Customers want more than low cost from outsourcers

Customers want greater involvement in business outcomes by outsourcers, including developing their own processes, software, and business practices

Customers are looking for a variety of new capabilities from IT outsourcers, ranging from their involvement in business outcomes to greater knowledge of the customer's area of business, according to a report by Forrester Research.

This change puts pressure on outsourcers, including India's top outsourcers like Infosys Technologies and Tata Consultancy Services (TCS), who in the past have sold their services using the low cost and easy availability of staff in India as a major differentiator, said Sudin Apte, a principal analyst at Forrester and principal author of the report, in a telephone interview on Tuesday.

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This model, popularly known as "time and materials" because the customer is essentially paying for a certain number of working hours from a given number of staff, is however getting commoditized, Apte said. The quality certifications of Indian providers, or the number of staff that they can offer will continue to be important, but these factors will no longer be significant differentiators in the market, he added.

Besides the large number of Indian companies offering services from the country, a number of multinational services companies such as IBM and Accenture have also set up operations in India to take advantage of the low cost of staff in the country.

About 10 percent to 12 percent of the business of India's top five outsourcers in the fiscal year ended March 31 came from new engagement and pricing models, Apte said.

Rather than transfer an existing IT services process to India, and try to get it done at a lower cost, customers now want suppliers to help them radically improve the way the process is managed by developing their own platforms consisting of processes, software, and business practices, Apte said.

"Customers want to see tangible business benefits, rather than just lower staff cost," Apte said. IT departments within companies are increasingly being measured by the business value they deliver, and that is reflected in what they are now expecting from their service providers, he added.

The "time and materials" model is also giving way to newer pricing models such as pricing based on outcomes and risk and reward sharing, Apte said. The earlier model linked to staff cost will however continue in some customer accounts, he added.

Customers accounting for over 50 percent of revenue to India's top five outsourcers are ready to make the shift to the new engagement model, that requires Indian companies to invest more in customer interaction, industries expertise, research and development (R&D), and creation of intellectual property (IP), Apte said.

The top five Indian outsourcers have risen to the challenge, including by increasing their investment in R&D, account management, and building new offerings, he added.

Infosys for example has introduced Flypp, a platform for delivery of mobile applications, which it is marketing to mobile operators wanting to set up their own branded app stores.

Indian outsourcers are also setting up new delivery centers outside India, as customers are increasingly demanding that the supplier should be in a position to deliver services from the various locations in which the customers are present, Apte said.

Wipro, for example, has set up a development center in Atlanta, while TCS said last year that it was expanding its business alliance with The Dow Chemical Company, including setting up a services facility near the site of Dow's global headquarters in Midland, Michigan. Indian companies have also set up centers in Europe, Latin America, and China.

Indian outsourcers will also have to focus more on client-facing roles, so that their capabilities can be conveyed and demonstrated to the people in customer companies that are involved in outsourcing decisions, according to Apte.

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