Global Economics

Innovation: Outsourcing's Second Wave


Back in June, IBM's (IBM) Chief Executive Sam Palmisano lit a traditional Indian lamp to kick off the company's largest-ever town hall meeting in Bangalore. Then he announced to his 43,000 Indian employees—an eighth of his global workforce—that IBM would invest $6 billion in India over the next three years.

It was a significant event for IBM—but it was an even more significant moment in the history of the global IT service industry. Palmisano heralded a new chapter in outsourcing, one where the big global players like IBM and Accenture (ACN) will lord it over the upstart Indian offshore IT services companies.

For the last two decades, the Indians pioneered and dominated the outsourcing game. Companies like Infosys (INFY), Wipro (WIT), and Tata Consultancy Services (TACSF), with their low-cost global delivery of services model, were able to leverage their talent at a low cost and deliver competitively priced IT services.

They specialized in providing such things as application development, infrastructure support, and business process outsourcing (BPO) to cost-conscious, top-tier multinational clients. The Indians disrupted the existing business models of high-priced consultants like IBM and Accenture, which saw their IT service revenues dwindle in recent years.

But now these Western players are turning the tables on their Eastern rivals. Corporate leaders are seeking more than cost efficiency to help boost profits. They are looking for innovation from their IT consultants that will help them increase their revenues. Here, global players like IBM and Accenture are coming out tops.

COMPETING THROUGH OPERATIONS. First, they are starting to beat the Indians at their own game by expanding the size of their offshore workforce to keep up with the competition for talent. IBM has more than quadrupled its Indian technical staff in recent years and is catching up with Accenture, which has already drastically expanded its offshore services capabilities.

Secondly, while using their offshore locations like India to help customers save costs, these Western consulting firms are now using their industrywide expertise to create global innovation networks (GIN), which they can tap into to create competitive new products and business models for their customers.

According to a recent survey of top-level executives sponsored by SAP (SAP), 55% of corporate leaders worldwide report that new business models—organizational structures, competencies, processes, and partnerships that define how a company operates—will confer a greater strategic advantage than new products and services by 2010. And both IT and business execs tell us that consultants remain one of their top sources for such business innovations.

This is where the Indian and other offshore providers lag. Offshore vendors are currently telling clients: "We will free resources for you to innovate." To which chief executives at client firms are now responding: "No, we want you to help us innovate." When Satyam (SAY) and Infosys talk about "process innovation" or "service innovation," they mean applying Six-Sigma or agile development techniques to optimize their own internal IT service delivery processes, not to innovate their clients' industry-specific processes and services.

And while Wipro and Tata Consulting employ research and development teams that can help firms innovate their products, they are not trained to deliver what chief executives care about most: new business models. So, offshore outsourcers need to align their interpretation of innovation with their clients'.

TEAMS OF INNOVATORS. Here, smart Western consultants have sensed and seized the opportunity. Here's how they work. These players are upgrading their own global delivery infrastructure to deliver not just technical services like applications development, but also business innovation services. That's where the global innovation networks come in. These are global ecosystems of internal and external partners that collaboratively design and deliver business innovations that clients want.

For instance, the software activities of IBM's Center for Business Optimization, whose consultants help reengineer and optimize clients' business models, are done in Bangalore by PhDs trained in operations research. In one current project, these Bangalore-based PhDs are working with IBM's logistics experts in Zurich and Japanese software engineers in IBM's Yamato Software Lab to jointly develop and deliver a scalable supply-chain optimization model to European and Asian clients.

Ditto for Accenture, whose Institute for High Performance relies on India-based MBAs to devise industry-transforming business models. And Deloitte's Intellectual Asset Management practice relies on a 100%-virtual innovation network, tapping a global expert network of 300-plus respected scientists, engineers, and physicians to help clients worldwide maximize their intellectual property (IP) portfolio value.

MORE THAN ENGINEERS. For now, the Western players are galloping away with the prizes. Offshore players in India and elsewhere can catch up—but only if they change their mindset and move fast. They need to acquire a new client-focused innovation mindset by recasting their operationally focused mission statement to help clients innovate by transforming their business processes, market offerings, or business models to boost value for their enterprise.

To effectively carry out this client-focused business innovator mission, offshore providers need a fresh, new talent pool and expertise. They need business designers who can invent new business models, industry specialists who can tailor business innovations to suit the client's context, and they need to extend their reach to global players who can broker and orchestrate the GINs for them.

So, in addition to the famous IIT-minted software engineers and mechanical engineering PhDs who can create massive programs and design jumbo jets, offshore providers also need MBAs and PhDs in economics who can design clients' new business models. These business designers must operate not out of India, but on European and U.S. soil where their clients are based. That way, while its software programmers in Bangalore are coding customer Food Lion's multichannel commerce platform, for instance, Infosys' U.S.-based microeconomists can invent the cross-channel pricing models.

STRATEGIC ADVISERS. Business execs in multinationals tell us that they are impressed by offshore providers' technical talent and project management skills, but underwhelmed by their vertical-specific process knowledge and domain expertise. To deliver business innovation to non-IT execs, offshore providers must retrain their consultants to act less as client order-takers or peddlers of cookie-cutter tech frameworks, and more as strategic advisers who can anticipate clients' business needs and engage them in collaborative innovation scenarios.

For example, before responding to a proposal from General Motors' (GM) IT department to upgrade its OnStar telematics software, Wipro's management consultants should proactively propose to the carmaker's chief financial officer a value-based pricing scheme, with risk-reward sharing, to co-develop and co-market an energy-efficient new car in emerging markets.

Finally, what is needed are some savvy global brokers. Offshore providers today promote their human assets, i.e., "we can rapidly assemble a team of our 5,000 engineers just for you." But users don't want to rely on a single provider's expertise alone to address their multifaceted innovation needs: Most users tell Forrester they prefer best-of-breed IT services from all over instead.

EMPHASIS ON ACUMEN. Offshore providers must form business development teams capable of seeding and orchestrating the external ecosystems of innovation specialists. With such Innovation Networks in place, Tata Consulting can quickly tap a Shanghai-based logistics expert to co-develop an innovative global transportation solution for GE's (GE) manufacturing unit in China.

Offshore players are behind in this second wave of outsourcing, but they needn't be if they can quickly build upon their existing strengths—trust-based, transparent client relationships and mature, automated global delivery processes—to shape these global innovation networks. Some already have pockets of expertise to drive industry-specific business innovation—Infosys has an expertise in financial services and Wipro in IP portfolio management, for instance. But their technical skills typically overshadow their business acumen.

Now is the time for Indian and other offshore players to emphasize the latter and transform themselves from low-margin IT vendors into strategic GIN services providers. As these global networks take off, companies will be able to access innovation twice over: from within their organizations and from outside, through their vendors or partners. That's when the true benefits of globalization will start to accrue, and make customers the real winners.


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