Tag Archives: Offshore Services

Infrastructure Management Services or IMS is one of the fastest growing services for IT Services companies. But computing infrastructure is what the Cloud will impact first and foremost. Is the fast growing IMS in jeopardy, then?

There are good reasons why the Cloud is a big trend. Enterprise IT loves the pay per use, “utility” model of provisioning computing power and storage. The infrastructure and the headache of managing it, both belong to someone else. Someone who can drive down costs tremendously through scale and automation in a way that the company on its own, never can.

But there are issues too. Since data will be outside the company firewall, information security is a big issue. Also, there are billions of dollars invested in data center infrastructure. Its all very well to say convert your investments into variable costs, but whose going to take those investments off the company’s hands? Not the cloud services vendor. In the meanwhile, virtualization technology like VMWare’s is helping companies achieve some of those savings in house.

The migration to cloud infrastructure is going to be gradual. Startups who don’t have anything invested will go straight to Amazon Web Services or a similar provider. But big business, which is where IT Services companies get the lion’s share of their revenues from, will take its time in migrating to the cloud.

Change is always an opportunity for a services company. Whether a company wants to try out the Cloud or implement a “Private Cloud” in house, they need advice and migration services.

Traditional IMS may also see a boost in the short term. A Fortune 1000 company may not shift much of its infrastructure to the Cloud, but between that and implementing a Private Cloud, the change will be significant – the pain of which they may decide is not worth bearing themselves. Often, this will lead to outsourcing decisions.

In the long-term how will the Cloud impact the IMS opportunity? There are some reasons to be concerned, but on balance, the impact will be positive.

The Cloud, by definition, reduces the workload on infrastructure management. But Private clouds retain a lot of the infrastructure management workload of legacy data centers. And as we have noted earlier, it will take many years before large companies will completely jettison their data centers, which will also need to be managed. Thus, the addressable space for IMS will shrink, but gradually.

While the pie might shrink somewhat, the slice of the pie that IMS gets could increase rapidly. Infrastructure management has been one of the laggards in the offshore services world. Some of it was because it required significant investments in NOCs (Network Operations Centers) by service providers, which slowed down progress. But it was also because clients have been less eager to offshore. The risk-benefit tradeoff for IMS is not as good as it is for Application Services. New technologies like virtualization will reduce the risk of outsourcing critical infrastructure management. The Cloud might just be the catalyst that gets more companies to outsource more aggressively.

But while there is opportunity ahead in IMS, service providers will have to change directions to take advantage of it. An advisory service to help clients understand the costs and benefits of migrating to the Cloud and/or a Private Cloud, should help position the service provider early in the decision cycle. A Private Cloud implementation and ongoing management service could be a money spinner, if not immediately, perhaps in a year or two (for which one would have to be offering it right now). In the future, there could be opportunities to resell third-party white-label Public Cloud services with a layer of IT management tools, although margins here are likely to be slim.

Photo Credit Kevin Dooley

In August Congress passed a bill to fund enhanced border security which is now Public Law 111-230. The funding for this bill was achieved by increasing the visa fees for H-1B and L-1 visas by $2,000. The fees apply selectively to companies who employ more than 50 employees in the US and if 50% or more of those employees are not US citizens or permanent residents.

The bill was weird and wicked in multiple ways. It increased fees for companies conducting legitimate business for purposes completely unconnected with their business. And it was constructed cleverly so that American businesses would not be affected. Which meant that not only would Microsoft and Intel not pay the higher fees, IBM and Accenture, who are in the same business of offshore services that Infosys and Cognizant are in, would also not pay them. Indian companies had been surgically targeted.

As if that wasn’t enough, in the 9/11 Health Care Bill (scrolls to fees) the same fees, which were imposed for 4 years in PL 111-230 have been extended another year. It was easy. Like taking candy from a child.

When I wrote about the Borders Bill, I made light of it. Financially, it is not a big burden for companies. An extra $2,000 paid a couple of times over a six year work permit is less than a 1% uptick in costs. It is not going to even affect margins, leave alone changing the value prop. But the precedent this sets is wrong and dangerous to both India and the US. It needs to be called out.

While the bill doesn’t talk about Indian offshore services companies explicitly, there is no doubt that they were the target. American lawmakers regularly beat up American businesses that “outsource American jobs to India and China”. In these hard times, they are tapping into the angst that high unemployment creates. But they should know better.

Offshore outsourcing is trade. When Ricardo talked about the law of Comparative Advantage, he did not exclude outsourcing from it. Trade brings benefits to the both countries. It may be harder to picture the benefits that the US gets from outsourcing but it does nonetheless. It lowers the costs of goods and services to consumers. It makes American businesses more efficient and more competitive in the global market. As outsourcing creates prosperity in India and China, they consume more American goods. And so on.

Which is why when the US has constantly preached to developing countries like India to open their markets, it has received the support of economists everywhere. Trade is good for the world. All of it, including outsourcing.

But if it is too much to ask lawmakers to guide their actions based upon sound economic principles, then I’d ask them to do it in their own interest. There are very few US companies who would support legislators that targeted Indian companies. Not just because they like how Indian services companies make them more efficient. But because India is one of the few large growth markets in the world today. No company wants their own government to hobble their attempts to get the best access to this market.

So far, both bills put together don’t amount to much. But as in many of these things, its the optics that matter. Right now the optics are all bad – anti-outsourcing and by extension anti-India. One hopes that it stops right here.

Meanwhile, what of Indian companies? Every major company I have talked to recently has aggressive plans to increase hiring in the markets. It won’t happen overnight, but the direction is right.

Last month I vented about why IT Services companies weren’t taking the lead on the Human Cloud.

I met an executive at a leading offshore company recently who explained why this was so. In the past few years, clients have become paranoid about information security. Well publicized leaks of customer data and a growing share of BPO is driving some of this. Cross company collaboration requires easier access to tools for sharing. Services companies are going the other way on information security. Employees’ internet access is heavily curtailed. Computers don’t have USB ports. And so on.

Not all clients are equally paranoid. But the service provider’s internal policy and infrastructure must support the most paranoid customer. Therein lies the problem.

GigaOm’s conference NetWork 2010 next month is about the future of work. Mathew Ingram describes the collaboration in distributed teams as the Human Cloud

The biggest change, for both workers and companies, is a move toward what we call “the human cloud.” In the same way that high-speed Internet access disrupted the corporate IT market, creating a “cloud” of web-enabled infrastructure, the human cloud is shorthand for how the web has disrupted the way we work. Companies rely on dispersed teams to get the best talent available regardless of location (or price) and many are using crowdsourcing and other innovative means to achieve their goals.

If you look at the speaker list for Network 2010 there is not a single speaker from the IT Services industry. Isn’t that disappointing. Offshore is the dominant template for the IT Services industry today. And Offshore is the Human Cloud. Distributed teams around the world plugging in to collaborate to build or troubleshoot systems or carry out business activities. The industry should be defining the future of work. But it is not even at the table.

How are offshore projects run today from a collaboration standpoint? Fifteen years ago the tools for collaboration were email, phone calls and weekly status reports in MS Word. Aside from desktop sharing is it much different than that today? The quality of the phone lines are much better now and occasionally you’ll have a video conference for a sales meeting. But that’s it, isn’t it? Companies try to get clients to log in to their extranet collaboration apps and then when they don’t they quietly bury them. Design is still done by flying people over. And application support is all based on email. Please tell me if it’s any different.

I know a lot of this inertia is because of the resistance to change of corporate clients. But IT Services companies must take the lead. This is your business. Better collaboration leads to better outcomes for both you and your client. Its gotta be worth a better effort than what we’ve seen so far.

Last week NTT announced the acquisition of Keane. With roughly a billion dollars in revenue, this was a major acquisition, just a few months after their acquisition of Intelligroup, a $126 million IT Services company. Now, the ET reports that HCL and Ingram Micro are competing to acquire Sonata.

Earlier this year I was half complaining about why we weren’t seeing consolidation happening in the industry that is very fragmented. Well, that changed soon enough. This will only pick up speed from here on out. Investment bankers are going to quite busy for a year or two.

In a post about the reasons why companies will acquire in the Offshore industry I had laid out four key reasons (and discounted one). To summarize they were:

1. Acquire Offshore Capability
2. Market Footprint Expansion (Geo or Vertical)
3. Capability Footprint Expansion (Service or Solution)
4. Aggregate to Scale Up

NTT-Keane is actually about #4. NTT is aggregating offshore services companies to build a large offshore company which will have customer relationships through which they can sell other products and services. This is not an IBM-Daksh or an EDS-Mphasis type deal, which is what #1 is.

HCL-Sonata, if it were to happen would again be a Type 4 deal. It is interesting to speculate as to why small and mid-sized companies are open to selling right now. My hypothesis is that the recent recession shook them up. They realized that their companies didn’t have what it took to compete, when the market got competitive as it did when demand shrank. But they couldn’t have sold when valuations were low. Now that valuations are back, they see this as a good time to exit.

The future of the industry lies with the big and the innovative. The companies that are already in the big league are having a good time (except, for some reason, Wipro, at least this quarter.) Mid sized companies with low differentiation, will need to either acquire and bulk up themselves or hope that someone will acquire and rescue them.

I will start out saying something provocative, but true nonetheless. There are just two key elements in making a Services company successful – Leadership and the HR function. The company that does better on both these elements, wins. In the best companies HR will excel at hiring, training and motivating employees. The company leadership decides on strategy which determines how to deploy these employees to generate the best returns for shareholders. It also promotes, recruits and motivates the team that runs the company. Together, better Leadership and better HR, separate the winners from the rest.

Which is why the CEOs of services companies should pay a lot of attention to the HR function and the executive who runs HR for them. The job of running HR for a services company is tough, complex and requires an almost impossible combination of skills.

The scale at which Indian services companies operate, in some respects, has not been seen anywhere in the world. A few of them have more than 100,000 employees, which is huge but nowhere near the largest employers in the world like Walmart. But if you take recruitment numbers they start looking scary – on a 100,000 employee base if you grow by 20% and attrition is 15%, both very conservative numbers, you are still looking at hiring 35,000 employees this year. I can’t think of any centralized recruitment operation with that kind of hiring. Maybe some of the Chinese contract manufacturers like Foxconn. Companies like Walmart, with 2.1 million employees, might hire more people in a year but for them recruitment is very decentralized. It is an ongoing process that is handled at the store level because the recruitment is going to be from the nearby area only.

Even outside recruitment, other processes like appraisals, are now operating at a scale that is achieved by only a handful of global companies. A company like Infosys at 120,000 employees will have practically every employee go through a single, centralized appraisal process and system. A global company like GE with over 300,000 employees will likely have a multitude of appraisal systems that differ by business, country and class of worker.

With this kind of scale, HR bosses have to run very tight processes for everything from recruitment to appraisals to separations and everything between. These processes have to be efficient, effective and must run on applications which allow it to scale without breaking down. A candidate or an employee is a “widget” that flows through a “supply chain” and an “employee life cycle”. How do you standardize around a set of processes and build supporting systems that allow higher throughput (100,000 employees growing at 20% a year) and reduced cycle times (start and finish appraisals, promotions and increments within 3 months)? HR Heads who possess “systems thinking” will come out ahead on this front.

On the other hand, HR teams must continue to play the traditional HR role – be the via media between management and employees. Be there to protect, represent and sometimes just listen to employees. An employee is an emotional being who can produce fantastic work if he is motivated. And who can drag down the morale of everyone around him if he is demotivated. Salaries matter when deciding whether to stay or leave a company. But other things matter too. Investment in training and growth. Quality of work. A pleasant, non-hostile work environment. A boss who knows what it means to be a boss. Bonds of friendship and trust. Only an empathetic HR function can work towards creating this environment for their employees.

Successful HR heads must have both empathy and systems thinking. It’s a tough ask. But as the recent quarter is showing us, the industry is still in a high growth phase. Which means that the HR function has never been more important that it is today.