ET BureauHYDERABAD: Even as India’s $160-billion information technology sector grapples with one of the slowest years of growth in the history of the industry, some of their largest customers such as Citigroup, Target Corp and Royal Bank of Scotland feel that the traditional labour arbitrage model of Indian IT is starting to become less relevant and that top outsourcing vendors need to adapt and transform fast.
In an exclusive round table with ET, top technology heads and chief information officers of companies such as Target, Royal Bank of Scotland, Lowe’s and Cargill said that India’s largest software services firms need to offer more than just cost benefits and strengthen their capabilities in newer, futuristic areas of technology.
These customer organisations have over the past two decades leveraged India as a low-cost destination for software development and have outsourced hundreds of millions of dollars of backoffice software projects to India’s largest IT firms.
"I think it’s also about changing the dynamics around how it is looked at today, and how it was viewed in the past. For example, in the past we looked at arbitrage, we looked at headcount, it was more like "you’re told and we will do" versus looking at customer outcomes. Headcount is no longer a discussion — so I think it’s more about customer-centric outcomes," said Pankaj Phatarphod, managing director and country head of services at Royal Bank of Scotland, which currently outsources IT to companies such as Infosys.
With increasing costs of doing business in India over the past decade, India’s IT industry is slowly but steadily losing its unique selling point of being the world’s foremost destination for lowcost software development and maintenance. And more worryingly for top executives at companies such as Infosys and TCS, some of their largest customers such as Target, Lowe’s AstraZeneca and JPMorgan are talking about insourcing and shifting business away from IT services firms into their own technology centres in places like India.
"There’s a lot more insourcing that we’ve been focused on. We’re seeing it across mature GICs. Most GICs have leveraged third party providers and will continue to leverage them, but there’s a shift towards more insourcing because technology is core IP today and will continue to be so in the future," said Navneet Kapoor, president, Target India.
What is driving these moves around insourcing is also the fact that some of the largest customers of Indian IT are facing disruption from new-age, tech rivals such as Apple, Google and Facebook.
And India, which was always seen as a plain-vanilla outsourcing destination, has of late also become a key battleground from where online retail wars are fought globally, with customers like Target tapping into local technology talent to gain an edge and manage this transition faster inside their own companies.
"For a fast changing business model like the one that we are in, we don’t have the luxury of moving slower. So, I would be in India, even if the cost structures were similar because of scale of talent available," said Kapoor. And customers now expect India’s largest software firms to do much more with less, even as technology budgets worldwide come under unprecedented pressure. "And just as global corporations are transforming, we expect service providers to operate differently and move away from a more historical service model. The expectation is much more from a service provider because the environment is much more disruptive," said Kapoor.
Some executives, however, still feel India offers immense cost benefits. "Cost still plays an important role. Because if we had hourly rates like in Europe and like in the US, nobody would come to India," said Gerd Hoefner, managing director of Siemens Technology and Services, India.
(NOTE: The author was in Hyderabad at the invitation of Nasscom).
In an exclusive round table with ET, top technology heads and chief information officers of companies such as Target, Royal Bank of Scotland, Lowe’s and Cargill said that India’s largest software services firms need to offer more than just cost benefits and strengthen their capabilities in newer, futuristic areas of technology.
"We were late to this game (of outsourcing) — even at the beginning, we clearly said that we should not bother do this for arbitrage. If we’re doing it for salary arbitrage, we’re already too late in that door, that opportunity is diminishing. So it’s about completely modernising our world. If for some reason we were doing it for salary arbitrage, I would encourage us to not even start. We’re really focused on the bigger benefits," said Kathy L Fortmann, president of Cargill Business Services.
These customer organisations have over the past two decades leveraged India as a low-cost destination for software development and have outsourced hundreds of millions of dollars of backoffice software projects to India’s largest IT firms.
"I think it’s also about changing the dynamics around how it is looked at today, and how it was viewed in the past. For example, in the past we looked at arbitrage, we looked at headcount, it was more like "you’re told and we will do" versus looking at customer outcomes. Headcount is no longer a discussion — so I think it’s more about customer-centric outcomes," said Pankaj Phatarphod, managing director and country head of services at Royal Bank of Scotland, which currently outsources IT to companies such as Infosys.
With increasing costs of doing business in India over the past decade, India’s IT industry is slowly but steadily losing its unique selling point of being the world’s foremost destination for lowcost software development and maintenance. And more worryingly for top executives at companies such as Infosys and TCS, some of their largest customers such as Target, Lowe’s AstraZeneca and JPMorgan are talking about insourcing and shifting business away from IT services firms into their own technology centres in places like India.
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"There’s a lot more insourcing that we’ve been focused on. We’re seeing it across mature GICs. Most GICs have leveraged third party providers and will continue to leverage them, but there’s a shift towards more insourcing because technology is core IP today and will continue to be so in the future," said Navneet Kapoor, president, Target India.
What is driving these moves around insourcing is also the fact that some of the largest customers of Indian IT are facing disruption from new-age, tech rivals such as Apple, Google and Facebook.
And India, which was always seen as a plain-vanilla outsourcing destination, has of late also become a key battleground from where online retail wars are fought globally, with customers like Target tapping into local technology talent to gain an edge and manage this transition faster inside their own companies.
"For a fast changing business model like the one that we are in, we don’t have the luxury of moving slower. So, I would be in India, even if the cost structures were similar because of scale of talent available," said Kapoor. And customers now expect India’s largest software firms to do much more with less, even as technology budgets worldwide come under unprecedented pressure. "And just as global corporations are transforming, we expect service providers to operate differently and move away from a more historical service model. The expectation is much more from a service provider because the environment is much more disruptive," said Kapoor.
Some executives, however, still feel India offers immense cost benefits. "Cost still plays an important role. Because if we had hourly rates like in Europe and like in the US, nobody would come to India," said Gerd Hoefner, managing director of Siemens Technology and Services, India.
(NOTE: The author was in Hyderabad at the invitation of Nasscom).
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