I've long been a fan of Sramana Mitra - she has a terrific blog and has her own deep definition and framework for Web 3.0 . Forbes.com carries a fascinating article by her this morning: The Coming Death Of Indian Outsourcing , in which she talks about the new challenges facing Indian Outsourcing Companies.
As usual, Mitra's basic analysis is spot-on, although one can certainly take issue with her conclusions. There is no question that Indian OCs (Outsourcing Companies) now face unprecedented challenges, and cannot carry on with a "Business As Usual" approach for much longer.
This should not come as a surprise; competing on the basis of price alone is never a sustainable business strategy. In a price war between brands (or countries!), no supplier wins. And this price advantage is rapidly eroding, with the steep rise in software development labor costs and the deteriorating strength of the dollar.
On the upside, the quality and maturity of software provided by the Indian OCs has been improving steadily, and it was high to begin with. But those are merely the hygiene factors, not competitive differentiators; they are simply the stakes needed to stay in the game.
As Mitra says, Indian Outsourcing companies need to move up the food chain - not just focusing on software development and maintenance, but up towards design and then product definition. As she correctly points out, the "thinking" still comes from the OCs' customers.
However, things are starting to change. And that's the point: Realizing this vision may not be as far away as it appears! The shift is already beginning to happen, although it has not yet captured the popular imagination.
I wrote about this shift in an earlier article, Enterprise 2.0: Battle of the IT Supply Chains : as offshore providers move up the value chain, the relationship between these vendors and their Enterprise clients is changing. Instead of outsourcing specific, contained projects, companies are looking at IT development vendors as strategic partners - essentially, suppliers of IT business value.
Since most Enterprises use IT globalsourcing in some way, future competitive battles will not be limited to the Enterprises themselves; the competition will be between one Enterprise supply chain and another, each of which includes the primary outsourcing providers (whether international or domestic), their corresponding software and technology suppliers, then the next level of suppliers and so on.
My image from the previous article is reproduced below.
Their recent sustained successes have left the major Indian Outsourcing companies with significant cash reserves, so it would not be difficult for them to buy their way higher into the value chain. The required mindset change and organizational realignment, however, is another matter; those are always the most difficult of all!