Sunday, September 23, 2007

IT Outsourcing: Quo Vadis?

There has been continuing debate, increasing of late, about where the IT Services industry is headed, and more importantly, what is the future of offshoring and global sourcing? An esteemed ex-colleague and a good friend of mine recently posted his views on the subject.

Because most of the IT Global Sourcing is concentrated in India, developments affecting Indian economy do end up playing a significant role in the evolution of the IT Services industry. In my opinion, there are broader, in fact even structural factors at play that the industry is marching to the tune of and will ultimately decide the fate of what we call as IT Services today. Some of these will support increased global sourcing, and some may dampen it overall. I will touch upon a few of them here in this post:

1. Structural changes within major IT Services providers

EDS recently announced that it is paring down its US workforce by as much as 12,000 employees within the next quarter to rebalance its global footprint and in all probability increase its presence in India primarily. IBM’s Indian workforce has more than doubled in two years, to 53,000 – about 15% of its worldwide total. Accenture’s India story is well-known too.

What is happening in IT Services space is not new – the script is almost unchanged, except for names and locations, from what transpired in the Automotive manufacturing and then in the Consumer Electronics industries. Most of the production and parts manufacture is now done in locations that are considered remote from the end-market or even where the Auto companies are headquartered. What is new of course is that the IT Services market is now maturing and beginning to take on the modular characteristics of some of its predecessors. EDS, IBM and Accenture are beginning to adopt strategies and structures to fend off the ‘emerging’ competitors like Infosys, Wipro and TCS, just like GM, Ford and Chrysler tried to, in a different era, against the Toyotas and the Hondas!

Strike One in favor of IT Global Sourcing!

2. Educational requirements for performing IT Services jobs

How many of IT jobs in the US, esp those being done in-house by companies, and even many of those being performed by the traditional IT majors, are done by engineering graduates? Empirical and anecdotal evidence based on what I come across in outsourcing deals tells me the percentage is much lower than 50%, maybe even closer to 25% (will appreciate if someone can point me to some authoritative source about this)! And now guess the answer to how many of these same jobs, once globally outsourced to locations like India, are performed by those whose primary graduate degree is engineering? Close to 100% won’t be off the mark!

This points to an asymmetry, which when confronted with the job market realities in India (supply-side challenges in terms of number of engineering graduates, rising salaries etc), should slowly resolve itself in a manner that allows for many more non-engineering graduates to become part of the IT services and outsourcing bandwagon in India as well. Most of today’s graduates, even if not engineers, have been exposed to IT and have the basic smarts to learn the techie concepts; further, with the increasing prevalence of IT and technology in our lives, some of the aspects in terms of service delivery are getting demystified enough that a well-structured training course can plug the gaps and create qualified human capital for the future.

I know of companies that are already exploring this route to build scalability and long-term growth for this industry in India.

Strike Two in favor of IT Global Sourcing!

3. Increasing Automation in IT Services Delivery

I mentioned modularization of IT services as a factor in the increasing globalization of its delivery in the first point above. That very same modularization is also leading to increased automation around IT services delivery – whether it be SaaS (Software-as-a-Service) or Platform-based BPO (where the entire vertical stack consisting of Infrastructure, Applications and Business Processes is delivered using a Proprietary or Shared Technology Platform), to name a couple of impressive-sounding buzzwords in the industry today.

Higher automation will surely lead to an increase in productivity; it is also likely to lead to lesser need for the labor component of IT services, something that has fueled the global sourcing wave (although the motivations have changed as the industry has matured, moving beyond costs to quality and risks). Why outsource in a conventional manner when you can automate? – that will be a thought that will start popping up more frequently in the years to come.

Ball One against IT Global Sourcing!

With the game thus interestingly poised at 2-1, I will take a break here and await your comments before continuing the dialog on this topic.

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