Tech industry moving towards SGO irrevocably, says expert.

Nearly five years ago, when I first delineated the concept of Second Generation Outsourcing (SGO), a business model that aspired to revolutionise the existing model of IT services and outsourcing, there were scanty indications that the industry would embrace such an approach.

An unprecedented recession, slowing growth, declining profit regimes, and escalating customer expectations about the differentiating advantages of IT outsourcing are now impelling the industry, desperately in need of reinvention, to search for new ways of doing business. There is now gratifying evidence that the industry is progressing irrevocably against the following significant markers of SGO.

Business Solutions

The IT solutions of yesterday are transforming into the ‘Business Solutions' of tomorrow. Such complex business solutions would assume responsibility for improving the customer's business performance in tangible, measurable terms. The concern of business solutions would be superior business outcomes for the client, not merely low cost of IT management.

Infosys, with its Infosys 3.0 initiative, is significantly fortifying its consulting capabilities. Cognizant recently attributed its industry-surpassing growth to its investment in Consulting. The mid-sized IT companies too are effecting changes to include business transformation capabilities. The BPO companies realise that they cannot be pure plays anymore. The acquisition of Headstrong by Genpact is a strong signal about the inevitability of business solutions.

Two borders that defined first generation outsourcing services will be transformed in the second. The artificial borders compartmentalising Consulting, IT and BPO services will be obliterated to create an amalgam of services that would manifest as powerful business solutions. The rigid boundary demarcating the client from the service provider will become more malleable as innovative partnerships between the client and the service provider are forged.

Collaborative Service Delivery

Collaborative service delivery was the marker of SGO that was greeted with the greatest scepticism when I first proposed it. Partnering with other service companies to deliver solutions was apparently anathema, particularly to the large companies. Today even large firms are graduating from simple models of sporadic sub-contracting to complex delivery models that hinge on substantive collaboration with peer service firms. Even very large firms realise they cannot be masters of every competence and have to factor in the efficiencies of niche firms wherever they might be in the world. Also, the quest for non-linearity in revenues is forcing large firms to lower their fixed employee costs as a fraction of their sales and outsourced commoditised tasks.

What happened in outsourcing in the manufacturing industry in the last several decades, with several OEMs making only between 20 per cent and 30 per cent of the parts of the product, is gradually overtaking the IT outsourcing industry too. Cognizant has spent nearly $10 million in the construction of its collaborative service delivery platform, Cognizant 2.0. The rise of firms such as Magna Infotech is incontrovertible proof that the collaborative service delivery model is here to stay. There is speculation among industry experts that the outsourced work by large IT companies could turn into a $2.5-billion industry in short order.

Value-based Pricing

New generation business solutions that focus on improving the client's business performance would require the service provider to take risks with the client and share in the rewards.

Value-based pricing or Outcome-based pricing is rapidly evolving to compete with conventional Time-and-Materials and Fixed Price contracts. IBM's contract with Airtel that makes its earnings dependent on Airtel's fortunes is now part of the legend. It was a harbinger of what is now becoming an entrenched trend. The more sophisticated among the BPO companies have greater experience in Outcome-based pricing than traditional IT service firms. However, it is early days for this pricing model in terms of sophistication.

The dynamics of Value-based pricing are profoundly different from that of traditional pricing mechanisms. To stitch together Value-based pricing mechanisms with the appropriate organisational culture may take as much as a decade. With Value-based pricing, the compact with the customer is being irreversibly revised.

Cloud Computing

To completely embrace the power of Cloud Computing would require nothing short of a tectonic shift both on the client side as well as the service provider side. Episodes such as Amazon's recent well-publicised troubles with its Cloud Computing services are only the birth pangs of an era whose time has come.

The greatest commercially viable work has been done in the hosting of applications and platforms. TCS, among large Indian IT providers, with its initiative iON is targeting revenues of $1 billion from Cloud Computing services of this kind addressing the needs of principally the small and mid-sized clients. While the gains from the area are impressive, the greatest leverage from Cloud Computing would be secured when service providers invent radically new means of delivering their services and clients transform to a seamless asset-based and rented architecture.

The leadership churn at the big and mid-sized IT and BPO companies is, at least in part, driven by the challenges of tomorrow that are dramatically different from those of yesteryear. The next two years may restructure the industry more than the previous decade did. Keep a watch for changes under these markers!

The author is Founder, Anantara Solutions Private Ltd.

(This article was published on July 3, 2011)
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