Outsourcing and Call Center Blog

21 October, 2007

The Death of Outsourcing, The Rising Rupee and Michael Porter

In an online debate featured in Business Week, Sabrina Siddiqui argues that Indian outsourcing has peaked (article brought to my attention via The Outsourcing Blog). Her three main arguments are:

  • The rising value of the Rupee, up some 8.4% at one point this year
  • Indian wage inflation running as much as 15%-25%
  • Poor infrastructure unable to sustain growth

Well, there is no arguing the facts here, the first two are well known and I can attest that here in Gurgaon we are often running on back-up generators for nearly half the day while the power grid sparks and flames-out somewhere, often spectacularly (I once watched a street-side transformer burst into flames and sparks like a roman candle around the corner from my office while 6 locals worked to change the tire on my car and 20 others stood nearly underneath the thing obliviously).

Now if you are in the Indian Ministry of Finance then you should probably be worried about these things but if you are running an Indian outsourcing company and you’ve been paying any attention to business thought over the last 30 years, you’re not too bothered. Why? Because if you have, you would have known long ago that the game of wage-arbitrage was risky and unsustainable and you would have established a position for your organsation that was insulated from currency fluctuations.

Enter Michael Porter
Michael Porter is one of the preeminent business thinkers and strategy gurus of the late 20th and now early 21st centuries. He has written a number of business books that are at the core of competitive thought for the last 30 years. He would, and I’m sure has, had a lot to say about the competitiveness of Indian business. I will wildly summarise what I think is applicable to Indian outsourcing.

Porter says that there are but 3 strategies to being competitive in your industry, they are:

  1. Be the lowest cost producer in your market (cost, not price – there’s a difference)
  2. Develop a special capability or unique Intellectual Property that allows you to command premium prices and is difficult for others to copy
  3. Find a niche market and dominate it creating a barrier to entry for competition

Product Differentiation Reprise
For a long time in this blog I have argued that we must focus on quality, quality people, quality training, quality methods and quality delivery and that price doesn’t matter. The reasons and rewards for doing this are manifold and I have and will cover them elsewhere, but following the quality trail would firmly place a company in competitive Strategy 2 – as opposed to where many of us are, trying to be in Strategy 1. But Strategy 1 is futile. Why? Because international currency fluctuations are utterly outside your control and by betting on Strategy 1 you are placing the success of your business on luck and on the Central Banks of India and the United States, it’s a sucker’s bet. Moreover, to succeed at Strategy 1 in outsourcing would require a company to have the lowest labour cost, in other words, to pay the lowest wages in the industry. I think the best phrase to describe that tactic is an old one I learned while growing up in Kentucky, that dog don’t hunt.

So, Indian Outsourcing Company, if you have invested in IP, been creative in the development of your products, been innovative in introducing quality and delivery schemes and generally developed your reputation for delivering outstanding products and services, you’re not too worried about all this currency and wage turmoil. OK, your diesel fuel bills are ridiculously high, but your customers will accept some additional costs because they are addicted to your product.

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7 Comments »

  1. Your views are very interesting; and I strongly agree with your approach by analyzing outsourcing via Michael Porter’s framework. With full understanding that it is difficult to summarize your views in a few paragraphs, it would be interesting to know your views after adding two additional complexities when analyzing “Indian Outsourcing.”
    1. Could not an Indian company locate activities and people in any part of the world, as well as hedge currencies and work with partners and vendors in any part of the world, enabling the (global) company to pursue its chosen strategy (any of the Porter options) regardless of local conditions?
    2. In our research at eCompetitors.com “outsourcing” refers to 73 distinct global “industries” – with each industry requiring its own Porter Five-Forces analysis. Do you view all outsourcing businesses in India as the same in terms of activities and opportunities for differentiation?

    Thanks again for sharing your perspectives.

    Comment by Alan S Michaels — 22 October, 2007 @ 9:49 | Reply

  2. Hi Alan, Thanks for your comments and thought-provoking questions, let me try and comment on them as best I can. I will mostly restrict my comments though to the Call Centre and BPO “industry” as that is where I have the most experience, and some might say insight, here.

    Could not an Indian company locate activities and people in any part of the world…
    To your first question, which asks if Indian companies themselves should globalise, I would say the answer is probably yes and in fact many of them are doing just that. I think a wise Call Centre strategy would be to have a position in a number of different countries to meet the varying demands of customers (not just to hedge currency risk). Of course this is exactly what InfoSys are doing. Their idea is that if you want to outsource, you’ll come to them and where you want your outsourcing to be done, India, Eastern Europe, East Asia, Latin America or North America is irrelevant because they can do it in any of those places at your pleasure. This strategy generally means you have to be well capitalised and well organised, neither of which are common features of the industry here. My prediction is that this globalisation is exactly what will happen resulting in a considerable consolidation of the industry here in India with the large multinational and public players taking all but the niche business in the long run.

    Do you view all outsourcing businesses in India as the same in terms of activities and opportunities for differentiation?
    You probably have a better view than me on this question. My segmentation of the market is much less granular than yours. I see three, possibly four segments that are distinguished mainly by size, organisation and access to capital. Without going into a long boring explanation of this segmentation, the short answer to your question would be “no”. For my own company, which is a large owner-run company, there are parts of the market that we can’t hope to touch. We have to look carefully at geography, customer size and the organisational “personality” to target prospects where we have a competitive advantage over companies like Infosys, Wipro, and WNS. I think, at least in the medium term, there are parts of the market that they can’t get to and definitely parts I can’t get to. Similarly, there are parts of the market that my company doesn’t want and there will be a number of smaller firms that will chase after that business.

    I hope these brief remarks provide some kind of insight. Thanks again for your comments. You’re welcome back any time.

    Comment by shamrin — 22 October, 2007 @ 11:39 | Reply

  3. Thank you Steve; I doubly appreciate your very informative and customized response! Alan

    Comment by Alan S Michaels — 23 October, 2007 @ 5:26 | Reply

  4. Couple of points here:

    1. One Billion population does not translate into 1 billion workers.What percentage of 1 billion is employable in IT?

    As a mid level manager at one of the largest IT providers, I am struggling with quality of resources and the ability to procure them.
    2.From an employee standpoint, why should an offshore resource work with an Indian IT vendor when she has better options such as Accenture and other MNC firms with better work life balance/compensation?

    3.With MNCs ramping in India up the cost of labor will continue to increase eating into profitability of Indian vendors.

    4.Indian IT companies are risk averse when it comes to making value added acquisitions, ( exception here is Wipro which has made some bold moves)

    5.Moving up the value chain will continue to be a pipe dream if Indian companies try to build scale/value organically.

    6.Rupee appreciation and wage appreciation can kill margins. Remember the Ireland story,Ireland was one of the pioneers in offshore call center services !!!

    7.What would help India eventualy is the demographics. The developed world is greying. If you need English speaking programmers at a reasonable cost India is the option. Others countries simply do not have the scale. At some point due to the labor shortage in US and rest of the world the Indian IT vendors would be able to charge more for services. Actually this is already happening making Indian vendors more complacent.

    THE REALITY IS THAT INDIAN IT VENDORS STILL CONTINUE TO BE BIG BODY SHOPPERS PLAYING WITH DEMAND AND SUPPLY OF RESOURCES,UNLIKE WHAT THE BUSINESS “PRESS” IN INDIA AND NASSCOM WOULD LIKE US TO BELIEVE.

    Comment by sam — 6 March, 2008 @ 3:28 | Reply

  5. Death is too strong a word, even literally.Even legacy systems are not dead. The author looks at the Indian outsourcing industry through the lens of a Silicon Valley enterprise technology analyst. The key difference between the enterprise technology industry and the outsourcing industry is that the former is made up of products while the latter is made up of processes and people that surround these products to make a service delivered business to business.

    Comment by madhu — 17 June, 2008 @ 14:02 | Reply

  6. very informative blog .. you can give your feedback on my blog http://www.outsource2.net

    Thanks,
    KSK

    Comment by Santhosh — 8 September, 2008 @ 16:19 | Reply

  7. Thank you Steve, We think you are right on your idea. Please visit our website for share your idea: http://www.callcenterinbangladesh.com

    Comment by DotMark Inc. — 26 November, 2008 @ 15:00 | Reply


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