India has been in the limelight over the past year for the business process outsourcing that international companies have been doing in order to cut their costs and sharpen focus on their core businesses. Some Indian companies too have started to outsource their non-core operations. Bharti recently decided to outsource its IT operations to IBM in a multi-year, $750-million, deal. Various banks are also starting to do the same. Think of this as the IT equivalent of the build-own-operate model common for infrastructure development.
Thomas Friedman writes how globalisation 3.0 is making outsourcing possible: These work-flow platforms can chop up any service job accounting, radiology, consulting, software engineering into different functions and then, thanks to scanning and digitization, outsource each function to teams of skilled knowledge workers around the globe, based on which team can do each function with the highest skill at the lowest price. Then the project is reassembled back at headquarters into a finished product. Thanks to this new work-flow network, knowledge workers anywhere in the world can contribute their talents more than ever before, spurring innovation and productivity. But these same knowledge workers will be under more pressure than ever to constantly upgrade their skills in this Darwinian environment.
John Hagel looks at the wider view: Offshoring is not just about cost reduction through wage rate arbitrage. Instead, it is a powerful way to improve performance by accessing distinctive resources and accelerating capability building. Bottom line: offshoring will force all of us to become more specialized and to make some difficult choices to exit certain activities along the way. In fact, by viewing offshoring too narrowly as simply a way to access cheap labor, companies risk unleashing a vicious cycle that will lead to value destruction.
Outsourcing is a fundamental trend, and there is little any US government is going to be able to do anything about it. What is clear is that companies globally are relooking at their cost structures and leveraging the commoditisation that has taken place in IT as well as services to focus on what they do best. It is hard to overlook a 30-70% cost savings for certain processes, but that is just the start. What outsourcing also allows is to also fundamentally redesign business processes. This is what companies like IBM are onow offering the global majors.
From the Indian viewpoint, outsourcing has been the key driver in making it a critical component in the global value chains of organizations. The Economist wrote about four trends in the context of Indian outsourcing: Some multinational firms with captive offshore operations in India, such as Phoenix, are thinking of selling themin effect, outsourcing through divestment. Second, young, fast-growing India-based firms, flush with cash and besieged by would-be investors offering more, are thinking of acquisitions as a way to sustain growth. Thirdly, while these upstarts race to expand in their target markets, the big western IT consultancies are reversing the process. Last month, mighty IBM bought Daksh, one of India’s biggest call-centre firms, with about 6,000 employees. Finally, as these multinationals bulk up in India, extending the range of their wares to include call-centre and other BPO operations, Indian firms such as TCS have been matching themas well as expanding overseas.
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