For the past decade, Indian outsourcing firms have talked about ‘moving up the value chain’ as a way of enhancing their service offerings, protecting their outsourcing dominance and increasing their opportunities for profitability. These long-term moves have important implications for client firms, since they imply a shift in how client firms and business leaders engage with these outsourcers. While Indian outsourcers have prepared for this shift, it seems that many business leaders on the client side have not. Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work, and how to prepare to leverage high-value outsourcing opportunities for their firms. The value chain rhetoric and reality
The last decade has brought enormous changes to the Indian outsourcing industry. The high corporate IT spending of the late 90’s, fuelled by global investments in hardware and software to cope with Y2K issues, and later the dot.com bubble, created important conditions for Indian outsourcers to thrive. But the development of the outsourcing services industry initially focussed on low cost, high quality labour. This strategy has since become unsustainable in India, as the inevitable pressure from alternative low-cost, high-quality labour markets such as Russia, the Philippines and China increases. With nearly 6 percent of India’s GDP accounted for by this industry, the pressure is on to change strategy.
Concurrent with their successful growth over the last decade, Indian vendors like Tata, Wipro and TCS, aware of the long-term problem of relying solely on a low cost/high quality advantage, have sought to move into higher value-added work as a solution. For at least the last 10 years, an almost universal theme in the Indian marketplace has been the crucial need for vendors to “move up the value chain.” So, simultaneously with building process maturity in their outsourcing practices, the last decade has also seen, to varying degrees, vendors who have sought to move from low value-add services like software maintenance or call centres, to increasingly higher value-added services such as systems integration, product development, R&D, market entry and consulting services. Such services enable vendors to take on increasingly partnership-like, strategic roles with their clients instead of being seen as mere vendors.
The rhetoric of moving up the value chain has been persuasive as well as prolific. But the reality bears scrutiny. What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift? Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that “moving up the value chain” means different things to different participants in India. Second, Indian outsourcing firms generally have extremely sophisticated knowledge-capture, -sharing and -cultivation activities. These capabilities enable creativity and create strong a connection between the sales people and IT service core of their businesses, which in turn creates the internal capabilities to provide high-value service. Third, IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves. 1. The true meaning of “Moving Up the Value Chain”
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers. For some, it means an emphasis on the vendor’s internal value chain (undertaking process or product changes, which improves the key metric, or ‘the revenue per employee,’ by decreasing headcount costs. (This is a move towards non-linear growth). Implementation of mature processes like the Capabilities Maturity Model, along with internal process re-engineering, are some of the models for accomplishing this move, which means keeping the same revenue base but decreasing employee head count to perform the same level of service. This is a ‘do more with less’ strategy that focuses on employees. Vish Iyer, head of Asia-Pacific Operations of Tata Consultancy Services, says that the goal of a non-linear growth model is to “leverage our intellectual property, not our head count.”
For other outsourcers, moving up the value chain means a focus on the external value chain, thus creating knowledge-based, high-value, complex offerings from professional services. In short, this means getting paid for solutions instead of getting paid for people – a revenue focus. This is in contrast to the historical focus of performing repeatable, highly mature, outsourced services across a variety of industries, services that emphasized replicating and refining best practices.
The effort to move up the value chain by undertaking more sophisticated, more deeply strategically embedded, complex offerings implies the need for a totally different set of internal capabilities in outsourcers. What is crucial for success solution definition and creation includes capabilities like innovating for each project, developing an internal expertise and strong processes for learning new capabilities, creating tight linkages within the outsourcer between sales and service professionals, and ensuring tightly woven external linkages with the business leaders on the client side, rather than the IT leaders, as has been typical. Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a ‘technology company’ to a solution provider. S. D. Shibulal, the new CEO of Infosys states that: “I clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporation”.
Infosys is not alone in focussing on service innovation. In April of 2010, MindTree, a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players, launched a “5*50” initiative3. Intended to create intrapreneurship amongst employees, the idea is to cultivate employees’ creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years. Four months after launch, the first incubated business idea was launched – digital surveillance – a high-value solution aimed at security organizations and government services. 2. Sophisticated knowledge management
My second observation relates to the sophistication of knowledge- management activities within Indian outsourcers. Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people. McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration – particularly in terms of blogs, wiki’s video sharing and podcasts. Such technology extensions enable the discovery, aggregation and sharing of knowledge, the sourcing of expertise, and a reduction in costs and time for sharing innovative ideas. Some Indian firms have been so successful in this activity that they’ve been able to commercialize their innovations into a new service offering. For example, Cognizant, which has most of its workforce in India performing offshore outsourcing and systems integration work, developed an excellent knowledge-management platform. The platform, called Cognizant 2.0 or C2 (reported in July-August, 2011 Ivey Business Journal), proved so popular at Cognizant’s 2009 conference that clients expressed an interest in buying it. Such strong knowledge-management practices facilitate the kind of knowledge work, collaboration, creativity and innovation required to provide excellent, solution-based product offerings to clients, while creating the right internal conditions to move up the value chain and extend service offerings. 3. IT savvy
My third observation is that a skill that appears in strong supply in Indian vendors, yet is in short supply in client firms is IT savvy. IT savvy is a set of behaviours, knowledge, structures and routines that reflect the capability to leverage technology to create business value. This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain. However, it can also be seen as a crucial individual leadership skill. IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy, and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments.
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations. IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients. This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams, something which in turn enables them to go beyond re-creating and replicating mature project work.
Strong knowledge management practices, investments in leadership development and training, and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions. For example, Tata Consultancy Groups’ extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients. Wipro has won numerous awards for leveraging knowledge management as a way of doing business ,and a business routine that is directly involved in value creation within the firm and for their customers. In 2010, having won the Asian MAKE aware (Most Admired Knowledge Enterprise), Ved Prakash Chief Knowledge Officer of Wipro said:
“Knowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders. Our customers have benefited from enhanced knowledge retention, organizational best practices, access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro. This award is indeed a testimony to our efforts in this direction over the years.”
Since excellence in knowledge management requires strong business-IT linkages, it can be seen as IT savvy in the form of behaviours, knowledge bases and structures which create value. Unfortunately, the existence of IT-savvy business leadership within the client firms is still a rarity. While there are certainly exemplar firms that get IT right (see Weill and Ross’ IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem, and so continue to experience alarming IT project failures.
These failures can be attributed to a lack of IT savvy in business leadership. This presents a pretty substantial problem for outsourcers, since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting, especially on the high-value service-development and the service-delivery phases. But while Indian outsourcers need IT-savvy business people to partner with within their clients, finding them is another matter.
Thus. the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices, of which Western firms can take advantage. These include consulting, R&D and systems integration services. and work practices like sophisticated knowledge management and IT-savvy business leadership. Below are some specific suggestions for learning from these high-value outsourcers.
What can you learn from high value Indian outsourcers?
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services. From a management practice standpoint, there is much to be learned from their sophisticated level of knowledge management, including expanded opportunities for deploying social media tools. We can also learn from their internal practices, which have developed a strong internal IT-savvy capability – a crucial capability in a world where technology touches almost everything firms do. With these practices strengthened, client firms will have laid a stronger foundation for better partnerships with high-value outsourcers, who develop and deliver complex consulting and valuable solutions instead of mere transactions. In some respects, this implies that for the high-value chain strategy to pay off, Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships.
As mentioned, Indian firms lead North America and Europe in their use of social media in the firm, especially for cultivating value-creating knowledge management activities. More firms need to study and copy these practices. Some are already innovating along these lines. For example, Best Buy and Intel are leveraging wikis, Twitter, RSS, internal Facebook-like social networks, blogs, even prediction markets, and open innovation techniques. But judging by the internal social media/social computing adoption rates, more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake.
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction, social media KM extends the visibility of networks, which helps source the right expertise. Such visibility also creates more ‘processed,’ user-generated content beyond uploaded PowerPoint presentations. Blogs, wiki-based collaborations, user content tagging and RSS feeds allow users to create their own content, to find similar content in search terms that are meaningful to them, and push out relevant news that they control. In moving up the value chain to more knowledge-intensive, innovation-demanding forms of services, high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools, processes and capabilities.
With respect to IT-savvy in business leadership, firms should seek to improve their own leveraging of IT. As mentioned, IT-savvy firms and business leaders undertake certain behaviours, develop certain types of knowledge and create structures and routines which bind business and IT together. Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings, accepting cross-appointments between IT and the business, accepting personal responsibility for designing business processes, and assuming responsibility and accountability for IT spending and value creation.
IT-savvy business knowledge includes process standardization and integration competence, knowledge or enterprise architecture and strategy enablement, proper business-case development, and systems and data reliability and governance.
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT, reward systems, training, governance and decision rights which separate infrastructure from applications, and business roles for scanning and technology updating.
High-value Indian outsourcers have had to develop these capabilities out of necessity. To survive and thrive in the highly competitive outsourcing industry, they needed to develop superior capabilities to manage client relationships and to create new business solutions. We can learn a lot about develop IT savvy business leaders at home from their activities. Readying yourself for leveraging high value chain opportunities
With sophisticated knowledge sharing and IT savvy in place, client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers. Activities like systems integration, end-to-end business solution development and deployment, R&D, market entry and product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services.
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer. However, this remains a large stumbling block for Indian outsourcers. In order to move up the value chain, Indian outsourcers must move away from typical partnerships with their client’s IT leadership and staff, and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them. It’s time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage. They know what they are doing. Do you?
Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]