Several of my friends have told me that my blog has a doomsday-ish ring to it. If you think I sound like an alarmist, you should read a book called The Elephant and the Dragon by Robyn Meredith. Robyn is a foreign correspondent for Forbes magazine and reports on China and India. And I must say that she has done a fantastic job of recapping the development of China and India as the next economic superpowers. And the fact that she is reporting from the field, based on first-hand observations, does add credence to her estimates and projections.

Robyn has a couple of very innovative concepts she pushes through in her book. First, she calls the development of China (as the factory of the world) and India (as the back-office of the world) as the Third Industrial Revolution, at par with the developments in Britain in the 1800s and the assembly line invented by Henry Ford in the early 1900s. Second, she introduces the concept of the Disassembly Line. With recent developments in supply chain management, technology and network connectivity, one of the drivers behind the growth of China and India is the ability to disaggregate the manufacturing and back-office processes into more and more granular levels.

Just to highlight a few quantitative and qualitative observations that Robyn makes in her book:

• China’s explosive growth is the result of decades-long planning & investment in infrastructure, shipping & port facilities. In 1989, China had 168 miles of expressways, but by 2004 had about 21,500 miles of expressways. This figure is expected to grow to 40K miles by 2010 and 55K miles by 2020 (comparable to the length of US Interstates)
• India’s strength, on the other hand, is its educated, English-speaking labor pool, that has a culture of working hard and long hours. By 2030, India is expected to have the largest labor pool in the world topping at about 986M personnel
• By 2030, the three largest economies in the world will be the US, China and India, according to the McKinsey Global Institute

• There are significant downsides to this growth spurt as well.

  • Chinese banks are estimated to be holding onto over $900B in bad-loans, six times the size of the America Savings & Loan crisis
  • Pollution in both China & India is rampant. Most of the cities in the list of the 20 most polluted in the world are from these two countries
  • China, in an effort to maintain its grip on manufacturing for the world, is developing relations with & making huge investments in resource-rich African countries. Not all of this is good, as can be seen by Steven Spielberg’s recent resignation as the Artistic Director for the opening & closing ceremonies of the 2008 Beijing Olympic games. China’s support for Sudan (oil purchases, weapon supplies) and the atrocities in Darfur were the issues here
• There are some upsides as well. China holds over $1 Trillion in US treasuries, which in turn has kept the interest rates here low. This in turn has kept credit card & mortgage payments low for US consumers, fueling the housing boom over the past few decades

What does all this mean for the US? I mentioned in an earlier post that the only way for the US to stay competitive is to keep innovating. Robyn articulates this point much better by emphasizing that:

• The US needs to get its act together in K-12 education. The university system in the US is exemplary but the public schools are not. All these years, I am sure you have seen reports in USA Today and the WSJ about how US students don’t compete well in the Math or Science Olympiads or that our 7th grade students read at the 4th grade level. Previously, we could afford to roll our eyes and turn the page. Not anymore. These comparisons are going to be the basis on which our kids will compete in the emerging global labor pool
• The US needs to increase investments in basic research, not just product development. This is the kind of research that resulted in the development of the Internet. The US Federal Agencies have been scaling back on R&D investments in the last few years and that is just the wrong way to go
• Given the surge in pollution and energy requirements in China & India, the immediate, tactical opportunities for US companies will be in the GreenTech and Energy markets

All in all, Robyn has done a phenomenal job of paraphrasing such complex issues as the emergence of China & India, projections for the next few decades and the implications for US companies & employees. Highly recommended reading.

Sampath

The Management Consulting industry has changed quite a bit over the past decade or so. And the off-shoring phenomenon has added a new element to the mix. Thought I would put together a back-of-the-envelope model for how I see Management Consulting continuing to evolve over the next 10 years.

If you mentioned Management Consulting in the 1990s, the key firms that came to mind were McKinsey, BCG, Bain and then, the Big 6 (Anderson, C&L, PW, KPMG, E&Y and Deloitte). The first 3 firms were focused exclusively on strategy consulting. The Management Consulting units of the Big 6, however, had more expansive offerings that included BPR and IT Design & Delivery. That is, the Big 6 not only advised on solutions to their customers' business problems. They also delivered these solutions. One of the things I distinctly remember about the 1990s is how Management Consulting firms would shy away from “low-value”, long-term, outsourcing relationships. These types of deals, typically focused on IT outsourcing, were pursued by EDS, IBM and maybe towards the end of the decade, by Accenture as well.

Off-shoring in the late 1990s and specifically in the early part of the current decade created new markets. The SWITCH companies (Satyam, Wipro, InfoSys, TCS, Cognizant and HCL) all have significant traction in IT markets (Engineering, R&D, Custom IT, ERP / CRM). The business process outsourcing market took a long circuitous route to maturity and now compares favorably with the IT market in India. As I mentioned in a previous article on BPO, the SWITCH companies have established sizeable BPO lines of business as well, either through acquisitions or organic growth.

The most interesting development I find in this context is the development of the KPO market. I view this as the natural evolution of strategy consulting. I remember the days in the 1990s, when a handful of well-dressed management consultants would engage with a customer for a couple of months. And after a series of interviews and mid-night sessions, we would deliver a well-crafted presentation on the strategic solutions to the customer’s imminent business problems. In the industry, we used to call our deliverables “credenza-ware”, because most of our presentations would gather dust on the CxOs’ credenzas. What the last few years have revealed is that with India’s large, latent pool of well qualified research analysts, strategic advise can be delivered at such a granular level that it is immediately actionable. This is what we have been doing at SalesQB. We do not just deliver PowerPoint presentations to Sales VPs on how they could execute their sales strategy. We provide personalized sales support to individual sales reps on specific deals & accounts that they are chasing. This is what I call Operational Analytics.

Fast-forward to the 2010s. I think Management Consulting firms will have to evolve and demonstrate strong Advise & Analytics capabilities that are tightly coupled with their current BPR, BPO and IT capabilities. And I think Accenture is already on the right track with its emphasis on Consulting, Outsourcing & Technology. It will be interesting to see how the SWITCH companies morph their identities from IT service vendors to business service providers to leading Management Consulting firms …

Sampath

John Chambers, CEO of Cisco, once said that “there is no substitute for being in the right industry at the right time.” By that account, the BPO industry in India is where one should be today. Several of my readers have asked me to put together a primer on BPO. So here goes. We will look at what BPO is, the key numbers, the industry structure & its evolution, key trends and some potential roadblocks.

Outsourcing is a well understood, tried & tested management process that global companies have been using to move to a “boundary-less” organizational model. From its initial focus on cost-cutting, outsourcing is now increasingly viewed as an enabler for long-term competitive advantage, process efficiencies and co-innovation. Most of the media noise over the last decade has focused on IT outsourcing (ITO) – Think helpdesk support, data center operations, application delivery & support. Business process outsourcing is the process equivalent of ITO – Think payroll processing, financials & accounting and customer support. And then, there is the off-shoring dimension. Countries such as India, China and South Africa have been vying for a share of the global outsourcing market. In this post, I will treat outsourcing & off-shoring differently to the extent I can, so that the big picture is a little clearer.

The Numbers

OK, let’s dive right into it:

1. According to TechNewsWorld, the global outsourcing market (including all services, industries & geographies) is estimated at over $5 Trillion


2. Gartner estimates that total Global IT spending in 2008 will exceed $8 Trillion


3. Depending on which analyst you ask, the Global IT outsourcing market is anywhere from $100B to $600B. The more concrete numbers here are around the off-shoring component. According to NASSCOM, the Indian IT industry (includes a small BPO component) raked in $24B in 2006 and $32B in 2007. NASSCOM estimates that the Indian IT sector will generate $60B by 2010. As of 2007, the Indian IT sector employed 1.6M people. That is 1.6M jobs that did not exist a few years ago!


4. Now for the BPO numbers. According to IDC, the global BPO market in 2008 is estimated to be around $680B. Gartner estimates that the off-shored component of BPO in 2007 is $25B. And NASSCOM estimates the size of the Indian BPO sector in 2007 is $8.4B. That is, India currently has 33% of the global off-shored BPO market and that less than 5% of the global BPO market is off-shored. Most estimates put the size of the Indian BPO market by 2010 at $20B. As of 2007, the Indian BPO sector employed 553K people. Again, these 553K jobs did not exist 4 years ago. And McKinsey estimates that the Indian BPO sector will employ over 1M people by 2008.


5. And while we are discussing numbers, let us also talk about KPO. Evalueserve estimates that the Indian KPO sector will generate about $10B and employ 250K people by 2011

These numbers aren’t as outrageous as FaceBook’s reported $15B valuation by Microsoft, but are staggering nonetheless. The IT, BPO and KPO sectors in India are looking at a CAGR of 20-40% over the next 5 years. Remember John Chambers’ pearls of wisdom?

The Services

Let’s come back to the topic of our blog – BPO. What is it? PwC suggests that the BPO market could be broadly broken down into three functional areas:

1. Business Administration – Payroll, HR, Finance and other general back-office functions


2. Supply Chain Management – Procurement, Warehouse / Inventory Management, Transportation & Logistics


3. Sales, Marketing & Customer Care – Analytics, Acquisition, Retention, Cross & Up selling

More specifically, the key BPO services that have been offered by Indian vendors over the past 5 years are:

1. Customer & technical support services (a.k.a Call Centers)


2. Telemarketing services


3. Helpdesk services


4. Insurance processing


5. Data entry, transcription & conversion


6. Scanning & OCR services


7. Bookkeeping & accounting services

There is a fair bit of grey area between BPO and KPO services. I think of BPO services as those that resemble the proverbial assembly line, with maybe a little bit of data reconciliation and research involved. Processes that require deep domain or industry knowledge, research & analysis, taking a step back & looking at the larger picture, are what I would consider to be in the realm of KPO services. Having said this, BPO services now include a number of sub-categories such as:

1. Legal Process Outsourcing (LPO) – Starting with low-end transcription work, these services now include patent processing, market identification, litigation documentation & legal research


2. Research Process Outsourcing (RPO) – This is the R&D in the bio-tech and pharmaceutical sectors (drug discovery, clinical trials etc)


3. Human Resource Outsourcing (HRO) – From its humble beginnings, this sector has grown to include payroll management, training, staffing, benefits administration, retirement planning & compensation consulting


4. Medical BPO – Apollo Hospitals in India is now offering outsourced hospital administration services


5. Procurement BPO – This is the management and / or execution of one or more procurement activities, all the way to outsourcing the entire procurement function

The Industry Structure & Evolution

According to a recent PwC report, BPO in India evolved in four distinct waves:

1. In the 80s and 90s, Fortune 1500 companies like AmEx, GE and CitiBank setup call center and back-office operations in India. These were “captive” units. That is, they were owned and operated by the parent company. So, in essence, this wasn’t outsourcing per se. Rather, a multinational corporation was just leveraging a global labor pool


2. Then, in the early 2000s, venture funded BPO companies, like Spectramind, sprung up and provided BPO as a service


3. Next, leading IT services companies like Wipro, InfoSys and HCL leveraged the natural synergies with their IT & software business and extended their offerings to include BPO. Most of these firms built BPO capabilities through acquisitions rather than organic growth


4. Next, we are now seeing domain / industry specific players, like TechMahindra, entering the BPO market to “verticalize” their offerings

Sanjeev Kumar, a PhD candidate at UMich’s Ross School of Business, and his advisor, Prof. M.S. Krishnan, have come up with the following model to describe how BPO is evolving. I think this model is very descriptive, though I would argue that what they call BPO 3.0 is being referred to as KPO in the trade rags. For Sanjeev’s complete article, click here.

The Key Trends

1. One key trend we have seen is for service provides to “move-up-the-value-chain”. Wipro, InfoSys and other Tier 1 ITO vendors have entered the BPO space in the last 2 – 3 years. I think the CIO / CTO mind-share that all the ITO vendors are clamoring for is pretty diluted. So, these vendors are moving to more of a solution focus, rather than a pure technology focus. And after BPO, the next logical step will be for these vendors to include KPO services (BI, Analytics, Strategic Advise) in their portfolio


2. The attrition rates are coming down, especially as the BPO vendors move to Tier II and Tier III cities in India. Some recent estimates put the attrition rates at around 15% for non-voice BPO services


3. India’s share of the global off-shored BPO market has been declining. So, we are seeing Indian BPO vendors establishing beach-heads in other countries such as China and Ireland. HCL recently bought an Irish call center and used that as leverage to get a sizeable BPO contract from British Telecom

The Key Roadblocks

1. The weakening dollar will continue to be the “monkey-wrench” for Indian BPO vendors. The only solution for these vendors is to continue to deliver higher-value services that justify higher bill rates. The other hedge strategy that is already underway is to start building capabilities in cheaper off-shore destinations


2. The huge employment numbers suggest that there will be significant HR issues in the near future. Putting together a labor pool with millions of “BPO worthy” employees will take a minor miracle, even with India’s large educational infrastructure

The Key Takeaway

I understand that most of us in Corporate America who wear IT or business operations hats are wary about BPO & off-shoring. We can continue to debate what these trends & numbers mean for the American economy and employee. My key goal in this post is to establish that BPO & off-shoring are real, big, growing and here to stay. Make sure you think about this when launching your start-up or planning your next career move.

Sampath

Nicholas Carr has made a career by telling all who will listen that IT Doesn’t Matter. Even though my career is deeply entrenched in the IT & high-tech industries, I have to admit that Mr. Carr has a valid point. During many afternoon musings over tea with my friends (you know who you are!), a hotly debated topic continues to be “Whether IT is really headed the way of electricity”. A seasoned IT executive we have worked with for a while continues to remind us that not long ago, most large enterprises used to have Vice Presidents for Electricity. This was a time when uninterruptible power supplies (UPS), diesel generators and battery packs were complex technologies. Generating enough power to run a large corporation used to take quite some doing. Today, in most contexts, we can afford to take uninterrupted power supply for granted and hence, we do not see many senior executives holding the Electricity portfolio. The question then begs – Will the CIO become obsolete in a similar vein?

The high-tech industry has seen several inflexion points that have significantly influenced its course. Key course corrections were driven by:

• Mainframe computing (The 1970s – 1980s)
• Client / Server computing and ERP / CRM (The 1990s)
• Web-based computing (Late 1990s and early 2000s)
• Software as a Service or SaaS (Early 2000s)
• IT off-shoring (Mid 2000s)

Each of the above trends drove significant new market activity and IT spending from enterprises. If Mr. Carr’s predictions are correct, what will drive the nail in the coffin for IT? One scenario comes to mind. SaaS vendors like Salesforce.com have established traction with small & mid-market customers and are beginning to make a dent with larger enterprises. It is not hard to imagine that in a few more years, SaaS vendors could deliver fully functional (ERP scale), industry-specific, reliable, secure, configurable / customizable offerings? If larger enterprises do indeed jump on to the SaaS band-wagon, Mr. Carr’s predictions don’t just seem on the mark, but they seem rather imminent.

My goal in this posting isn’t just to validate Mr. Karr’s predictions, but to take the argument a bit further. The figure below portrays my humble perception of how enterprises are already undergoing significant transformation.

As I mentioned earlier in this posting, just better adoption of SaaS by larger enterprises will be enough to drive IT outside the enterprise. My contention is that this argument could easily be extended to non-core business processes in an enterprise. The already existing & viable business process outsourcing (BPO) market is testament to this trend. Companies such as GE and Citibank set up call center, customer & technical support operations in India several years ago. More than a dozen mid-sized BPO companies in India are now offerings services that include payroll processing, financials & accounting, billing and other back-office functions. And at the heels of the BPO trend is knowledge worker outsourcing, also called KPO, which addresses business processes that require deep domain & industry knowledge. Examples include legal research & patent filings, market analytics, sales & marketing support, drug research & discovery and financials equity research. McKinsey, the management consulting company, has had a research & analysis shop in India for a while now. As has Gartner. Just the simple fact that a large, educated, low-cost and easily accessible labor pool is available off-shore has put the BPO & KPO trends on over-drive. And if Mr. Carr’s predictions about IT are true, the commoditization & outsourcing of non-core business processes isn’t far behind.

What does all this imply? I believe that the enterprise of the future will look a lot different from what we are used to today. Just a quick anecdote here. We recently had a few new cities incorporate themselves in the greater Atlanta metro area. Two of these new cities have outsourced most of their operations to CH2MILL. This includes all their payroll, billing, tax collection and other back-office functions. The elected council members legislate and drive the cities’ agenda. Everything else in the background just hums along, like electricity.

Sampath

There is a mind-numbing amount of information in the public domain about how Web 2.0 and Enterprise 2.0 will change the world for ever. This article attempts to provide an entrepreneur’s perspective on these trends and distill the key issues with a bit of common sense. The term Web 2.0 was first coined by Tim O’Reilly to denote a new breed of Internet services companies. The key traits of companies in this new breed, according to O’Reilly, were:

• They were platform plays. E.g. eBay & YouTube
• They had a social networking component. E.g. MySpace, Skype & Amazon
• They had community driven content. E.g. Wikipedia & eBay
• They released users from the software development lifecycle, meaning that users would access Web 2.0 services using a simple web browser. In tech-speak, this is called Software as a Service or Saas

Whether the above differentiators really warrant a new category or not is debatable. One could easily argue that these basic characteristics should have been incorporated into most, well thought-out “Web 1.0” Internet companies that were launched in the mid 1990s and that we are only now coming around to fully understand the implications. Nevertheless, Web 2.0 is a handy way to characterize these companies & somewhat comprehend the implications.

From its consumer underpinnings, Web 2.0 evolved over 2005 – 2006 to take on an enterprise flavor. Terms like Me, Inc., Prosumer and Enterprise 2.0 have been used to describe companies adopting this approach. Examples of companies in this space include SalesForce.com, SugarCRM, NetSuite etc. The case that is being made here is that business services can be delivered using a consumer model to professionals, hence the Prosumer go-to-market strategy. According to Philip Lay at TCG Advisors, the cornerstones of Enterprise 2.0 are

• Software as a Service or SaaS
• Service Oriented Architecture (SOA, read Web Services) and
• Open Source Computing (E.g. Ajax)

Philip rightly points out that now (2007) is not the time for us to get overly excited about Enterprise 2.0. We are not going to see Fortune 500 companies jump onto this bandwagon and move all their front & back office applications to an Enterprise 2.0 model in a big way. What we will see is niche solutions being brought to market with this model, focusing on narrow audiences & their key business problems. Over the next decade or so, the broader Enterprise 2.0 market should pick up a good bit of steam.

OK, now for the entrepreneur’s perspective. My thoughts on launching an Enterprise 2.0 start-up:

• It is seductive to get caught in the jargon / tech-speak and draw analogies with companies with eBay, Google & Amazon. Have been guilty of getting caught in that trap myself on several occasions. Instead of getting carried away with technologies and analogies, focus on pressing business problems that your core audience loses sleep over today
• Deliver compelling, comprehensive solutions & value propositions to these critical business problems. How will you get your target audience what they need faster, better, & cheaper? SaaS & Web2.0 are just enablers. How will you deliver highly targeted, personalized, context-driven business services to individual professionals? How will you incorporate “mass-customization” into your solutions?
• Ensure that there is a large market for the solutions you are offering and that you have a scalable plan to get to the finish line

Thoughts?

Sampath