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Wave 3 of Indian Outsourcing

Posted on Thursday, Apr 3rd 2008

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.

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When you say Outsourcing and India in the same sentence, people conclude that you are talking IT. That’s the perception and I strongly think that changing that perception is going to be the biggest challenge Indian Outsourcing players are going to face.

ITES, being highly commodotized and prone to recessionary pressures, is always a hard sell. Coming up with “creative solutions” and then successfully pitching them to C-level execs are both difficult tasks. These C-level execs really are not in the mood for spending too much on IT services systems, beyond bare sustainability type things.

So what other/new competetive advantages can the Infosyss and Wipros carve out, given there capabilities? I’ve read a few postings (in Sranama’s blog) about getting into the product space. Now that is something that would definitely help them create a whole new set of opportunities but again, developing products will require these firms to ramp up on some other skills sets (imagination/innovation, market intelligence, consumer behavior, etc.).

Finally, moving up the value chain and getting more strategic in terms of what you have to offer also means that you will be encroaching the space of some established players. Don’t get me wrong, Indian companies have demostrated, on more than a few occasions, that they can take on the so called market leaders and incumbents. All I am trying to say is that the road ahead is going to be long and tough. A number of factors that gave the Indian outsourcing firms an advantage and momentum in the past are not around anymore. The risk has gone up significantly, not necessarily the rewards.

Uday Kumar Friday, April 4, 2008 at 7:21 AM PT

Uday,

My entire posting was about the IT services and solutions space and not the ITes / BPO segment that I’m less familiar with.

I completely agree with you that moving up the value chain is an uphill task. However, I see huge rewards for the companies who can make it – in terms of profitability and Return on Talent – a key measure of how effectively companies leverage their most critical resource – people.

Sudhakar Ram Friday, April 4, 2008 at 8:16 AM PT

Hi Sudhakar,

How do you foresee the process of ‘spec’ing these IP / Frameworks? Who does the “product marketing” to figure out where the packaged software vendors already have offerings, and where the opportunities to do this kind of “extensions” lie?

The subtext of my question is that India’s lack of product marketing expertise has become a limiting factor in building products. Now, the path you propose for Wave 3 needs to draw upon the same skill-set which India pretty much lacks.

Are you saying that players who go after this strategy would need to access Product Marketing from outside India?

I would appreciate some color on execution of the Wave 3 strategy you are championing.

Regards, Sramana

Sramana Mitra Friday, April 4, 2008 at 3:42 PM PT

Sramana,

You are absolutely right. When we look at Strategic, Wave 3 solutions being built by Indian companies, it does need strong Product marketing, product management as well as deep domian capabilities very specific to each country.

For example, in the Insurance vertical that Mastek specializes in, each country has its own product as well as regulatory and compliance environments. We access this expertise in each of thee markets, locally, through a combination of local employees and consultants. In fact, our acqusition of Vector in the US was largely driven by the deep expertise that they had in the US Life and Annuity industry.

Similarly, we don’t really find Product Managers in India and we end up recruiting them in our Business Units in the US and UK.

Hence, execution of a Wave 3 strategy has to be genuinely global and not India centric. Even to figure out the niche segments where there are IP creation opportunities requires deep understanding of the industry business drivers and current state of IT platforms available – only possible with strong industry experience.

Over the next decade or so, as China and India emerge as dominant markets outside of US, the solutions companies need to have similar strategies and capabilities to address these markets, too.

Sudhakar Ram Saturday, April 5, 2008 at 12:14 PM PT

[…] Sudhakar Ram, CMD of Mastek, writes on wave three of Indian outsourcing […]

Best Business Blog Posts in India: Weekly Edition 3 | Asia Stock and Financial News Sunday, April 6, 2008 at 11:47 PM PT

Sudhakar,

Given the global trends in the IT products and services space, especially, SOA, SaaS, Green computing and so on, and the shrinking labor arbitrage in India, how do you see the Wave 3 fitting in?

In specific, I am interested in knowing your thoughts on the % of revenues for the Indian IT biggies for the Wave 3 type of work, in the next few years. If we look at their Web sites, all the major Indian IT services companies claim to have this focus on IP creation through product extensions, Innovator networks, frameworks etc. They are also trying to play in the SaaS and SOA space as strategic partners with the product vendors (Microsoft, Oracle, SAP etc.) or with key customers in various verticals.

But what is not evident is the thinking that the so-called Wave 3 needs different skillsets, and operating models. For example, the business consulting practice of most of the IT majors has not really taken off, during the last 5 years

Kumar Narasimha Tuesday, April 8, 2008 at 1:11 AM PT

Kumar and Sudhakar,

I happen to also be of the opinion that Indian outsourcers have a great opportunity ahead to pick up small software companies in the valley that are looking for exits at very affordable prices. With the US industry in a recession, the IPO market slammed shut, M&A exits are the only place to go.

It’s a market condition that could be exploited nicely if the Indian guys play their cards right.

For a great example of a company that IS playing their card right, see Dominique’s story Private Equity on Steroids that discusses Serena Software’s strategy.

Sramana

Sramana Mitra Tuesday, April 8, 2008 at 12:50 PM PT

Kumar and Sramana,

To me Wave 3 is not so much about new technology as it is about creating strategic impact. Even today, Tier 1 companies generate a significant amount of business through services around new technologies like SOA, Rich UI tools, Web 2.0 and the like. However, that is similar to the services on technologies like Business Intelligence, package implementation etc.

While the percentage of revenues from Wave 3 work will vary by player, I don’t see it constituting a signifant portion of the business of Tier 1 companies, today.

I completely agree with you that the business model, the financial metrics and the talent base required for Wave 3 companies is quite different from the services model.

In that context, I like Sramana’s idea of picking up small sofware companies, not just in the valley, but across the US

Sudhakar Ram Thursday, April 10, 2008 at 4:08 AM PT

To agree with Mr. Ram’s views is easy. However, for India to actually execute on a Wave 3 strategy will be far from it. I’m sure companies like Infosys, Mastek and other Tier 1 providers are buried deep into strategic planning sessions trying to find ways of creating a Wave 3 strategy every day.

India’s competitive advantages are simply not aligned with the creativity and innovation that Wave 3 demands. In the first place, its not even clear what it is that is to be achieved. What does Wave 3 look like ? Simply admitting that “we need to move up the value chain” is not very helpful. Such is the nature of creativity and innovation, which is fundamental to Wave 3. Does India have the necessary foundation blocks for a Wave 3 strategy ? It is hard enough to find decent programmers and analysts, it is next to impossible to find the sort of strategic thinkers and transformation specialists that is required for Wave 3 to become a $100 B industry.

Internal systems (domestic I.T. in India ) shows no sign of creating a demand for innovative models or radical shifts in business process. In such a bland domestic environment, is it really possible for a Wave 3 strategy to emerge and dominate the global scenario ? This is like expecting something like SaaS as a model (or Salesforce as a company) to emerge from India. Unless domestic business activities creates this sort of demand, its very hard to simply think up this stuff.

Perhaps the acquisition strategy represents the best entry strategy for large Indian players. Acquiring companies like the Boston Consulting Group or McKinsey, and subsequently adopting their innovative mindset would provide the best chance of succeeding in a Wave 3 transformation. Mr. Ram refers to such large transformation projects presently being undertaken by Mastek. I’m not sure these projects would qualify to be categorized as “software services exports” anymore. These are much broader initiatives at the firm / city/ country levels and sounds more like the sort of high-end consulting work that BCG types undertake.

It remains a big question mark whether India can move up the value chain to position itself for the next wave. Talk of moving up this chain started as far back as 2004, but very little discernible progress has been made. We probably have another 5 years at most before various factors catch up with India. General strength in numbers of educated people will probably put India at an advantage for the foreseeable future, but all of that will be put to Wave 2 use. I disagree that Wave 2 will need to experience a knockout punch for Wave 3 to kick in. Simply receiving this death blow is not a sufficient condition for Wave 3 to successfully emerge from India. I feel Wave 2 will most surely cross $100 B before Wave 3 hits the $B mark, and this will be good for India. Notwithstanding the emergence of Wave 3 work, Wave 2 will persist for decades to come, and India will be well positioned with the domain expertise and critical mass of knowledge workers to dominate in this segment.

Hari Swaminathan Wednesday, April 16, 2008 at 9:23 PM PT

Indeed, it remains a HUGE question mark. Complacency won’t get the Indians anywhere. Doing the same thing over and over again won’t either.

Yes, strategic thinking is the need of the hour. India has not been good at strategic thinking. But are we just going to sit around and accept that as status quo, or are we going to change things?

Sramana Mitra Thursday, April 17, 2008 at 12:16 PM PT

Sudhakar,
I love the way you articulate the Waves though I am not sure if I completely agree with you on your conclusion “decline in Wave 2 work as a necessary precondition for the emergence of the Third Wave.” The argument you make for the decline of Wave 2 – I am reading ADM as the backbone of Wave 2 here? – may have little basis, as lease for the present. And there is little reason why ADM and work “up the value chain” cannot co-exist.

Mohan Babu K Thursday, April 17, 2008 at 2:49 PM PT

[…] Wave 3 model for Indian IT service providers Filed under: Business, India, Strategy — Subbaraman Iyer @ 4:59 pm Sudhakar Ram of Mastek writes an interesting perspective on the growth options for Indian IT service providers here. […]

Wave 3 model for Indian IT service providers « Serendipitous moments Friday, April 18, 2008 at 2:26 AM PT

Sudhakar:

First, while I would agree with the basic premise of the Wave model, I guess there are 2 key dilemma that are faced by the Indian IT service companies.

One, is how quickly and effectively can the new offerings under Wave 3 be monetized, and second how well does it lend itself to good execution.

My comments are attached here: http://subbaiyer.wordpress.com/2008/04/18/wave-3-model-for-indian-it-service-providers/

Subbaraman Iyer Friday, April 18, 2008 at 2:32 AM PT

In reponse to Hari Swaminthan’s comments, I have posted one more blog on what Wave 3 companies look like. Subbaraman Iyer’s remarks are also addressed in that post.

As regards Mohan Babu’s comments, I don’t see the decline of Wave 2 as a necessary precondition for Wave 3. With the growth rates tapering off it does look like Wave 2 is maturing and that revenues from Wave 2 activities will not see the kind of growth that we saw in the last 5 years. I do see Wave 2 and Wave 3 co-exisitng much the same as Wave 1 staff augmentation type revenues are still a small part of most service company revenues.

Sudhakar Ram Saturday, April 19, 2008 at 7:19 AM PT

Sudhakar,

To understand more deeply, the dilemma’s that the Indian IT services companies face.

  1. To remonetize through leveraged IP or new opportunities.
  2. Strong execution capabilities which are global.

I find the following :

  1. Lack of product DNA at mid manager level.
  2. Still working in Project mode.
  3. Processes built for ” Labour Arbitrage” kills the new Wave 3 execution.

Unless, the transformation is quick and we come out of the complacency of Wave 2, it is going to be a “also ran”. Even with all inherent advantages.

Bala Rajagopal Monday, April 21, 2008 at 8:23 PM PT

[…] Wave 3 of Indian Outsourcing – Sramana Mitra on Strategy […]

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Dear Bala,

Your identification of the gaps is quite right. Knowing the problem is half the battle won!

Sudhakar Ram Friday, April 25, 2008 at 8:33 AM PT

Folks,
I have been building enterprise software products in United States for past 12 years and would like to add in my 2 cents to the great discussion here…

Let’s take this problem apart and tackle one piece at a time:

Lack of Product Mgmt/Product Marketing in India – This is starting to change.. I see companies like Zoho.com (parent – AdventNet -Chennai based company with office in Pleasanton) & Toufee that are founded in india and have brought innovative (albeit rough around the edges) offerings to the marketplace. India will build good product mgmt/marketing expertise, especially as the Big IT power houses start focusing on it.

Lack of development experience in building products/packaged IP — There are early developments that are encouraging on this front as well. Look at InfoSys’s Finacle solution: this is a step in this direction.

Last but not the least – Returning NRIs will bring experience in building enterprise grade products & packaged IP with them : This will power the Wave 3 forward.

Cost of hardware, computing power, Network bandwidth continues to drop & freeware tools and standards continue to drive down the cost of building new products. Many companies – Indian or other wise – can use the increase in bench strength due to recession & start building packaged IP & products for post-recession rollout…

Gaurav Deshpande Friday, April 25, 2008 at 6:22 PM PT

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It is allright to be cynical of the domain expertise shortage in india but it is too early to sound the death knell for Wave 3. Companies are taking a two pronged approach to platform play – horizontal and vertical. And this is across geos and verticals. Combined with the huge domain expertise in the ranks of all the tier 1 players and emerging technologies like web 2.0 and open source, its just a couple of years where SAAS changes the entire delivery and pricing model for most relationships. Already companies like Cognizant and TCS are rolling out beta versions of their open source model across select clients who are willing to experiment. With due maturity, we will cross this hurdle too with elan, if I may say so.

mrityunjay Friday, August 8, 2008 at 6:04 AM PT

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[…] Welcome to Gauravonomics Blog! Subscribe to my combined feed in a feed reader or by e-mail and you’ll never miss a single post. Thanks for visiting!In March 2008, when I called social media outsourcing the next big business opportunity for India, nobody else was talking about social media outsourcing. Now, less than a year later, it seems that social media outsourcing ins leading the third wave of Indian outsourcing. […]

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