Outsourcing: Tata Communications Interview (Part 3)

By guest author Tony Scott

Labor Arbitrage or Value-Added Services?

Tony: So if you look at these businesses overall, what percentage today is value-added services vs. labor arbitrage compared to five years ago, and what do you expect it to be five years from now?

David: I think, taking TCTS as example, the first thing with any customer when you look at off-shoring activity is that traditionally it is based around labor arbitrage, which is least disruptive. I have found that to be the case with every customer The second thing is to work with customers in more of a partnership mode. To do that you need to change the way you operate, because eventually labor arbitrage is going to go away, so it’s really how you work with them from an IP standpoint. Clients will talk to you about to do their business, which is critical.  So labor arbitrage happens in the initial stages, but if you stay stagnant like that, eventually you go out of business. To stay in business you have to move to more of a knowledge-shop capability.

Shridhar: I will talk first about the TCTS experience. When we find customers, as David mentioned, the easiest thing to convince them about is labor arbitrage. Since the risk of actually transferring a process from place A to place B is so high and the competency levels of your potential partner are unknown, that is how you always begin the journey. I guess we have been very fortunate in being able to communicate our competency in managing core networks. In the design, building, and operating piece we could communicate that we could be a long-term partner to the client. In a way, with this initial positioning it is not as though from day one the story is purely labor arbitrage; it’s going to be an eighteen-month story where over time the client sees the full benefits.

So if you ask me what has happened to our customer profiles, all of them have gone up the value chain. Let’s say they started with order entry, which is a basic labor arbitrage kind of scenario. But if you look at the profiles of customers we’ve worked with for some time, the basic labor arbitrage work is about 15%–20% and for the rest, customers are getting into a bigger web of value-added services. But it will always happen that when we sign on a new customer, they will start on the lower end of the curve, and as we are able to establish our relationship, we will mutually move up. For mature customers, about 15% of it would be lower end services, but for my new customers it’s much higher than that.

Tony: You’ve moved customers up the value chain and moved your own company to provide an increasing number of high-value services. For most outsouring companies it’s a challenge to move from pure labor arbitrage-type services into higher value-add services. What have you done to overcome those challenges?

Shridhar: We have been lucky in that we have Tata Communications as a parent, which gives us access to the skill base of Tata Communications and the brand of the Tata Group. These are two key elements in establishing a partnership in terms of taking the client up the value chain. If you don’t have the brand name, the client is not going to come to you with information, nor will the client trust you enough to even talk to you. And if you can’t demonstrate that you have the basic competency, thinking about going up the value chain with you is probably is a difficult thing for the client.

This segment is part 3 in the series : Outsourcing: Tata Communications Interview
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