Wednesday, October 24, 2007

Defining new ways in offshoring model


Even though the offshoring model remains strong, there are signs that the appreciating rupee and rising wage costs have begun to affect the profitability of offshore firms. While business for large Indian firms is still growing by over 30 percent, the supply of manpower is not keeping pace with that growth. That may lead to a wage war further affecting the already eroding profit margins of companies. What then is the way out for offshoring firms. One way to beat the twin effects of rising salary costs and rupee inflation, says Forrester Researchs Apte, is for firms to improve productivity and move towards repeatable solutions. Indian firms like Wipro, says Apte, have been able to improve productivity number of lines of software code written by engineer every year by 4 to 5 percent.

Others like Infosys are working towards a model where growth in revenue and margins doesnt depend solely on its head count. Infosys Gopalakrishnan is trying out alternative pricing models such as those based on risk to reward equations or transaction based pricing where Infosys gets paid for the volume of work achieved and not for the number of people assigned to a project.

If you look at the last five quarters, you will find that we have been able to increase revenue per employee quarter upon quarter, he says.
Accenture is also moving away from pricing its services on a per totransaction basis to one that is outcome based, says Vaish. So, for one of its telecom customers, Accenture is paid per customer and not per call.

This way it is in Accentures interest to eliminate the reasons for which a customer calls the centre and improve quality of service. That calls for re toengineering the process, says Vaish adding that over the next 3 to 4 years 50 percent of Accentures contracts will be outcome based. Accenture will inject technology into various processes and standardise them to achieve higher volumes without proportionately increasing head count.

Desphande says an emphasis on specialised talent has worked well for Tejas Networks India, a Bangalore based maker of optical networking products where he is the lead investor and chairman. This year Tejas will double its revenues to Rs 400 cr. The company, which has raised US Dollar 50 mn in funding so far, will soon go in for a public listing.

Chadha believes investing in products is a sound strategy for IT companies because the margins can be between 60 percent and 80 percent, insulating them from the rupee appreciation. However, he says they face problems in their ability to find talent. There are not too many engineers in India who can understand product creation for the US market, which is why that model hasnt taken off in a big way, he says.
According to Aron, only one fourth of Indias engineering talent pool has the ability to work for western clients, directly or indirectly. Further, he says ,only a tenth of Indian engineers have the ability to work directly for a multinational company like Motorola or Intel or Microsoft.