What's Next For India?

Gail Farnsley knows in her gut that better online collaboration tools will help Cummins build better truck engines. But gut feelings don't deliver ROI, so this CIO hasn't been lobbying for a big budget to implement them. Instead, she's talking with IT outsourcing partners in India, including IBM, Tata Consultancy Services, and its own IT joint venture, KPIT Cummins, about what they have going in this area. Do they have collaboration tools that they hope to sell to other companies, where Cummins could be a test site for little or no cost? This is the next frontier for offshore outsourcing--innovation and new technologies. You say you can cut some costs shipping IT work to India? That's old news. Top-flight IT teams are using cost-cutting relationships they've built over the past few years to take the next step and tap outsourcers to make their companies run better. Call it innovation from outsourcing. Easy to say, but make no mistake: It's extremely difficult, even for experienced outsourcing buyers, to get breakthrough ideas out of their IT service providers. "We're to blame as customers," says Ajit Naidu, a Merrill Lynch managing director in charge of technology for global equity markets and services, speaking at last month's Nasscom conference in Mumbai, India. "We don't give enough big-picture exposure. We do piecemeal projects. We don't provide enough understanding of the whole business problem." But don't let the outsourcers off the hook, because they aren't delivering on the innovation front. In our survey of 430 IT pros who work with Indian IT service providers, just 10% cite "innovative ideas" as one of the most significant benefits that would prompt them to use such services again; 72% cite lower costs. Indian outsourcers aren't built--culturally or structurally --to ooze innovation. Culturally, India's IT services business boomed by delivering what customers ask for, not by telling clients that there's a better way to do something. And structurally, with high turnover and a constant need to promote people, Indian IT companies' front-line staffers often don't have the business knowledge to push an innovation agenda. Indian IT companies are taking some promising steps to deliver more innovation (see "Can India's Outsourcers Step Up?"), and just as important, buyers are starting to demand that. More companies are tying outsourcer pay to business goals (see "More Deals Tie Pay To Results"), and more are working on projects jointly. "I'm seeing a lot more willingness from all my partners to invest together," says Farnsley, who after five years as Cummins' CIO is leaving this month to create an IT research institute at Purdue University. For example, if Cummins wants to put a new technology to use in its environment, and KPIT Cummins sees that technology as a growth business, they split the cost of training KPIT staff on it. Cummins' internal IT staff is good at spotting problems and areas for improvement and "escalating" those to decision makers, Farnsley says. Cummins is now demanding more of that from its service providers. Farnsley put it to them this way: "One of your responsibilities is to make sure I'm not being stupid." Remember all the hard knocks companies took when they raced to offshore IT work earlier this decade and saw the supposed savings shrivel because their people didn't have the skills to manage offshore projects? That only gets more difficult when the goal is innovation. Robert Willett, CIO of Best Buy and CEO of its international group, knows he and his team need to get better at accepting ideas from partners. "We're still struggling with that," Willett says. "We need to be more on receive than transmit." Often the outsourcers get to know a process or technology better than any staffer, and improvements need to spring from those everyday interactions. "I can't pay anyone as a job to be innovative," Suren Gupta, CIO of Wells Fargo consumer lending, said at Nasscom. Innovation from outsourcing may be the new Holy Grail, but it's still out of reach for most. Just 12% of customers of Indian IT service providers say their "delivering innovative ideas" has improved significantly in the last two years. And 31% say it has gotten significantly worse. The evidence suggests that innovation from outsourcing is hard to do. Which means CIOs who get this right could give their companies a competitive advantage that's hard to match. CAN INDIA'S OUTSOURCERS STEP UP? More CIOs are pushing their offshore outsourcers to deliver innovative ideas, drawing on the knowledge gained in tasks such as developing applications and maintaining infrastructure. The question: Do those frontline outsourcing employees really have any great ideas? It's not a cheap-shot question. In India's fast-growing IT market, people are switching roles--if not companies--every couple years, moving up the ladder and often off one client's project and onto another's. Of the 430 IT pros we surveyed who work with Indian IT outsourcers, 44% say turnover is one of the biggest problems. Half complain of "underqualified people." Building enough knowledge to offer game-changing ideas is a tall order in that environment. Yet Indian outsourcers have good reason to make this happen. Their cost advantage, while still significant, has eroded amid rising wages and unfavorable exchange rates, so they need to deliver higher-end services. They also want "nonlinearity"--revenue growth such as selling intellectual property that doesn't require hiring another person. Here are a few ways India's outsourcers are trying to bridge the innovation gap. At IBM, every Sunday night automated e-mails go out to teams working on client projects. A software program matches what the teams are working on against software systems that IBM has built and implemented elsewhere. Any chance, the e-mails ask, one of these pre-built systems can solve a customer problem? "The 'last-mile problem' is people with visibility into opportunities don't have insights into the solutions," says Jeby Cherian, director of an 800-person IBM group in India that builds reusable, SOA-based software systems. The e-mails detail the relevant software, IBM contacts who've done implementations, and reference clients. Frontline IBMers are expected to respond in 24 hours. Says Cherian, "We've solved the last-mile problem." Not Yet A Flood Wipro expects more customers to ask its teams to improve processes like accounts payable, rather than just writing software to automate it as is, or running it using lower-cost people. "Companies will give us a little more of a free hand in telling them how it can be done," says N.S. Bala, Wipro's senior VP for the manufacturing sector. "I won't say it's a flood, but that's the trend you're starting to see." Wipro is building what Bala calls a "catalog of services" in areas such as accounts payable, where the company tries to replace what customers are doing--from software to process--and run it for them. Most companies, though, aren't buying the idea that Wipro can standardize an accounts payable process for reuse across companies, much as it would a technology standard. "Five to 10% of the people in customer organizations see what we're trying to offer," he says. "Ninety percent believe they've already done it, or they're too complex for your ideas." The largest India-based IT companies are putting more emphasis on creating their own intellectual property. For example, Patni, an Indian services company with 15,000 employees, now has about 2,500 people in product engineering, generating 17% of its revenue. At Infosys, CEO S. Gopalakrishnan acknowledges that frontline innovation--telling the client there might be a better way--hasn't been ingrained in its culture. So in addition to training people to do that, the company is making it a requirement on more projects. "Maybe they aren't proactive, but when you say explicitly, 'You must come up with ideas,' they do," he says. Infosys, like most big outsoucers, also has an applied tech lab, where researchers work with clients to "co-create" products or software. Most interesting, though, is the relationship it has with about six major client companies. They're not working on a specific project but instead are partnering with Infosys to explore approaches important to their industries--which range from retail to insurance to manufacturing. Research includes cloud computing and Web 2.0 collaboration, information management and analytics, mobility, and automation. Infosys owns whatever intellectual property comes out of this work (sometimes with a period of exclusivity for the client). "The IP belongs to Infosys, but for the client it's more important to get a glimpse into where the technology is headed," says Subu Goparaju, a VP who heads the company's software labs. "And they get to influence our R&D agenda." Such close ties are rare. More than a third (36%) of people we surveyed say "lack of innovation" is one of the biggest problems in working with their Indian outsourcers, while just 10% cite innovative ideas as a big benefit that would keep them working with those service providers. Outsourcers that can deliver are going to stand out from the crowd. MORE DEALS TIE PAY TO RESULTS Indian outsourcers are inking some deals that tie their pay to a client's business outcome, like increased sales or lower costs. It's not commonplace, with just one in five customers saying they're tying outsourced project costs to business goals, our research finds. But pay-for-performance is where the most forward-thinking CIOs are pushing India's outsourcing industry. Darryl West, CIO of one of the United Kingdom's largest banks, the 67,000-employee Lloyds TSB, wants outsourcers to measure success less on service-level agreements and instead use more relevant measures. Lloyds has started challenging its Indian outsourcers to show capabilities in higher-end work, said West, speaking last month at the Nasscom conference for India's IT services industry. How far will outsourcers go in sharing risks and rewards? West noted that about 90% of the bonuses he and his team get are tied to a survey of Lloyds senior managers that focuses on perceptions of how IT is performing, not on IT-centric metrics such as server uptime. West's question for outsourcers: "Would you be willing to be judged on a summary like this--which is much more of a perception measure than a quantitative one--and how much of your fee would you want to tie to that? Because my bonus and my team's is tied to that." In our survey of 430 IT pros working with Indian outsourcers, 20% cite the "ability to tie project costs to business goals" as a key benefit that would prompt them to work with an outsourcer again. Thirty-one percent cite "understanding our business and industry" as an area that's improved significantly over the past year. At Infosys, that kind of industry knowledge is critical for it to ink pay-for-performance deals. For example, it's working with an automaker whose data was out of sync with its dealers, so that 3% of the cars that dealers ordered had options the manufacturer, which sells about 4 million vehicles a year, couldn't deliver. "We signed up to reduce errors 80%, and part of our fee is tied to that," says Rajesh Rao, associate VP and head of Infosys' enterprise services group. About half of the group's deals have some element of outcome-based pricing. At KPIT Cummins, a $150 million-a-year IT services company based in Pune, India, pay-for-performance and variable pricing deals have grown in the past two years to about 20% of all deals, says president Pawan Sharma. These kinds of pay-to-perform deals highlight the increasing value of industry-specific knowledge, says Infosys' Rao. That's what it takes to win these deals--and write profitable contracts that have attainable goals. Says Rao, "Gone are the days when we could say our primary attribute was our global delivery model and our knowledge of SAP," he says. "Those things won't even get us invited." TALENT CHALLENGED, TRAINING OBSESSED Indian IT companies are, in part, in the education business. And they had better stick with that job, since high turnover and inadequate skills are among their customers' top complaints. About half of respondents to our survey of IT pros working with Indian outsourcers say underqualified people assigned to projects is among the biggest problems; 41% say retention of key people has gotten worse in the past two years. India has lots of world-class IT pros, but they're spread thin: One-fifth of respondents say the skills of people on their projects exceeded expectations; an equal number say they fell woefully short. This is despite training programs that put most U.S. companies to shame. Infosys will spend $170 million on training this year, with new college grads getting six months of on-site training. Wipro can train 5,000 people at a time at its Bangalore campus, and all employees get at least nine days of training a year. Less than half of U.S. IT pros get company-paid training, according to our 2007 Salary Survey. Indian companies aren't keeping their training tools to themselves. Microland, a pioneer in remote infrastructure management, created a Web-based virtualized environment that mimics customer infrastructure, for training and problem-solving. "The only thing I can't simulate is the load," says CTO K.S. Ganesan. Now it's considering offering it as a service. Infosys CEO S. Gopalakrishnan sees an opportunity in selling "learning services," including training it uses internally. Training can only do so much. The average Infosys employee is 27 years old. With India's IT industry so young, there just aren't enough experienced people to keep up with its growth. Count on the training obsession--and the customer complaints--to continue. INDIA'S IT LOOKS INWARD The farmers of Brahmanwada, a village in the central Indian state of Maharashtra, use a shared Internet connection, provided by the Indian conglomerate ITC, to check if that day's crop prices make it worth hauling their goods to market for sale. Over the past seven years, ITC has installed 6,500 Internet-connected computers in villages across nine Indian states. The program, called e-Choupal, is a rare example of India's booming IT sector helping people in rural areas. India's IT services industry grew up serving the West through low-cost outsourcing, and most providers still get at least half of their revenue from the United States alone. Now the industry is starting to look inward--seeing opportunities from closing the digital divide between urban and rural areas to helping thriving businesses keep pace in a domestic economy expanding 9% a year. IBM does about $1 billion in revenue a year in India. IT adoption there is in its "first generation, maybe 1.5," says Inder Thurkral, VP of emerging market strategy. Yet with customers like mobile phone company Bharti Airtel, which adds 2 million subscribers a month in India, it's breaking new ground, doing some of its biggest deployments of middleware technology for quickly adding services to a network. "For them, IT is clearly a way to scale their businesses," says Thurkral. At ITC, agribusiness CEO S. Sivakumar hopes to use the e-Choupal network to deliver credit, health care, and education services. This year, it plans to sell vocational courses, such as basic computer skills and retail training. "We're seeing it as a universal network that connects rural India to the rest of the world," he says. India's IT talent has grudgingly won over the world with its IT prowess. Now it's poised to do the same closer to home. OUTSOURCING'S REAL RETURN Toyota Financial Services has been one step ahead of the pack in its outsourcing in India. It set up an operation with Tata Consultancy Services in Calcutta five years ago, when most companies thought India's tech center, Bangalore, was as exotic as they could handle. The payoff is that staff attrition in Calcutta is half what it is for TCS overall. Now Toyota Financial Services CIO Shaun Coyne wants to push what started as a cost-saving relationship to higher value. "If India wants to do what's next, look at what problems we're trying to solve and get business solutions to the business units more quickly," Coyne said at the Nasscom conference for India's IT services industry last month. TCS staffers do application management and support for Toyota Financial Services, Toyota's U.S. lending arm, and remotely support the infrastructure running its U.S. data centers. For Coyne, two opportunities loom. One is economies of scale: Bring more of Toyota's operations around the world onto this remote management platform, without adding people. The bigger opportunity is better analysis to understand things like a customer's lifetime value to Toyota. If Toyota Financial's CRM data and support are consolidated, TCS could have a role in improving analysis. The best CIOs go into outsourcing looking for more than cost savings. Robert Willett, Best Buy's CIO and CEO of its international operation, cites five reasons to outsource: new capabilities, speed, lower risk, skills a company doesn't have in-house, and lower costs. "If you move cost to No. 1, you might as well not outsource," Willett says. But most companies aren't getting those advantages from outsourcing, our survey of 430 IT pros finds. Only a third say access to tech skills is a key benefit they're getting that would draw them to do business again with an Indian IT outsourcer. Only 21% cite speed as such a benefit, while 30% say projects taking too long is one of the biggest problems. These uneven results might explain a certain ambivalence toward Indian IT outsourcing. In the next two years, 43% will increase their use, while 26% will decrease. Yet 45% say they believe less in the benefits of working with Indian outsourcers than two years ago, while 31% believe more. Companies like Toyota Financial invest with an eye on the long-term, as well as short-term, returns. Not everyone may be so patient. SOFTWARE STARTUPS, SOCIAL STIGMAS When Siva Prasad Cotipalli quit a plum marketing job with Oracle India to create a startup, his mother didn't worry about his business plan. "She's worried if I'll get married," says Cotipalli, founder of a two-person Internet-based microlending company, Dhanax, in Bangalore. In India, would-be in-laws prefer to see Infosys or IBM on the business card. Cotipalli's story says much about the entrepreneurial environment for software in India. Jumping from big companies to startups, with their lower salaries but the hope of a big payday down the road, is just beginning to be considered a reasonable career move. "There's a lot of social pressure," says Cotipalli, to work for a name-brand company. He and his colleague, former GE employee Prashant Mishra, are building Dhanax out of a passion for how microlending could help India's farmers and small-business people. They also see a huge opportunity in an underserved market. Manav Garg says it's still hard to recruit people to work for startups, but it's getting easier. His Bangalore company, EKA, has 95 employees behind its enterprise software to facilitate buying and managing of agricultural and metal commodities. But he, too, knows of an employee who faced the marriage problem. "So he left, joined IBM, and got married in a year," Garg says. India's software startup environment is getting better--more venture and angel funding, and more professionals taking the entrepreneurial leap. Meantime, some U.S. software veterans with Indian roots are heading home to start companies. For those would-be in-laws, though, it'll take a few more software millionaires before they're convinced.