OFFSHORING 2.

0
Future of offshoring

The first wave of IT outsourcing tested the waters, and involved getting comfortable with someone
managing your IT systems from thousands of miles away relying on email as the primary communication
medium. However, a lot has changed since then; India has come a long way from being just the doer of
back-end operations to much more complex and knowledge intensive analytical services.

Today, offshoring is not just about reducing costs by shifting technology and back-end processes to labor-
efficient locations like India and China. More than ever, offshoring is concerned with sourcing the right
talent required to enable the innovation engine of an organization. Offshore vendors are chosen today for
their ability to provide resources quickly and cheaply. This is possible only because both providers and
consumers are a lot more mature today about offshoring.

Moving on to the future of offshoring – it is all about collaboration, integration, and syndication of multiple
teams across multiple locations with the capability of transferring resources across centers. It is about
creating a global syndicated network of delivery which balances to create maximum value irrespective of
the delivery center you use.

The next-gen organization will comprise talent from across the globe, at the same time utilizing local
talent and drive innovation by establishing strong ties with its business partners wherever it operates. By
the end of 2008, the offshore workforce is expected to be 1.5 million strong.

Take Wipro’s example – we have a global software development center in Atlanta, where we will
collaborate with the University System of Georgia to educate and train nearly 500 employees. The new
center will enable us to provide localized and closer-to-customer service for the Americas region.

However, this is just the tip of the iceberg. According to a report from the McKinsey Global Institute, the
global market for offshore services has tripled since 2001; however, only 10% of the $300 Billion
opportunity has been captured. It is estimated that this will grow by an additional $80 Billion in the next
five years.

Several companies are now experimenting with new forms of organizational structures to accommodate
the changing nature of offshoring. They are defining pricing models that are more value based and will
have a 'risk reward' component based on meeting SLAs for service quality, and productivity. The key to
gaining competitive advantage over other service providers would be to create end-to-end process
reengineering capabilities which deliver prominent improvements in efficiency and at lower cost.

According to Gartner, outsourcing’s future is in the utility delivery model, where shared services are
delivered and paid for on demand. It is set to become a workable reality during the next two years (by
2011) due to widespread user acceptance of shared, standardized services. The rise of on-demand utility
services can already be seen in the currently popular off-premise software-as-a-service model and in
more traditional IT infrastructure utility (IU) services, for example the on-demand provision of storage
space or processing power. These services signal a “tipping point” that will lead to “an accelerated period
of change and innovation” in IT outsourcing.
• Offshoring (IT and Business Process Outsourcing to offshore destinations) is passé now.
Outsourcing services providers are now working on Research and Development (R&D), New
Product Development (NPD), engineering, and knowledge intensive analytical services.

• Not too long ago these were considered the core areas or something close as that. But the shift
can be attributed to lack of in-house talent pool which leads these organizations to look beyond
their geographical confines to tap talent pool available worldwide to perform the innovation and
knowledge work.

• Today, about 60% of all off-shored jobs are in “staff augmentation” mode. This simply means that
IT managers are now managing a pool of resources, several time zones away in a distant
geography.

• Sectors like R&D, engineering, product development which comprises the ‘innovation services’
are the second most common and quick growing set of offerings provided after IT. These services
being complex than the IT services demand deeper and analytical skill sets; new skills that are
beyond the realm of conventional offshoring.

• Process Improvement and Standardization will drive the next wave of Outsourcing or Offshoring
2.0. Vendors need to collaborate with clients and offer pro-active suggestions instead of adapting
just a client- vendor relationship.

• Typical revenue growth rates for offshore vendors have been in the neighborhood of 35% CAGR
for the last ten years and expected to continue for another five years at least.

• Clients are looking for vendors who develop solutions around specific business problems which
they face; in a way it demonstrates the vendor’s expertise of solving critical business problems.

• Wipro talks about offshoring 2.0 as being about strategic impact, mature relationships, multi-
sourcing, risk-reward sharing, and a joint approach instead of a typical client/vendor relationship.

• But with offshoring being not necessarily great news for rapidly rising U.S. unemployment rate,
President Obama has announced tax incentive plans for companies who keep work onshore.
Though this may work in some BPO areas with the resulting price differential with locations such
as Latin America and India being minimal, in areas such as IT services where India and China
have established its maturity the impact is expected to be low with these countries being
significantly cheaper.

• According to Wipro, the drivers for Outsourcing 2.0 are:

o 3Cs innovation imperatives- Customers, Competition, and Compliance

o Changes in “What”, “How” and “Who” in outsourcing 1.0

o Post security competencies

o Lower technical and physical entry barriers

o Evolution of Web 2.0 where the principles are based on collaboration and community
sharing
• The primary differences between Outsourcing 1.0 and 2.0 are- 1.0 was about excellence in taking
on prescribed tasks defining good contracts and delivering predictable results to customers
whereas Outsourcing 2.0 is a collaborative approach that requires taking the initiative, delivering
surprising, non-repeatable, unpredictable results

• In Outsourcing 1.0 locations did not matter as skills and people are essentially fungible.
Outsourcing 2.0 takes advantage of the strengths and accommodates the weaknesses of specific
geographies, countries and markets

• While in 1.0 one of the main objectives of outsourcing is to articulate or isolate a specific business
function, 2.0 needs both parties to have business models that are fundamentally aligned

• Wipro feels that adopting to the new paradigm shift will help better value realization, and new
models will evolve with tighter integration capabilities

• With Wipro’s Web 2.0 framework, the relationship is focused on creating strategic impact with
higher productivity and customer reach

• The relationship is at a more matured level as the key focus is on capacity generation,
collaboration and communication for better value generation