SIM: Indian outsourcing companies get a new competitor

MUMBAI: In 2004, at the height of the American presidential campaign dominated among other things by offshoring and a jobless recovery, HCL’s Vineet Nayar set off a firestorm with a comment that American graduates were not employable.

As trade unions seethed and politicians fumed, two men looked at the reaction the comments had caused and wondered if there was a business opportunity.

Since offshoring was considered a purely Indian phenomenon and sensing a backlash to the process in the years ahead, Debashish Sinha and Neeraj Gupta two IT industry executives in the US began quietly working on an alternative that would appeal to many companies and the political establishment.

It took them five years to come up with a concrete plan and get investor funding. System In Motion (SIM), a Michigan-based start up, launched few months ago plans to challenge the traditional offshore outsourcing market leaders by delivering low cost services from locations such as Ann Arbor.

With the Indian outsourcing industry still being viewed by some in the US as one of the reasons for the country’s ‘jobless recovery’, this start up is promising to create more than 1,100 jobs over next five years in Michigan, home to Ford, General Motors and Chrysler-the Detroit’s big three.

“With nearly 30% unemployment rate in the region, for every Java programmer advertisement we put, there are around 100 applicants, with many of them having a decade’s experience,” says Sinha. The company is backed by several angel investors including Preetish Nijhawan, the Akamai founder, has Michael G Parks, the former CIO of Virgin Mobile and Wells Fargo on the board too.

“I would agree that there will be more start-ups providing onshore services but it will remain a niche business and represents the ongoing evolution of outsourcing rather than indictment against offshore outsourcing. The bulk of new jobs in the US have long been created by small businesses and this is another example of that,” said Stan Lepeak, managing director of Equa Terra’s global research pravctice.

The Michigan government has already assured tax rebates worth around $7.4 million linked to the job creation. In her ‘state of the state address’ delivered last week, Michigan governor Jennifer M. Granholm praised System In Motion for creating some 1,900 jobs in the Pittsfield township.

Local outsourcing to low cost American locations is not entirely a new trend. Smaller US firms such as Rural America Onshore Sourcing and Xpanxion have been attempting to build a sustainable rural outsourcing model in the US at a time when offshore locations such as India are facing a backlash and unemployment rates have touched an all-time high.

Xpanxion, an Atlanta-headquartered software firm, which shifted its software testing work from Pune to Nebraska a few years ago is among a handful of such firms seeking to create a more comfortable and cost-effective alternative to offshore outsourcing.

NCR, Coca Cola and Goldleaf Financial Solutions are among customers outsourcing software projects to Xpanxion. Cost advantages of delivering a project from a location such as Corsicana, or Kearney (Nebraska) could be almost 20-40% cheaper when compared to Los Angeles.

 “In some ways Vineet’s comments (and the local reaction) were among trigger. The market also is beginning to see offshoring as a pure INdian phenomenon, but we launched System In Motion to leverage the American workforce,” says Sinha.

Nayar clarified on his comments in his blog posting, and said that employability crisis was a global problem that needed to be solved together by schools, governments and the students.

With the highest unemployment rate in the US, the state of Michigan not only offers an available pool of experienced software development professionals at 20-30% lower salary levels than California or Boston, it is also home to some top outsourcing customers who want to stave off rising anti-offshoring sentiment by participating in local job creation.

SIM has only seven customers so far and they include some top automakers and Thomson Reuters. At this stage, the firm is far away from being any substantial threat to India’s $50-billion offshore outsourcing industry. However, amid high unemployment rates in the US and local anti-offshoring sentiments the company looks set to become a trendsetter.

“I have seen that offshoring requires tremendous energy and efforts and some projects can’t sustain the overheads,” argues Parks, who is chief delivery officer of SIM, has dealt with top outsourcing companies including TCS and Wipro during past assignments.

“There are 7-8 Fortune companies including Ford, GM and Chrysler, almost 3,12,000 students are available within 75 miles and the unemployment rate is nearly 30%. If you add the local incentives and Michigan becomes a globally competitive location,” says Gupta, an IIM-Calcutta and BITS Pilani graduate. Gupta, who headed Patni Computers’ global sales and marketing until last year, is the chief executive of SIM.

SIM is hoping that potential outsourcers with less than $2 billion in revenues and with around $7-8 million outsourcing budgets may instead want to keep the jobs within US.

“Offshore outsourcing industry has struggled to address the needs of mid market where there is no scale,” he says. This, according to him, is where the sweet spot lies for System In Motion. When Gupta and Sinha met in February last year for discussing the start up, the recession was worsening and their own employers were preparing to hire more locals in order to address political sentiments.

“The entire mechanics of the global delivery model and investor expectations is based on an India-led model, and it would be too much to expect these organisations to change dramatically,” argues Gupta. He added that customers were struggling to manage global risks and also address the local employment issues at that time.

“We were seeing wage inflation in India, and around 20% wage inflation in the US,” says Gupta. For some of the top Indian tech firms, hiring local workers in the US had indeed picked momentum. “What these companies are doing is developing the top end of the pyramid, they will never spend time on developing the bottom, they cannot have their entire pyramid in the US,” says Sinha.

Meanwhile, the economics of offshoring still outweigh the benefits of delivering projects locally, as Indian engineers get paid nearly a third of what their US counterparts make.

While there is no official estimate about the size of market for project delivered from low cost locations in the US, Gupta is hoping that at least 20% of over $200 billion US IT services market could be addressed with this model.

Local experts such as Stan Lepeak, managing director of Equa Terra’s Global research practice say that despite initial momentum, SIM would continue to be a niche firm.

“I would agree that there will be more start-ups providing onshore services but it will remain a niche business and represents the ongoing evolution of outsourcing rather than indictment against offshore outsourcing,” he said.

“The bulk of new jobs in the US have long been created by small businesses and this is another example of that,” Mr Lepeak added. Executives at bigger outsourcing rivals question the ability of SIM to sustain some of the competitive advantages.

“What happens when the economy rebounds, all those available to work at lower wages will go back to high paying jobs,” said a senior official at one of the large Indian tech firms.

Rodney Nelsestuen, senior research director at outsourcing advisory firm TowerGroup agrees. “I lived in Michigan for 12 years and the mentality is not around low paying jobs since Michigan has had high paying jobs for 100 years. It will take a number of years to change that,” said Mr Nelsestuen.

“Tax breaks will stimulate some new business but there needs to be commercial credit which is still tight and a business case for success which is far from certain,” he added.

For large outsourcing customers, India would continue to remain attractive. “While trends relative to protectionism, tax laws, exchange rates and unemployment levels have benefited onshoring, skilled labor shortages and the superior cost savings that offshore work brings still have a much greater impact on buyer’s sourcing patterns,” Mr Lepeak said.

Source : Business Standard. 08/02/10

 

Publishing: India remains top outsourcing destination

Chennai/Bangalore: India remains the destination of choice for content, design, media distribution and other outsourced publishing work. Sixty-six per cent of respondents in a recent publishing survey said they would prefer to outsource publishing and pre-press work to India over competitors like the US, UK, China, Australia and the Phillippines.

The survey conducted by research firm Valuenotes Database among 237 publishers, consultants and service providers, largely from the US and UK, notes that India remains a favoured publishing sourcing destination with 66 per cent of the respondents rooting for it. India was followed by the US with 30 per cent, the Phillippines (18 per cent), UK and China (16 per cent each), Vietnam (8 per cent) and Australia (5 per cent), with the remaining 18 per cent in favour of other upcoming destinations.

Rakhi Vig, manager – product sales with Valuenotes Database, said the increasing costs of production and print, coupled with the global economic slowdown, has led to the industry struggling to address the increasing demand of digital content as opposed to print. “Over the past few months, we have seen publishers trying a variety of approaches – going digital, reducing print publishing, and cutting costs. In spite of these measures, one thing comes across very strongly – the industry is yet to find that one formula that addresses all its problems,” she said.

Some 64 per cent of the publishing buyers (companies outsourcing publishing work) have been outsourcing different aspects of their work, and would continue to do so, the survey said. Eight per cent of the companies are not outsourcing at present, but are considering the possibility, while another 8 per cent said they were outsourcing some aspects of their work, but intended to stop the practice soon. Five per cent of the respondents were unsure about whether to outsource, while the remaining 15 per cent definitely had no plans to outsource.

“Sixty-four per cent of the respondents still have faith in their vendors,” Vig said. Cost pressures and capability constraints continue to be the key drivers for outsourcing. However, in some cases, outsourcing has put additional pressure on inhouse teams to spend more resources on evaluating the outsourced work, the survey said.

Roughly 40 per cent of the buyers surveyed were looking at cost savings in the range of 15-25 per cent, while service providers on the other hand, perceived higher savings in the range of 25-40 per cent — suggesting at least on paper that buyer expectations are yet to match the high degree of vendor confidence.

“Yes, there is a misalignment in buyer expectations versus service provider perceptions. Providers need to ensure that the buyer understands the difference between provider-end cost savings and actual cost savings. Buyers need to account for project management and inhouse quality checks. They need to give their vendors time for costs to go down as productivity and efficiency kick in,” Vig said.

About 19 per cent of the buyers surveyed expressed high satisfaction with the quality of services rendered, while 62 per cent expressed medium satisfaction. Low satisfaction rates were at 19 per cent, according to the survey.

Regardless of the upbeat perceptions of service providers looking to bag more publishing deals, 75 per cent of the buyer profile made it clear that considerable improvements are required in service delivery, while 58 per cent felt that quality of service requires drastic improvement.

Forty-two per cent of the companies surveyed plan to increase outsourcing by 25 per cent, while 33 per cent will continue to outsource at the present levels.

“Even though 16 per cent of the companies surveyed did not approve of outsourcing, the overall publishing outsourcing market is still set to increase 15-20 per cent,” the survey said.

Source : Business Standard. 28/01/10

Bharti to outsource $1bn cable biz

NEW DELHI: Bharti Airtel has invited bids to outsource the management of its 1,20,00 km-plus of inter-city optic fibre cable network and hopes to close the deal before the end of this fiscal, its chief executive officer Manoj Kohli told ET.

The deal is estimated to be worth up to $1 billion over a five-year period, industry sources familiar with the development said even as Mr Kohli refused to put a value to the contract size.

“We will form a JV and have a stake in the company to which we award this contract,” Mr Kohli added. ET first reported in August 2009 that Bharti would outsource the management of its inter-city fibre network, the physical cables on which voice and data signals travel between cities.

Bharti Airtel operates optical fibre cable network of over 100,000 route kilometers. Bharti Airtel is also set to renew its multi-billion network-outsourcing contracts with Ericsson and Nokia Siemens this year.

State-owned telco BSNL, which has the largest fibre network in the country, comprising about 600,000 km route is also set to invite bids from segment players in February to outsource the management of its network. According to executives with the PSU, the deal is would be closed in the second half of this fiscal. BSNL’s network outsourcing contract is expected to be worth over additional $1 billion over a five-year period.
Bharti Airtel and BSNL contracts could well be the largest outsourcing deals in the country this calendar year.

In April 2009, Bharti Airtel entered into a joint venture with Franco-American telecom gear-maker Alcatel-Lucent to manage its landline and broadband business. Bharti is the minority partner in the 26:74 joint venture, and is paying the JV company about $500 million over a five-year period for managing its landline and broadband business in about 100 cities for the next five years.

With Alcatel-Lucent being a global leader in the fixedline and fibre optic space, its existing JV with Bharti should be the front-runner to bag the new contract.

But, Bharti has always looked at the best value proposition and may well consider bids from other players too. For instance, while Ericsson and NSN manage its mobile networks in India, the telco however offered the contract to Chinese gear maker Huawei for its Sri Lanka rollout.

ET also first reported in September 09 that BSNL plans to outsource its fibre optic cable operations. The PSU is now readying the tender for the same, but the contract could run into complications since it is set to face stiff resistance from its employee unions. This is because, the deal will have a direct impact on 30,000 jobs in BSNL as the firms that wins the deal cannot absorb all employees at the PSU who are currently responsible for the maintenance of its optic cables.

Currently, India is divided into 22 telecom circles. Sweden’s Ericsson manages Bharti’s networks in 15 circles while the rest is handled by Nokia

Siemens. So far, Bharti has signed four major network outsourcing deals with Ericsson in the past five years since signing a $400-million deal in February 2004. The latest contract in mid-2007 was valued at $2 billion.

Bharti has also signed four network outsourcing deals with NSN beginning May 2004, when it signed a three-year, $275-million deal to build and manage networks across five circles. The last in the series of contracts was a $900-million deal signed in 2007 that went beyond mere network expansion. As part of the new deal, NSN was also given the task of enhancing the Indian telco’s national and international long-distance networks.

Industry executives tracking Bharti’s outsourcing moves say that the renewal of these contracts by Bharti this year opens up a $2 billion opportunity for the industry. Ericsson and NSN will not be guaranteed an automatic extension, but will have to compete with other potential bidders, they add.

Wile industry executives point out that incumbents — Ericsson and Nokia Siemens — remain favorites to bag these deals, Bharti’s decision to invite bids also presents an opportunity for other equipment vendors, such as Huawei, ZTE and Alcatel-Lucent, to bid for one of the largest networks management contracts globally. Significantly, Chinese equipment vendors will be participating for the first time.

Sistema Shyam Teleservices, one of the new entrants in the telecom space is also set to join the outsourcing bandwagon and the telco is currently in the process of identifying a partner to manage its upcoming networks across the country. Sistema — one of the largest public diversified corporations in Russia and the CIS — has a 74% stake in the JV with the Shyam Group that offers mobile services under the ‘MTS’ brand in India. Sistema Shyam is the only CDMA player, among the new crop of telecom operators.

Source : Business Standard. 27/01/10

 

MIJU Components… The fastest setup

Year/ place: 2005, Pune (Maharashtra)
Sector: Automotive
Services provided: Turnkey project. Consulting services, procurement, installing, project execution and management of the complete setup of MIJU S.A.’s subsidiary in India.

MIJU S.A. is a Spanish SME manufacturing rubber components for automotive industry. MIJU Components Pvt. Ltd. is without any doubt the fastest setup that INDOLINK has carried out and is subject to an interesting Case Study.

The first contact of MIJU’s management with India was in January 2004 with the Auto Expo’04 Exhibition in New Delhi. That same year MIJU contacts INDOLINK and we carry out the analysis and evaluation of two different strategies: setup or outsource. The first option proofs to be more feasible and by the month of July the company is forms, lands are bought and key personnel is recruited to follow their training process. The building of the factory starts in November. In March 2005 the imported machines are installed and two months later they start to dispatch the first materials to the customers.

In a period of one year and four months MIJU goes through the process of considering whether to setup or outsouce from India to being a global supplier dispatching to his customers from their Indian subsidiary.

Currently we are also carrying outsourcing activities for this customer.

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