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A Look At Global Sourcing In 2005

By Ravi Kalakota & Marcia Robinson, Authors, Offshore Outsourcing: Business Models, ROI and Best Practices

What’s in store for global sourcing in 2005? First, it’s here to stay, especially in the areas of R&D and software product engineering. Second, the business world will see more companies from countries other than the United States and the United Kingdom begin offshore projects while established service providers and captive centers cope with rising operating costs and attrition rates. Greater demand for global sourcing and the ongoing management challenges should make for an interesting 2005.

Global Sourcing — It’s Not Just for U.S. and U.K. Companies Anymore.
When the discussion turns toward R&D and engineering offshore outsourcing, people often assume that the companies offshoring are from the United States or the United Kingdom. Although companies from both countries routinely adopt offshore strategies either through vendor partnerships or by building their own development centers, they don’t represent the full spectrum of companies that have sent work offshore.

Businesses from China, Korea, Singapore, Germany, France, Italy, Ireland, Greece, Spain, and Portugal are beginning to venture offshore, albeit to a lesser extent than their U.S. and U.K. counterparts.

For example, while the India versus China debate wears on, companies such as Huawei Technologies, the Chinese manufacturer of network equipment, have quietly been building up their presence in India. Huawei established operations in India as early as 1998. The 600 employees based at its Bangalore R&D center may see their numbers swell to 3,000 by 2006. The Bangalore facility develops solutions in the areas of next-generation networks, data communications, network management, operations support systems, and intelligent networks among others.

Leveraging India & China
In an interview with the Financial Express, James Yuan, Huawei Tech India’s chief operating officer, explained that his company wanted to leverage both India and China. He stated that Huawei has found Indian professionals have strong project management skills while Chinese workers tend to be talented in the areas of system design and manufacturing. Accordingly, the company combined the two talent pools to achieve the best results.

Other Chinese companies are not far behind. ZTE Corporation, one of China’s largest listed telecommunications equipment providers, situated itself in India in 2001. More than 200 ZTE employees are strategically located in Delhi, Bangalore, and Mumbai primarily to take advantage of India’s rapidly growing telecom market. ZTE clearly built up its presence in India with the hopes of actively participating in the network construction in India, which it now is. The company has been evaluating opening an R&D center in Bangalore and recently signed a joint agreement with ITI, India’s biggest manufacturer of telecom equipment.

The South Koreans are aggressively adopting the low-cost R&D model. Samsung, one of the fastest-growing global technology companies, demonstrated its willingness to cross into India in search of tech talent. The Korean giant plans to double the amount of workers at its R&D centers in Noida and Bangalore to 600 and 1,400, respectively. With the additional employees, India will rank as Samsung’s R&D hub. In addition to R&D, Samsung has set up a manufacturing base in Noida and plans to extend its capacity in the near future.

In Germany, several firms have recently relocated jobs, despite a national climate that is decidedly against offshoring. In 2004, Deutsche Telekom, the largest European telecom company, established its own development center in Pune, India, for its infotech division, T-Systems International GmbH. The center’s employees will develop and service new products for clients such as ABB, Airbus, and Dresdner Bank, while attending to Deutsche’s software needs mainly in the area of enterprise software. Other European companies that have relocated jobs include Lufthansa, Deutsche Bank, Societe Generale, SAP, and Royal Philips Electronics.

The adoption of offshore outsourcing as a viable business and delivery model by global corporations represents a clear maturation phase for the industry. What does this mean? In the software industry, we expect to see merger and acquisition activity pick up dramatically this year. Fueled by heavy cash flows from the likes of Accenture, TCS, Infosys, and Wipro, further consolidation should accelerate in 2005. In the face of rapid growth, companies realize they need to gobble up others to achieve the kind of infrastructure expansion and cost rationalization that will make them more competitive.

Management Challenges — Rising Costs and Job-Hopping Employees
How else has managing offshore outsourcing changed for software industry participants? As many have recently documented, the challenges of doing business in some low-cost countries such as India have risen, placing great pressure on managers handling offshore projects.

Salaries and attrition are increasing rapidly in an industry that is experiencing extraordinary growth. Some providers have been harder hit than others. Infosys reported that in fiscal 2005 it had seen salaries for Indian employees jump by 17%. The problem grows worse when you move from entry-level employees to middle management: Infosys disclosed that wages for middle management were up by 15%–20%, thanks to a shortage of project manager skills.

Mohandas Pai, the CFO of Infosys, framed the wage inflation issue this way during a recent call with investors: “Wage inflation could be on the entire basket between 15%–20%, but the basket is essential in India. Wages paid in India constitute about 13% of total revenues because…we work onsite, we work offshore, and for the onsite part, that is the work done outside India, for the total revenue the wages are about 35%. So on 13%, even if you have a 20% hike, it is 2.6% of revenues…This is manageable.”


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