Wave 3 of Indian Outsourcing

By Sudhakar Ram, Guest Author

Sramana had written about the Death of Indian Outsourcing a few months back. I got in touch with her, and since this was a subject I was passionate about, I have ended up writing this guest column on her blog!

We often tend to look at life in a linear fashion, with the assumption that the past is the best indicator of the future and that the trend under observation will continue to grow (or fall). However, most trends in reality follow an S-Curve – with a slow and steady start, rapid growth, a slowdown, followed by a decline.

As a participant in and observer of the Indian IT industry for over two decades, I can clearly see that software and services exports from India have gone through two waves and that a Third Wave is now unfolding.

Wave 1, which we can trace to the 80s and 90s, clearly established that Indian IT professionals were competent and could be trusted to deliver world-class work. This was the staff augmentation era of the industry, largely serviced through onsite services.

Wave 2, starting off in the mid-90s and currently at its peak, established India as an offshore programming destination. With labor arbitrage as the basic value proposition, Indian companies established large offshore development centers that had competent technical staff, mature CMM processes and world-class infrastructure. While the trigger for Wave 2 was the offshore initiatives by companies like GE, Motorola, Nortel etc., the Y2K bug gave it the necessary momentum. Although things slowed a bit after the dotcom bust, the shrinking IT budgets actually gave an impetus to large Fortune 500 companies to use offshore centers as a mainstream sourcing option.

With rising salaries, the appreciating rupee and recessionary pressures in the US, it is difficult to see the Indian industry continuing to sustain a 40-50% growth rate in the labor arbitrage mode. Hence there is a genuine question whether Indian outsourcing is on the decline.

My view, however, is that this is the classic S-Curve in operation. And for Indian industry to grow, we need to shift to Wave 3 work – which is strategic, value-added and non-linear. Capitalizing on the large pool of technical talent available in India and the free availability of domain experts in the western world, Indian companies need to start making substantial investments in building intellectual property – not necessarily as packaged software, but also as frameworks, components, web services and the like. We need to move up to create solutions that have strategic impact and C-level visibility within client organizations. We need to own significant parts of the transformation initiative budgets and be equipped to convert our CMM advantages to predictable deliveries.

At Mastek, we have been involved with large transformation programs, not just within global corporations but also at the city and country levels. We feel that the next wave will take Indian software services exports beyond the $100 billion mark! Far from being a death knell for Indian industry, we see the decline in Wave 2 work as a necessary precondition for the emergence of the Third Wave.