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Outsourcing is inevitable & here to stay: Murthy 

INDIAWEST[ THURSDAY, JULY 17, 2003 11:18:11 AM ]

PALO ALTO, California: When Infosys chairman and chief mentor Narayana Murthy talks, people listen. Being the Bill Gates of Indian IT industry, his words carry a lot of weight.

But last week, while addressing a select group of TiE members at the Crowne Plaza Cabana, Murthy was extremely cautious in talking about outsourcing.

The 'O' word has caused much brouhaha in the United States and is at the center of a political debate. While Murthy did not elaborate on the current scene, he did, however, tell his audience, "I'm personally excited about outsourcing," pointing out that outsourcing had energised the Indian economy and that it had grown by nearly 65 per cent in the last fiscal year, while the software segment had grown by only 20 per cent.

Off shore development of software in India had created job opportunities for younger people in the 18-22 age group, he said, and was stimulating a whole generation of technologists.

Murthy also broadly hinted that outsourcing was inevitable and here to stay.

He chose to quote an expert in the area of outsourcing, the chairman and founder of the Chasm Group, Geoffery Moore, who has also authored a book on the subject.

Murthy pointed out Moore's opinion that in a corporation while activities that are of core importance will remain within the company, other peripheral activities that are not tremendously vital will be outsourced if it reduced the cost for the corporation.

Addressing close to 50 charter members and sponsors of TiE -- all leaders and top representatives of big corporations -- the Infosys chief urged them to "leverage" the goodwill they had generated over the years. "People from India have raised the image of Indians here in the U.S. You have conducted yourself as competent and law abiding citizens and India looks good because of you."

Murthy was the first speaker to kick off a new tradition at TiE on July 7, called the 'President's Breakfast Series'. "We will invite special speakers to address this select group of TiE charter members and sponsors so they can network and talk," explained TiE president Sridar Iyengar to India-West.

At the Crowne Cabana, Murthy spoke about entrepreneurship and mentoring in this economy. He pointed out that there were four requirements for a successful entrepreneur:

  • A powerful idea that can be simply explained with a clear understanding of the market. "In India I have found hundreds of entrepreneurs failed because the benefit accrued to the customer was not clearly identifiable." 
  • A good business model. He attributed the success of Infosys to a model he has developed called the PSPD. P - for predictability of revenue and developing a revenue-forecasting algorithm. S - for sustainability. P - for profitability, and D -- for a de-risking model that would understand risk factors associated with products, customers, employees and geo-political situations. 
  • A powerful idea that can be simply explained with a clear understanding of the market. "In India I have found hundreds of entrepreneurs failed because the benefit accrued to the customer was not clearly identifiable." 
  • Profits and money in the bank. "The age of VCs going behind ideas is almost at an end." He said that for a company to survive in the long run it needed to have money in the bank. "Money in the bank is the only testimony to how successful you have been. From Day 1 it has been my axiom to be profitable and pay dividends."
  • A powerful idea that can be simply explained with a clear understanding of the market. "In India I have found hundreds of entrepreneurs failed because the benefit accrued to the customer was not clearly identifiable." 
  • The Infosys chief also stressed the importance of creating a good value system within a company that enhances trust among its employees. Unlike other business heads, Murthy carries a unique title of "chief mentor."
  • A powerful idea that can be simply explained with a clear understanding of the market. "In India I have found hundreds of entrepreneurs failed because the benefit accrued to the customer was not clearly identifiable." 
  • He explained that in the executive level, Infosys is divided into three tiers, like a pyramid, with each top tier mentoring and assisting members of the lower level. "In my experience I have found that this builds a private relationship between different levels of employees and people are open in their feedback."
  • A powerful idea that can be simply explained with a clear understanding of the market. "In India I have found hundreds of entrepreneurs failed because the benefit accrued to the customer was not clearly identifiable." 
  • But more than any other principle, Narayana Murthy believes that for a successful corporation the leader has to "walk the talk." "There is nothing more powerful than leading by example," he added.

Why Outsource from India?

In 10 or 15 years, organizations may be outsourcing all work that is "support" rather than revenue producing, and all activities that do not offer career opportunities into senior management. In the 1990s, outsourcing took on new strategic dimensions. Rapidly changing market dynamics caused organizations to spend more time focusing on their core business and global competitive pressures.

Organizations are realizing that they can't be all things to all people. As a result, organizations are focusing more on their core competencies and relying on service providers to manage critical but non-core processes for them.

India has effectively provided efficient software solutions to Fortune 500 companies. Citibank, Morgan Stanley, Wal-Mart, AT&T, General Electric, Reebok, General Motors, Sony, Boeing, Coca-Cola, Pepsi, Swissair, United Airlines, Philips, General Electric, IBM, Reebok, Lucas, British Aerospace, General Motors, and Sears are some companies relying on software companies in India.

It is not surprising that corporate giants in the United States, Europe, and Japan are increasingly looking to India for cost-effective and high-quality software solutions. In fact, a World Bank-funded study in the United States confirmed that vendors rated India as their number one choice for outsourcing.

India has invested heavily in technical education and can provide a ready supply of bright people at relatively low cost. Infrastructure improvements in India, particularly in the area of telecommunications, and the independent nature of working in IT make it possible to bring this talent to bear on virtually any programming task. Traditionally, the most active location for staging these types of IT initiatives has been India. A strong supply of high-programming talent, favorable government and tax incentives, and the ability to complement U.S. time zones with a virtual around-the-clock approach are some of the advantages India has to offer.

Some of the key benefits of outsourcing from India are:

  • Access to leading practices: external service providers give companies access to an extensive, highly specialized knowledge base--which providers must improve continuously to stay in business.
  • Clearer strategic focus: allows managers to focus on core competencies and strategic issues rather than on routine, time-consuming activities
  • Better resource allocation: can help shift the traditional focus from transactional activities and reporting to the delivery of forward-looking information and value-added business analysis.
  • Improving service quality and productivity --reduce response time, deploy solutions faster and improve system availability.
  • Improve performance--maximize the performance of an organization's enterprise client/server computing environment through the use of the latest technology and an outsourcer's performance management tools and expertise
  • Achieving cost effectiveness as well as cost Reductions
  • Significant cost savings, up to 80% in certain cases.
  • While it can be quite difficult to recruit the expected competence in Western countries, it is a completely different scenario in India, where there are lots of available programmers with a good academic background.

Business Process Outsourcing

Business Process Outsourcing (BPO) is the investment strategy for sourcing best practices in the business value chain. Any process can be outsourced creatively to add capabilities rather than get rid of tasks.

BPO is a business discipline, which is of a long-term nature. Any company can outsource routine tasks. And in doing so, they may save money and provide a more efficient service than using in-house operations, but it will not leverage a firm's capabilities in terms of customer service, innovation and change adaptation. A company has to prioritize its process needs, build a portfolio of best practice process, link them together, integrate them and balance what it retains in-house and what it out sources.

The payback is huge and it has become essential since the best practices have to be used in every process.

  • BPO helps build best practice processes

The BPO provider base is expanding and so is the range of processes that can be outsourced. Over a period of time, any routine business process can be outsourced by BPO. A BPO provider can far more effectively handle processes like payroll processing. This will not only reduce costs but also capital investment.

  • BPO provides expertise on demand

If business activity goes up, the process base is available and if it goes down, there are no layoffs. A company need not staff its processes with in-house employee and not knowing what to do with these heavy cost processes at a time when business is not doing well. When business volumes of activities and transactions can vary widely, BPO, adds flexibility, adaptability and ability to scale.

  • BPO levels

Merely identifying best prospects & service is not enough to improve customer value. Effective execution of the same in a manner to enhance the profitability of customer relationships is vital. Business Process Outsourcing can be broadly split into following levels, based on the outsourcing trends & reports.

  • Basic Data entry
  • Data processing & analysis
  • Departmental outsourcing (HR, Accounting, Payroll)
  • Customer interaction services
  • Business Intelligence & Knowledge services
  • Outsourcing partners ideally provide the business, application, education and technical consulting services needed to implement the BPO initiatives strongly into the organization.
You can read more about specific areas of BPO which outsourcing vendors cater to below:
  • BPO Value proposition
  • Focus on core competencies
  • Converting fixed costs to variable
  • Take advantage of a proven, shared infrastructure
  • Manage enterprise processes efficiently
  • Develop profitable customer relationship & reach out to wider markets
  • Reduce transaction overheads
  • End-to-end business solutions
  • Entry into specialized, business intelligence & knowledge based solutions
  • Maximize ROI using web enabling services
  • Substantial bottom line benefits

Best Practices in Outsourcing

In long-term relationships, the key component for success of the relationship is best laid during negotiations, which lead up to the signing of the Service Level Agreement. Some of the common practices employed for a successful management of outsourcing relationship have been listed below.

  • Relationship between key management personnel:
    If there is a good understanding and strong working relationship between the key management personnel of both teams, then such relationships often tends to last long. Research on outsourcing success has indicated that peer friendships and working chemistry with one's counterpart in the other company has been an important factor in long term relationships.
  • Measurable Objectives:
    The objectives to be achieved by outsourcing must quantifiable and must be established as criteria right at the start of the contract. If the customer can compare the performance with the pre-established objective, then the benefits of outsourcing would be clear. The vendor would know where they stand in meeting customer expectations. Well-defined performance criteria have quantifiable objectives, service quantities, quality, customer satisfaction and are measurable against other providers.
  • Forming special committees:
    Successful outsourcing relationships involve setting up of special executive committees or boards that draw out the best strategies for smooth & effective handling of outsourcing relationship. Identification, resolution and rapid escalation of issues are a key responsibility of this team.
  • Incentives and Penalties:
    The provider is encouraged to meet or exceed customer expectations by establishing performance based pricing. When performance exceeds the criteria, the incentives apply and when they fall short, the penalties are imposed.
  • Periodical review meetings:
    For a successful outsourcing relationship, it is better to have frequent formal review meetings. These meetings can discuss what both teams are working towards and a high level view of the future goals and objectives. Product reviews and deliverables can be discussed at such meetings.
  • Training vendor personnel:
    The vendor personnel need to have ongoing training so that they align their business goals to the business objectives of the customer. The issues driving the clients needs have to be understood and the vendors' service has to relate to them.
  • Bridging cultural differences:
    Both parties to the outsourcing relationship will have their own culture. These differences have to be recognized and bridged. Organizing social events, education on company background, participation in others' quality programs, etc are some of the ways to bridge this gap.
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