Aparita

The Toronto Star, [06/02/2003]

It’s the latest twist on tech outsourcing. Satyam sets up Canadian operation.

Special to the Star

For someone who’s been in Canada for a little over two months, Sanjay Tugnait has settled in rather well. He’s still getting used to the little things, like Toronto’s temperamental weather, and the coffee.

“It’s too strong for me,” he smiles, easing back in his company digs at First Canadian Place. “I have to run down and get myself a mochaccino.”

Tugnait is the country manager for Satyam Computer Services Ltd. (satyam.com), a global consulting and IT services based company based in India. Satyam is India’s fourth largest technology-based services company, whose competitors include the likes of Infosys Technologies Ltd., Wipro Ltd. and Tata Consultancy Services. Satyam’s roster of clients includes more than 270 global firms - among them, four Fortune 10 and 76 Fortune 500 companies.

Satyam was started up more than a decade ago by current chairman Ramalinga Raju, 46, whose family owned a small textile and construction business in the Indian province of Andhra Pradesh. But the tech company soon left the family business behind in terms of growth. For the quarter ending March 31, 2002, Satyam’s revenue grew 12 per cent from the previous quarter to $343.4 million (U.S.).

Tugnait is heading Satyam’s newly created global development centre in Toronto, the latest in a series of global development centres in India, the U.S., the U.K., the Middle East, Japan, Singapore and Australia. In doing so, Satyam has joined companies such as Infosys Technologies Ltd. and Wipro Ltd. in increasing India’s IT presence in Canada.

While the Infosys global development centre opened in Toronto in 2000, Wipro opened its global development centre in Windsor in 2002.

Satyam’s Toronto operations were underway early this year and Tugnait’s schedule is already chock-a-block full of appointments.

“Canada is an extremely important market for us,” says Tugnait. “We are very excited about expanding our market to North America. There is a definite attraction in that.

“Also in terms of building an alternate disaster recovery site and providing business continuity to our clients, especially for our U.S. clients, Canada offers great incentive,” he adds.

Currently, U.S. clients constitute 67 per cent of Satyam’s international clients. Canada, in comparison, makes for a much smaller percentage. But Canadian companies, especially in the manufacturing and financial services sector, are a great potential for Satyam.

Traditionally, technology service companies such as Satyam have operated out of India. The modus operandi has been to negotiate offshore and outsourcing projects - usually long term contracting out of non-core and core business processes to an outside provider - and ship the work to India. Or allow access to experts sitting in India into the mainframe of a company, say, in Europe.

Several factors help weigh the scales in favour of offshoring and outsourcing, says Tugnait.

“Labour arbitrage and cutting down your infrastructure costs makes a difference of almost 20 to 40 per cent, sometimes more,” explains Tugnait. “Because we are a very stable company in managing offshore projects, the cost of failure also comes down.”

So why the expansion outside of India?

“Indian (IT) companies are expanding globally in terms of sales and marketing and customer acquisition,” says Tugnait. “At the same time, because of the political situation and some of the uncertainties present in the current world economic environment, we are building alternate sites and development centres.

“In terms of sales and marketing, it’s quite simple. You need to expand and hedge your bets. You can’t be America-centric. Moreover, existing clients of the company are expanding into other territories. So, you need to follow the dollar. Many of our (U.S.) clients have bases in Canada and were asking us to set up a centre here.”

The Toronto centre is also mindful of Satyam’s Canadian clients, says Tugnait.

“Often times you’ll have a client who wants a percentage of the work off-shored, but the rest to be done in their backyard.”

Canada also provides an excellent opportunity for companies such as Satyam to set up “near-shore” operations.

“Because of the cost arbitrage with the U.S., cost of living, same time zones, and the proximity to the (auto-industry) in Detroit, we can operate a near-shore centre for doing work such as application development and maintenance for our U.S.-based clients,” explains Tugnait. “The near-shore development centre is actually a big priority for us.”

Also Indian IT companies have started to scale up their offshore and outsourcing niches by adding high-end consulting and support systems.

The hitherto soaring Indian IT sector has recently been jolted out of complacency. There’s been a stall in the boom to offshore/outsource services to India and an increase in competition on the application development front from China, Eastern Europe and the Philippines.

In April this yea r, Infosys announced a lower-than-expected 11.8 per cent growth forecast for the next year. In the same month, Wipro announced weaker than expected earnings of $170 million (U.S.) and projected a 4 per cent revenue increase for the current quarter. The announcements threw the shares for a tumble.

Although Satyam posted flat quarterly earnings, its stock traded up 6 per cent, also raising rival shares.

The Indian IT industry, then, is adding to its advantages by providing end-to-end services and global development centres. Besides resources such as code-gurus who can solve tech problems with a snap of the fingers, companies such as Satyam are now offering high-end consulting systems architecting and even business-process support.

Satyam, with a 1,000 strong team focusing on SAP alone, is an early entrant into this developing trend of packaged implementation.

Nevertheless, there has been a growing momentum in the backlash against offshoring and outsourcing.

For example, a new customer service centre scheduled to open in New Jersey would repatriate an overseas customer services operation based out of India, after the department of Human Services negotiated a deal with eFunds Corp. of Arizona.

The monthly cost for running the centre, which answers questions posed by New Jersey welfare and food stamp recipients, will increase $74,000 (U.S.) over the current arrangement, officials said.
Similarly unions in Australia attacked their nation’s telecom company Telstra for outsourcing arrangements with Indian companies Infosys and Satyam.

Despite the backlash, however, experts say that offshoring and outsourcing is here to stay.

The American accounting industry has recently begun using India’s outsourcing and technology services to process American clients’ tax returns, in some cases replacing work traditionally done by U.S. accountants. Although in its initial stages, experts predict the project might soon become the norm for accounting firms to deal with individuals’ taxes.

Tugnait emphasizes that Satyam will also be adding to the Canadian economy.

“We’re setting up a centre here,” he says. “We’ll be recruiting local talent, from administration, to IT consultants to management positions. We’re not here to divert funds from Canada, we’ll be contributing to Canada.”

Toronto Star, [02/24/2003]

It began as a way to harness cheap overseas labour And it’s evolved — can an out-sourced CEO be far off?

Special to the Star

NEW DELHI-Night has coated New Delhi in its pitch black blanket, but the day has just begun for Subir Arora. Dressed casually in jeans and a shirt, Arora drives about an hour from his house in Kalkaji to his office in Noida. He works as a sales manager at FCS Solutions Ltd, the Indian arm of an American recruitment agency, managing a team of employees who call up American firms to fulfill their staffing needs for IT consultants.

“I work according to EST (Eastern Standard Time) because most of our clients are located in the east coast,” says the 26-year-old Arora, stifling a yawn as he whizzes down the wide bridge across the river Yamuna that separates New Delhi from the satellite town Noida, a growing hub for offshore development work. “Here, in Delhi, my hours are from 7:30 p.m. to 4:30 a.m and 6:30 p.m. to 3:30 a.m. during the summers.”

The hours are the only downside for Arora since it means most of his social activities have to be accommodated during Saturday. His position and salary more than make up for that small inconvenience. While his salary of 300,000 rupees ($10,000 Canadian) may seem peanuts compared to North American salaries, it affords Arora a decent lifestyle in India besides all the perks of the jobs.

“This is the biggest thing happening right now,” he says enthusiastically. “And it can only grow from here. I joined this work because of the future prospects of India for becoming a hub for business process outsourcing and IT enabled services.”

Business Process Outsourcing, or BPO. IT Enabled Services, or IT-eS.

These are magic phrases that provide people such as Arora the opportunity to join multitudes of upwardly mobile young Indians who do back-end work for North American companies. Similar set ups can be seen in China, Philippines, Costa Rica or Hungary.

In simpler terms BPO and IT-eS could be explained as long-term contracting out of non-core and core business processes to an outside provider.

So, a company somewhere in Manila might do the accounting of a firm in New York. Engineers sitting in Bangalore are doing research and development for international tech giants such as Texas Instruments, Intel and Hewlett Packard. And an architect in Budapest might draw inspiration from his European environs to design a house for you in Toronto.

Welcome to the latest development in globalization.

And forget about the cheap shoes made in India, cheap electronics made in China or even software coding and credit card processing done in Asia. Now, thanks to the Internet and the bridging of the digital divide, all kinds of knowledge based work can be done anywhere in the world.

Supporters of this phenomenon call it the next step towards building a global economy. In fact, Mohanbir Sawhney predicts that it won’t be too long before global corporations as we know them today will change the way they function.

“The notion of a parent company with subsidiaries around the globe that are replicas of the parent company has started to become an antiquated notion,” says Sawhney in a telephone interview from Illinois, home to Kellogg School of Management where Sawhney is the McCormick Tribune professor of e-commerce and technology.

“What you’ll probably see in the near future is the rise of what I call a differentiated network company. That is, global companies organized in terms of capability clusters distributed around the world. So a company may have its R&D headquarters in Israel, call centres and customer support centers and accounting done in India, and human resources done somewhere else. The Australian subsidiary could do e-governance, because Australia has done a lot in terms of automating governance. And, of course, marketing and sales around the world.”

It’s a subject Sawhney elaborated upon at an event held by TiE, www.tie.org, at the Royal Bank Conference Centre in Toronto last week.

Sawhney was the keynote speaker of the three-member panel. The other two speakers were Richard Garnick, chief executive of Americas for Wipro Technologies and Rakesh Puri, vice president client management of EXL Service, one of the largest BPO providers in India.

TiE is a not-for-profit organization created in 1992 in the Silicon Valley for the advancement of entrepreneurship. Currently TiE has 22 chapters across the globe and about 5,000 members.
Citing the example of GE Capital International Services (GECIS), Sawhney posits the future dynamics of the outlocation of BPOs.

“The GECIS Indian operation is today providing 450 processes to 15 of the top 20 GE operating companies worldwide,” says Sawhney. “And recently, GECIS India hired Japanese people in northern China to serve Japanese markets. So now the subsidiaries are trading among each other. India can provide customer service to Japan, in turn buying R&D from them.”

Outsourcing of work by companies is already happening, he adds. Handspring, for example, a company that makes PDAs (personal digital assistant), doesn’t manufacture, design, ship or support their products. It’s all done through a network of partner companies and Handspring manages the network.

“It’s like a business web. The metaphor I like to use (for outsourcing) is that of a symphony orchestra,” says Sawhney. “The conductor doesn’t sing or play an instrument, he just waves a wand. But he takes the applause at the end.”

In fact, the prospects are so lucrative that talking to Business Week magazine on the `new global job shift,’ Forrester Research Inc., analyst John McCarthy predicts at least 3.3 million white-collar jobs and $136 billion in wages will shift from the U.S. to low-cost countries by 2015.

Europe is joining the trend, too. British banks like HSBC Securities Inc. have huge back offices in China and India; French companies are using call centres in Mauritius; and German multinationals from Siemens to roller-bearings maker INA-Schaeffler are hiring in Russia, the Baltics, and Eastern Europe.

Therein, lies the rub.

Critics of this latest wave of globalization say outlocation and outsourcing leads to corporate downsizing. Already, New Jersey legislators are pushing a bill that would block the state from outsourcing public jobs overseas. At Boeing Co., an anxious union is trying to ward off more job shifts to the aircraft maker’s new 350-person R&D center in Moscow, according to Business Week.

Paying a highly-skilled software developer in a developing country substantially less than what a North American developer might earn might suggest exploitation. And creating markets in the developing world smells like neo-imperialism.

There will be a painful transition period, Sawhney agrees. But companies don’t really have a choice in face of a competitive imperative to cut costs, he adds.

“I’ve been talking to Boeing,” says Sawhney. “They are thinking about outsourcing manufacturing to other parts of the world and getting cheap aerospace engineers from Russia but the union is up in arms about it. But, even if Boeing doesn’t do it, you think Airbus won’t?”

Instead of raising such alarmist notions of disappearing jobs, American politicians and industry experts should be devoting their time, energy and money into the American education system, says Sawhney.

“Outsourcing and outlocation is going to happen, like it or not,” he says. “But you still have time. (Policy makers) in the States should be thinking ahead, building up a quality human capital. They should be figuring out ways to re-skill people.”

The notion of exploitation of skilled labour in developing countries doesn’t arise when you compare costs of living.

“The engineer is India, who might be earning $20 an hour in India compared to $100 in the States, is saying thank you very much,” says Sawhney. “He earns a decent salary at a lower cost of living and is enjoying a better lifestyle with his family and community over there.”

Currently, only a small percentage of work from the West is being outsourced to developing countries. Outsourcing experts say it will take about another decade until there is a significant change in that equation.

The real issue, then, appears will globalization make the world a better place? Whether the standards of living between the developed and developing countries will eventually balance out?

That, in turn, depends on whether the shift works to ameliorate the conditions of those who live below the poverty line in countries such as India, Philippines or Costa Rica - the common man who doesn’t have access to knowledge based jobs.

For the moment, however, recent university graduates such as Arora are happy to be the beneficiaries of this latest trend of globalization.

“A few years ago, there were limited job opportunities even if you were highly qualified,” he says. “Now, at least you have a future to look forward to.”