How do you choose an offshore outsourcing supplier in India? How do you decide which of these four approaches, or combination of approaches, will best align with your business strategy?
It depends on the context. The companies that created captive centers were doing it because they wanted to sell airplanes in that country, or products to the Chinese market, or they were going to commit to a large volume of work. Most companies, if you're just looking for cost savings, start off with the fee-for-service model, because that's the least amount of commitment. But there's a lot of fluidity. For example, one of the financial services firms in our study, with a fee-for-service model, engaged one of the large Indian suppliers. After five years they said, "We have so much work here; why are we giving this supplier this margin?" They're creating their own captive center now. We've also seen a company that had a captive center and then sold it.
So it seems that most companies will start with fee-for-service, and then afterward begin thinking about other models that they might want to move to. At what point should you think about the other options?
I wish I could tell you that the people we talk to have this great master vision, but a lot of it is just dipping their toes in the water and more strategic things came up. We like to think that all of this was so planned, but usually some opportunity arises and they see the opportunity.
What should you be thinking about strategically when you decide where to go?
Everybody assumes that chief information officers are going to pick up one of the Gartner or IDC reports and look at the country comparisons. But most of the customers we talked to went to a destination where they had existing manufacturing capabilities. Because they had a launch pad, they did not pick their destinations based on looking at IT criteria but, instead, where they already were globally, and where they wanted to go globally. They want to colocate their IT with that. That's great, because they can send the people who are already living there to do things. They can visit suppliers, and have the suppliers come on their premises. It's great to already have the visas and everybody established on your launching pad.
Besides India, what other countries do you believe U.S. CIOs will be turning to?
I think the Philippines are going to be one of the next big locations, because they have 300,000 IT professionals. I wouldn't discount Central and South America to provide Spanish-speaking call centers and other kinds of business processes, since governments in that part of the world are trying to stimulate higher-value work. I think our main interest in China is that we want to sell products there. We've got a huge language barrier there, as far as IT, but in other business processes I see much more activity in China.
Can a company that wants to get going on strategic IT offshoring dive into this whole hog, or do they need to ramp up slowly?
I believe that every company has to go through their own learning curve. They have to develop their own experience to do it. Now, they could go up that learning curve quickly by looking at best practices and what other people have already learned, but essentially they're going to have to learn how to do it themselves.
Do you see any change in how executives think about offshore outsourcing as they learn more about it?
I see so many parallels between the development of the offshore outsourcing market today and the domestic outsourcing market 15 years ago. I really believe that ten years from now this is going to be as much of a nonissue as domestic outsourcing. We live in a global economy, and we're going to source IT and other business processes globally. This is not going to be front-page news anymore.
Basically, if you're looking at India, you're either talking about a Tier 1 supplier-the companies you've probably heard of, such as Infosys or Tata-or smaller, lesser-known Tier 2 suppliers. Each has their strengths and weaknesses. [Oxford University Professor] David Feeny, [University of Warwick Professor] Leslie Willcocks and I just developed something called the "Supplier Capability Model." The model gives customers a way to assess what the suppliers are able to deliver in terms of their capabilities. That's very different than looking at supplier resources. Customers look at the suppliers' facilities, and at their employees' resumes, and they think that's going to translate to delivering what they want. Our model says: Don't look at the suppliers' resources; look at their capability to deploy those resources for the customer's benefit.
What would be examples of such capabilities?
A good example is behavior-management capability. Behavior management has to do with how a supplier retains, motivates and rewards employees. So instead of looking at resumes, you're looking at the culture that the supplier has been able to create to motivate, retain and reward their internal employees. Tier 2 suppliers typically have had a much stronger behavior-management capability than Tier 1 suppliers.
What are they doing differently?
Because they are smaller companies, their chief executive officer knows all the employees personally; they know their own personal strengths and weaknesses, their commitment to that company. They socialize together. The employees receive a lot of personal recognition, which is very important in Indian culture. However, they are weak on other things.
Sourcing capability, the ability to globally access and mobilize resources, including people with scarce skills, on behalf of a client. And the large Tier 1 suppliers have broader technology skills.
|Dr. Mary C. Lacity: A Brief Reading List|
Netsourcing: Renting Business Applications and Services Over a Network
Global Information Technology Outsourcing: In Search of Business Advantage
"Twenty Practices for Offshore Sourcing"
You mentioned that the Tier 1 players are getting so busy that it's hard for them to take on a lot more clients. Is that correct?
Well, many of the Tier 1 companies have now gone public. They're in a different game now. They're like an EDS or an IBM: They want big contracts and large customers. So they're going to be less interested in servicing a small customer. A smaller U.S. customer might get better attention with a Tier 2 supplier.
So if you're a smaller U.S. company, should you usually look at Tier 2 suppliers first?
I'm reluctant to state a platitude; you might be able to attract a Tier 1 vendor if you're in a business line they haven't entered yet. But I would definitely look at the Tier 2 suppliers.
How do you go about finding the right Tier 2 of Indian provider?
That's where these intermediaries are great, because they tend to have relationships with up to 250 suppliers in India. They can introduce these suppliers to U.S. customers very well.
Who are these intermediaries?
They're usually Indians who have set up American businesses. Probably the most famous ones are neoIT, SourceQuest and Technology Partners International. They're the three I know best.
A complete list of publications by Dr. Mary C. Lacity can be found at www.umsl.edu/~lacity/vita.html
This article was originally published on 03-17-2005