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Stephen Dunn

T.E. Raja Simhan

Stephen Dunn, Managing Principal, Everest Group Europe, a global consulting firm, has a blend of information technology, process and business experience built on nearly two decades of working with suppliers, and as a consultant and strategic advisor for global companies. His client engagements for Everest include leading the re-structuring and re-negotiation of an IT contract with around $2 billion in annual spend for a European government.

He believes that for at least 20 years India will be an attractive destination for offshoring IT services, and Europe offers the biggest market opportunity. However, as cost goes up in India, more work will move to other geographies and increase the pace there. Offshoring is spreading across Asia, and all the countries are experiencing robust economic growth.

On the sidelines of the recent Nasscom BPO Strategy Summit 2008 held in Bangalore, Dunn discussed with eWorld the business opportunities and challenges for Indian companies, in Europe. Here’s his take: Europe – huge business opportunity

The European Union is the same size as that of the US with the addressable market for offshoring estimated to reach $220-$280 billion by 2012. But, you need lots of time and investment with challenges on supply side (labour) and working with new and existing customers over time to gain trust and solve business problems.

Compulsion for European companies

Offshoring and near-shoring are important elements of transforming an operational model. Companies will have the right business opportunity if they take a long-term view without changing the composition of their workforce. For instance, most German companies are growing at 5-8 per cent a year but have staff attrition of 3-4 per cent a year. Can we lay off 500 people and move jobs to Poland or India? This can be done, but is difficult and expensive. However, over time, if the company is going to rebalance the workforce between high-cost and low-cost locations, the shift can be done, taking advantage of the year-on-year growth instead of doing additional hiring in Germany or Warsaw. But, as opposed to the US, where transition and transformation can be done in 9-15 months, it may take five years in Germany.

Europe — a tough market

The stringent set of labour laws make it difficult to offshore work, by local companies, and there is the language barrier. Europe is a difficult market to penetrate and companies should have a strategy for each country. It is difficult to sell in Germany if your headquarters are in France or Italy.

US versus UK

Bank of America or Citigroup have done a significant amount of offshoring. But three insurance companies, including Aviva in the UK, have offshored 15 per cent each or more of their work.

In the US, no company has offshored over 7 per cent of their work. Headcount-wise, US companies may have a lead, but in terms of the quantum of work, the UK companies have demonstrated far greater amount of offshoring.

People tend to believe that European companies are very conservative and slow to offshore. To some extent, that’s true. However, there are companies that have been aggressive in cost reduction efforts, including offshoring.

Cost advantage

Depending on what research report you read, offshoring saves you 15 per cent; you can hear it as 75 per cent or it could say there is no saving.

Everest has put out around 30 case studies and found that 87 per cent of companies saved at least 30 per cent. The reason why there is a wide variation in saving is not a subject that is talked about a lot. It is a combination of things. If I take 70 per cent of my accounts payable function offshore, I save a lot more money than if I take only 10 per cent. A lot of companies, while offshoring, redeploy people to move things. Moving work from Germany to Prague gives different savings, than to India.

Right strategy

The first step for an Indian company is to have a near-shore centre in Eastern or Central Europe. Build sales capability in each of the European countries. You can’t put offices in all 25 countries, but pick one or two and stay for the long term. You can’t have a short- term perspective and expect business to flow on Day One. Local companies will initially show resistance, and not be willing to invest time in establishing a relationship. Lots of doors are going to be closed or take many years to open.

Challenges in Europe

There are issues on the demand size (business) and supply side (employees) for Indians.

The supply side issue in Central and Eastern Europe is the same as in India. While India has got a large population, how many graduates can take the positions? There are issues such as wage inflation in India, and in Central and Eastern Europe too. On the demand side, there is lack of clarity on the level of saving.

There is a question of sustainability of the labour arbitrage, which depends on which source of destination you are talking about. For most destinations, it is going to last for at least 20 years.

Learn the lessons

There is always pain involved in expansion. Whenever you move to any new market, there are lessons to be learned. Accenture and IBM have the advantage of having local operations. The challenge they face is that their local employees do not have the experience of nearshoring and offshoring that Indian companies have.

raja@thehindu.co.in

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