Search the Internet          Tips  Sites: Finance, Investment

Outsourcing is inevitable, not a choice: Premji

Fakir Chand in Bangalore

Wipro Chairman Azim H Premji has called upon the Indian IT industry to gear up its business strategy for emerging as a global leader in outsourcing technology solutions and products.

Delivering the keynote address at "The Global Outsourcing Forum 2002", organised by IDC India Ltd, in Bangalore on Thursday, Premji said outsourcing was no longer a desired choice but an absolute strategic necessity.

"What happened to manufacturing 15 years ago is now happening to services. Globalisation has made it imperative that it is impossible to achieve leadership in every area.

Services and functions that can be achieved at greater efficiencies are being outsourced. In the emergent global consumerism, businesses have started to realise that if you are not best at what you are doing, you should not be doing it any more," Premji stated.

To emphasise his point, Premji cited the business philosophy of Nike that boasts of $2 billion revenue from its sales without owning a single production facility.

"As the world's largest footwear and accessories' company, Nike concentrates only on research, design, and marketing, while outsourcing all its production requirements from the world over.

Similarly, many Japanese manufacturers use the just-in-time delivery system, which forces them to rely on vendors for accessories," Premji disclosed.

As organisations begin to cut overheads in areas other than its core competencies, Premji said they must stick to doing only what they are best at and leave the rest to others.

Apart from globalisation, the other key driver is the pressure on margins. Economic downturn has led to a totally altered competitive landscape. Cost saving and cost-restructuring has become paramount for many organisations to survive and sustain the onslaught of global competition.

Sharing his thoughts on the drivers for outsourcing and their implications, Premji said there was tremendous pressure on system integrators and technology companies to devise cost effective ways of delivering solutions to customers and protect their margins.

"Outsourcing also helps organisations in releasing capital funds and financial resources for more strategic purposes. Simple tactical reasons can be a driver for outsourcing," Premji affirmed.

In order to capitalise on the growing opportunity, Premji hinted that one-time application development could be a good candidate for outsourcing, as organisations would not have to invest in building permanent expertise.

"India as a country, and IT as an industry, have understood and utilised the concept of outsourcing rather well. India pioneered the concept of the offshore development centre," Premji claimed.

Recalling how Indian offshore development centres have become a viable and accepted model to provide benefits of cost, quality and speed, Premji said such facilities were offering a virtual extension of the client's development environment, with parent site linkage in terms of infrastructure to deliver multi-site solutions seamlessly.

"The offshore model is a key factor in strengthening Indian presence in the global IT market. More than 185 of the Fortune 500 companies are now outsourcing their software requirements to India.

India exports software services to over 95 countries, with around 62 per cent of exports to the US, 24 per cent to Europe, and 4 per cent to Japan," Premji asserted.

Highlighting the distinct advantages the Indian software industry has in emerging as a global leader in outsourcing, Premji said the sub-continent was home to the second largest technical resource pool, after the US, with strong English-speaking capability, emphasis on quality processes, pioneers in offshore software delivery model and knowledge of new generation technologies.

The Nasscom-McKinsey report has shown a similar scenario being re-enacted in the IT enabled services sector. The report also projects 2 million jobs being generated by outsourcing centres in India by 2008.

"By 2008, the ITES sector has alone been estimated to generate a revenue of $24 billion, which will be 3 per cent of India's GDP. The sector achieved a whopping growth rate of 71 per cent during the last year (2001-02), making it the fastest growing industry. About 330 centres have been set up across the country during the last 5 years," Premji disclosed.

At the same time, Premji warned the industry that the woeful infrastructure could be a major deterrent in competing with countries like Israel, Ireland, Mexico, Russia, and China.

Ireland, which has been a major outsourcing center, has out-priced itself with limited manpower. But China and the Philippines pose serious competition in the long run because of the cost of their large pool of manpower.

China has launched a major drive to upgrade its language skills by introducing English in schools and colleges. It has set up over 50 technology parks, cut down telecom costs and assures greater than 99.8 per cent power reliability.

"At the national level, we need to get our act together quickly. We must ensure that our power reliability goes up significantly. Our telecom costs are still double those of the US. They have to be further reduced to become internationally competitive. We also need to augment the manpower resources for outsourcing by setting up adequate vocational training centers," Premji averred.

At a company level, Premji said firms must ensure that they make a success of every outsourcing relationship.

To achieve such an objective, the Wipro czar dwelt on the following critical factors for outsourcing relationships.

• First, one should be clear about what areas must be outsourced. The more stable the requirement and lesser the need for large number of interactions between a customer and its partner, the better it is to outsource the application.

• The more critical the application is to the customer, the more important it is for the partner to have comprehensive processes to understand and appreciate the elements of the latter's business. Here, the knowledge acquisition process of the partner who takes over the application is also important.

  The project management capabilities can make a critical difference. The more critical the project is to the business process, the more is the need to ensure that delivery schedules are met.

• In the dynamic world of today, the partner who has the application outsourced must have the ability to scale up to customer requirements, quickly and seamlessly.

• In the enhanced security consciousness era, it is important for the partner with the outsourced application to develop contingent plans for systems, data, people, communications and locations for ensuring business community.

• Finally, both the partners in the outsourcing relationship must share more than business. They must share a common vision of the future.

Delegates from the US, Europe, and the Asia-Pacific countries are participating in the forum.

ALSO READ:
More Money Headlines

Tell us what you think of this report