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China poses serious competition to Indian IT sector: Premji

Wipro Chairman Azim H Premji has urged the Indian information technology industry to fortify and restructure its strategy to emerge as the world leader in outsourcing.

Delivering the keynote address at 'The Global Outsourcing Forum 2002,' organised by IDC India Ltd, in Bangalore on Nov 21, Premji said outsourcing was very significant for the growth of the IT industry.

India, he said, needs to get its act together quickly and ensure power reliability, cut telecom costs further, augment manpower resources and set up adequate training centres to address the issue.

Excerpts from Premji's address:

"I am very happy to be here with you and welcome you to this conference.

"The conference is important because it brings to us different perspectives from various parts of the world - we have speakers from the US, Europe, APAC countries and from India. I am sure the conference will help us focus on the most valuable opportunities available in outsourcing.

"I would like to share with you my thoughts on the drivers for outsourcing and their implications for us. I am sure the expert speakers will provide us with more data and insights about these and you will deliberate upon them further.

"The fundamental truth is that outsourcing is no longer a desired choice but an absolute strategic necessity. What happened to manufacturing fifteen years back has now happened to services.

"Globalisation has made it imperative that it is impossible to achieve leadership in every area. Services and functions that can be done at greater efficiencies and effectiveness are best outsourced.

"In the emergent global consumerism, businesses have started to realise that if you are not best in the world at what you are doing, you should not be doing it.

"Nike, which is number one in its segment with $ 2 billion in sales, does not own a single production facility. Instead, it concentrates on research, design, marketing and outsources production.

"Many Japanese manufacturers use the just in time delivery system which forces them to rely on vendors for the parts. The organisation cannot afford to have overheads in areas other than its core competencies.

"Organisations must choose the core competencies 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 completely altered competitive landscape. Cost-saving and cost-restructuring have become important for many organisations to survive.

"Similarly, there is tremendous pressure on system integrators and technology companies to devise cost effective ways of delivering solutions to customers, if they have to protect their own 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.

"For instance, one-time application development can be a good candidate for outsourcing. The organisation need not invest in building permanent expertise. Instead, it can leverage specialised knowledge outside the organisation for a specific purpose.

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

"Offshore development centres have become a viable and accepted model providing benefits of cost, quality and speed. The centres offer a virtual extension of the client's development environment, with complete linkage with the parent site in terms of infrastructure to deliver multi site solutions seamlessly. India, Israel, China, Mexico, Ireland, Russia have adopted this model.

"The offshore model a key factor in strengthening Indian presence in the global IT market. More than 185 of the Fortune 500 companies outsource their Software requirements to India.

"India exports software services to more than 95 countries around the world, with 62 per cent of exports to North America, 24 per cent to Europe and 4 per cent to Japan.

"The Indian software industry has certain distinct advantages in becoming an outsourcing partner. We have the second largest technical resource pool, after the United States, strong English speaking capability, high emphasis on quality processes, pioneers in offshore software delivery model, well developed infrastructure for software development and knowledge of new generation technologies

"The Nasscom-McKinsey report of 2002 concludes a similar scenario is being re-enacted in the IT-Enabled Services space.

"The report predicts two million jobs that outsourcing centres in India will provide in six years. By 2008, the revenue predicted is of the order of $24 billion, which will be 3 per cent of India's gross domestic product.

"The growth rate achieved by the sector was 71 per cent last year making it the fastest growing industry. In the last five years, more than 336 centres have come up in India.

"At the same time, we must remember that while India has the edge, the poor infrastructure can act as a major deterrent for us.

"Countries like Ireland, which has been a major outsourcing centre, has outpriced 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 a 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 US. This has to come down to become internationally competitive.

"We also need to augment the manpower resources for outsourcing by setting up adequate vocational training centres.

"At a company level, we must ensure that we make a success of every outsourcing relationship. I would like to dwell on the critical success factors for outsourcing relationships.

"First, one must be clear about what areas must be outsourced. The more stable the requirement and the lesser the need for large number of interactions between the customer and the partner to whom the application is outsourced.

"Second, 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 customer's business. The knowledge acquisition process of the partner who takes over the application is extremely important.

"Third, 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. Quality of processes is extremely important in both ensuring this and keeping the customer constantly informed about the process.

"Fourth, 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.

"Fifth, in the enhanced security consciousness era, it is important to 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."

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