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Tuesday, February 27, 2007

Offshore Firms & Potential Business Model Innovation

John Hagel shares his perspectives on the future growth and opportunities for the Indian IT ecosystem. I could not attend John’s session in the Nasscom summit- I had to be in china for a different meeting. John summarizes his perspective on the growth possibilities and correctly identifies that the continued growth of the industry hinges on the ability to access and develop talent. He highlights the issues that the industry is grappling with - turnover rates ,wage rates & emerging competition from other low cost locations. The responses to these issues are on a wide-ranging front - The Indian IT services continue to invest heavily in scaling their recruiting and training efforts, increasingly branching out and establishing facilities in second and third tier cities in India to reach a broader pool of talent, including establishing development and operations centers in other low labor cost countries. Indian firms are also investing in developing more value added services to generate more revenue per employee and in general are focused on operational excellence to enhance profitability per employee and to become more responsive to increasing customer expectations. McKinsey & Co. has come out with a report with a framework for benchmarking operational performance and found a high dispersion of performance across Indian offshoring service companies. The report highlights rightly so, that offshoring service companies could do a much better job of absorbing increasing wage rates if they focus more aggressively on enhancing the productivity of their operations. One of the interesting sidelights in the report was the finding that third-party service providers generally outperform captive offshore facilities – a point that I have repeatedly highlighted.
So, what next? – the story looks good so far and is likely to be as good moving forward. John highlights that the biggest opportunity of all requires a different form of innovation. It also requires a very different mindset for the leadership of the Indian IT service companies. He eggs the industry to look at a different model to scale up - rather than continuing to focus on attracting and retaining talent within their own companies, these firms could create enormous value by developing the management techniques required to mobilize and leverage specialized talent wherever it resides. This would require building scalable talent networks encompassing a broad range of smaller, more specialized companies.
He points to the fact that where the Indian headquartered companies don’t have the capability already in place, they may go out and acquire a smaller, more specialized company, but their instinct is to bring the capability in house. As an alternative, John argues, these companies could take their emerging skills in partnering with technology product companies and apply them to building talent networks to mobilize and leverage large numbers of more specialized service providers. The real power would be to master the techniques required to accelerate the development of talent across such a distributed network of partners, thus creating stronger incentives for partners to join the network. He believes that this would call for innovating in learning and training capabilities and help these firms in creating new IT architectures –one that are focused outside-in. This echoes my thought about the emergence of global networks.
A very illuminating proposition - this needs to be reviewed seriously. I know for a fact that today possibly every IT major is looking towards acquisition and spreading globally for both resourcing and servicing markets – a different business model of operation could provide them with a competitive edge. Indian compnaies have been extremely innovative and ruthlessly efficient in scaling up their operations. They are helping may western enterprises to focus on innovation by offshoring/outsourcing their works. Its time for the indian headquartered majors to focus on innovation as a way to move to the next orbit in a concerted way. This may need to start today rather than later as early adopters like in other industries would reap disproportionate benefits, if executed well.

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