Acquisitions to increase; Captives on the radar

The trend of acquiring companies with large presence in India is likely to continue in the near future; in fact, the pace should increase, says Taneja. And it is not only the Indian vendors but captives of global organisations (such as Philips sale to Infosys) will continue to sell out. Some of these captives are finding it difficult to scale up owing to a mix of lack of strategic direction within the parent firm, scale of current operations not able to justify overheads, as well as supply issues, he says.

The client pull

Manpower is important. But multinationals also want to buy companies with prominent clients and efficient processes. Some mid-size firms are ‘captive shops’ for large western companies, and acquiring one of these firms brings in not just the company but also important clients, says Michael R. Guilbault, Senior Analyst, Professional Services Business Quarterly, Technology Business Research Inc, a research company.

Acquiring companies can get more ‘bang for their buck’ by purchasing well-functioning smaller firms to enhance their service lines. Infosys, for instance, would like to avoid buying large companies that do not have models as streamlined and functional as its own model, he says.

The Rupee factor

With the appreciation of the Rupee, smaller and mid-size Indian IT companies that have not achieved critical mass are ripe for consolidation. The further the Rupee appreciates, the more these companies will seek association with larger firms to remain profitable.

The Indian IT industry is poised for consolidation as appreciating wages make smaller shops unprofitable. Going forward, a lot of the captive units of multinational corporations are likely to be sold off and consolidated with larger players. If a company were to buy a captive BPO unit, it would immediately acquire a dedicated workforce, processes and skills sets, along with a new major client: the seller, says Guilbault.

One is not enough

Companies will not stop with one acquisition. They will look at more inorganic opportunities to ramp up their India operations in a big way. If they have acquired an IT services company, they will look at a BPO company or a focused testing company, says R Chandrasekaran, President and Managing Director, Cognizant Technology Solutions.

Consolidation is bound to happen in the IT industry and there will emerge a Global list of 10 or 20 companies, he says.

Challenge from Indian vendors

Indian providers are becoming more global on the one hand, and global companies, previously located elsewhere, are increasing their India footprint. There is a demand for acquiring more competencies, skills and talent all around to address the market needs, according to T.A.N Murty, Head Investor Relations, Satyam Computer.

Valuations have also been fair to the companies being acquired; if not better, as acquirers have valued the targets from a strategic perspective, rather than simple financial terms, he says. Valuations would continue to be fair in response with the market demand and potential for the services or products, and may not change upwards significantly as such, because Indian IT service companies generally have enjoyed higher valuations than European or American service providers, he says.

Acquisitions to continue

A lot of the acquisitions will continue over the next 18 months, and primarily by global service providers that have so far ‘missed the boat’ in establishing an organic footprint in India, as IBM and Accenture, for example, have been doing for some time now. Companies have realised belatedly that not having an India delivery story is actually hurting them even with their mainstream clients and hence there has been — and will continue to be — a flurry of acquisitions to at least be able to ‘immediately’ claim to have an India presence. The talent acquisition for actual delivery is actually —strangely enough — a secondary driver in these situations, says Partha Iyengar, Vice-President, and Regional Research Director–India, Gartner.

A wider pool of even Tier 2 global vendors, including in newer markets such as Western Europe, are feeling the heat of not having a viable offshore strategy, he says.

China card, valuations

A wild card that will also emerge in the next 18 months is the strong possibility of Chinese service providers acquiring smaller Indian providers to establish an India presence as well.

Also, valuations will go down. However, it is quite likely that there will be some surprising (shocking) high-end acquisition of a high-end provider as well, in which case the valuations will most likely be at a significant premium to fair market value, says Iyengar.

“I will not be surprised if one of the latter also happens during the next 12-18 months,” he says.

The early acquisitions were at significant premiums to what might be construed ‘fair price’ in a rational market.

The acquisitions these days are probably more rational or, in some cases, quite advantageous for the buyer, since many of the smaller companies that are now the targets struggle to maintain growth and hence are willing to be acquired for a much more attractive (from the buyer’s perspective) valuation, he says.

Even as the larger companies see and maintain hyper-growth, the smaller companies are starting to struggle and actually have growth rates that are much lower and slowing further.

Thus, they will increasingly see their future tied to being acquired by a larger player, and hence are willing to be acquired for much lower valuations than in the past.

Challenges to momentum

According to Subramanian of Satyam, the India Advantage is being threatened by factors such as attrition (15 per cent in IT companies and as high as 50 per cent in BPO companies); availability of employable people (only 25 per cent of engineering graduates are readily employable) and increasing labour cost.

The industry, academia and government should collectively work to overcome these problems, he says.