David on IT Outsourcing in China: [news] Lessons from India (Part 1 of a gazillion ...)

Friday, June 11, 2004

Dateline: China

I read a lot of stories on my smartphone. It's a good way for me to spend idle time; besides, I get tired of sitting in front of a computer. Anyway, I came across an article and it set a new bookmarks record for me: I have 25 bookmarks for this article!! (I can set bookmarks for articles I read on my smartphone, just in case you were wondering what I'm talking about.)

The article is from the current issue of CFO. Get it; read it. It's a special issue on offshoring. See http://shorl.com/fevytidisodri .) The specific article, titled "The View from the East," can be found at http://shorl.com/gystabesamysi . Let's rock & roll ...

In the order presented in the article:

1) India's systems integrators (SIs) are facing challenges similar to their U.S. counterparts, e.g., currency fluctuations (not an issue in China -- yet), wage inflation (not a serious issue in China), and "public grumbling over jobs moving offshore."

2) The biggest threat to India's SIs are the global (mostly U.S.) IT consultancies, such as IBM Global Services (IGS), Accenture and EDS.

3) Initial work for India's SIs was writing proprietary software, but they were able to move up the food chain as they honed their project management skills. (A repeat performance is in store for China's SIs, either domestically brewed or American.) Today, India's SIs take on everything from SAP projects to IT architecture design to "conducting research and development for new products." And "(m)ost recently, the Indian companies have added business process outsourcing (BPO) services to their menu of capabilities ..."

4) India's SIs were able to grow in "a stealthy fashion" according to a partner in the Delhi office of McKinsey. This won't happen in China; the U.S. firms are much wiser this time around.

5) India's SIs are claiming that their new generation of project management skills will be their competitive advantage. They think CMM is their salvation. What's scary is that they really seem to believe this!! It makes me gag ...

6) The mostly U.S. firms are responding by setting up their own centers in India -- and hiring literally tens of thousands of Indian software engineers. The stated objective is to improve win rates. (Gee, and they pay better, too. Hmmm ... who would I work for if I was a IIT grad?) Trust me, they'll be coming to China, too. Where? I'm not going to say just yet!! ;-) BTW, If you're a Chinese software engineer, expect a five-fold increase in pay when the U.S. firms get to China.

7) Interesting quote from the CEO of Mphasis (an Indian): "The fact that the multinationals are coming to India certainly means that some, if not all, of our cost advantage will be whittled away."

8) The rising rupee is hurting, as is wage inflation. The average salary for an IT project manager rose 50% in 2003 from a year earlier. Hey, go to China! Tidbit: The labor arbitrage between the U.S. and India has already fallen by 18% in the past two years.

9) And things get more interesting: India's SIs are putting pricing pressure on one another, especially at the low end of the market. "The traditional offering of Indian vendors -- application development and maintenance -- has become a commodity, and prices are falling." Survival of the fittest!!

10) India's SIs lack domain expertise. (Think verticals, as one example.) This is especially critical as they move up the food chain. "The progress on anticipated growth drivers -- that is, domain expertise, services breadth, and geographical diversification -- remains less than satisfactory for most."

11) A benchmark to note: TCS tries to run their bench at a 78% utilization rate. What's scary is that when I mention this to China's SIs, they have no clue what I'm talking about -- or why this is necessary. After all, why not run your bench at 100%? This kind of thinking is scary, too. (Trust me, the other 22% are not playing computer games.)

12) ABC (activity-based costing) as a financial strategy? I've long been a proponent of ABC; maybe it has legs in this space.

Whew ... a great article. Well, time to go to sleep.

Cheers,

David Scott Lewis

President & Principal Analyst

IT E-Strategies, Inc.

Menlo Park, CA & Qingdao, China

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