Wipro - Bangalore Tiger by Stephen Hamm (2006)

Labour Arbitrage as a driver

In 2005, Indian knowledge workers (IT, BPO professionals) were paid about 1/5th (20%) the level of their Western counters. (Hamm, 2006)

Body Shopping was the initial model that launched the Indian IT services industry through the likes of TCS in 1968.
Indian techies did routine coding jobs directly for Western companies.

This gave way to Labour Arbitrage, a model where 30% of the team (highly-paid Westerners) are placed nearby or at the client location (onsite),
and the remaining 70% low-cost workers work remotely from India (offshore).
Traditional Western services biggies such as EDS and IBM, who were fully on-shored were caught in this seismic shift, as until then, they got away with charge mega-bucks for advising corporations on technology matters and creating bespoke software systems. Labour arbitrage chipped away the monopoly of Western consulting companies.

In 2005, Bernstein Research placed the average Net profit margin of the top six Indian tech services firms at 21.7%, compared to 4.3% for the top six Western companies. (Hamm, 2006)

From Global Service Delivery to Global Capability Centres

The Internet enabled remote work and offshoring, that fuelled the ‘global service delivery’ model. Indian service providers supported back-end services such as accounting, travel and entertainment expenses, medical claims processing, customer service, etc. This was a phase of single project deals.

As the industry acquired experience in people and business process management they innovated into the ‘global capability centre’ model. Through project deliveries and domain and process knowledge improvements from channels like BPOs, the industry reached a point where they could help Western companies efficiently manage their business processes (daily operations) – in areas ranging from banking and insurance to retail and education – rather than just act as data processors. This brought the era of renewing multi-year, multi million dollar projects.

The industry grew into the erstwhile domain of Western IT service providers, viz. technology systems integration, business process outsourcing, consulting (design and deployment of new technologies), complex bespoke application development and systems management, and even hardware engineering (electronic product development using COTS and IP creation).

The role of tech aggregators

Quoting Nandan Nilekani, then Infosys CEO, from a dinner conversation he had with him in 2005 at Bangalore (paraphrased here): (Hamm, 2006)

When the market need is more advanced than the technology is capable of delivering - the premium is on product innovation.
But today, the level of the tech service industry has surpassed the ability of corporations to absorb technology solutions. So the balance of power has shifted from innovation to the distributor of technology, e.g. Google, and systems or technology integrators - those who make the technology work in companies by deploying it.

The threat to the West

Globalization and cost arbitrage, led to offshoring of a lot of low-value jobs, and buffetted the Indian middle-class contribution to GDP.
For those off-shored, it calls for reinvention and moving up the value chain, just sa AI is causing today. Complacency needs to be replaced by intensity to win, a hard-work ethic, and a drive for self-improvement. We still need to collaborate though we also now need to compete.

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As Walmart did for retail, the outsourcing industry did for tech services: provides a wide array of merchandise (services) at low prices.

Vertically Integrated makes way for Virtual corporations

For much of the 20th century, the model was the vertically integrated corporation. E.g. JD Rockefeller’s Standard Oil ran oil exploration, pipeline networks, refining, gasoline distribution (trucks) and retailing (gas stations). This model started to break down and by the 1990s management gurus were preaching its antithesis -> the virtual corporation. This paradigm focused on identifying the core strength of the organisation. The activities that gave it its competitive advantage. That was held onto, and the rest could be outsourced for efficiency.

Dell Computers grew on this model. Instead of owning a large R&D effort, they used electronics component manufacturers to do their R&D, bought components designed by the manufacturers, and assembled and sold PCs. Dell’s strength was a focus on customer needs, a hyper efficient supply-chain network and a phone & Internet sales channel network.
Dell manages the brand, the supply chain and the product assembly points. The rest is virtual. It uses a large network of designers, component builders and product manufacturers to bring new products to market.

Procter & Gamble (P&G) adopted the model in 2003, outsourcing IT operations, HR functions, customer service, and large parts of product development.

Virtual corporations led to the mushrooming of services and in particular the IT services industry, especially business process outsourcing.

Indian IT services and BPO companies enable the virtual corporation by providing call centers, back office or BPO services (accounting, travel expensing, insurance claims and mortgage processing, etc.). Offering a variety of services makes them integrated service providers and strategic partners to their clients.

The virtual corporation is focused on its brand and customers, while leveraging outsourced services for product innovation and delivery agility. They slice and dice market data to spot new opportunities for new products and services.

The business functions of R&D, design, technology, engineering (manufacturing), distribution are composed out of agile, on the fly supply-chain networks. These are setup or spun down as needed, allowing for new product and services delivery within short spans of 6 to 12 months. For the services provider, this requires a broad range of expertise across design, COTS assembly, software, engineering, supply chain network relationships, etc.

Multinationals make way for transnationals

The multinational corporations replicated a central template from the mother lode – creating a replica of all its functions (sales, marketing, support, manufacturing) to serve the local market – in each market where it established a base.

As multinationals lost to lower-cost, nimble competitors, the transnational model arose. This retained the design centers and manufacturing plants across diverse geographies. But instead of tailoring each base to the local market, it caters to a global audience. The premium is on central direction rather than local autonomy. Costs and proximity to markets determine where to route goods. Functions are performed at the most efficient location – wherever that may be – in terms of access to capital, expertise, availability of labour, and cost competitiveness.

So, Romania and Vietnam make sense for launching delivery centers due to their pool of low-cost and high-quality software talent, and these are highly competitive with Indian centers.

Transnational outposts are grounded in high-bandwidth communication networks that link their work in real-time with key centers. Collaboration and process management tools over the Internet create deep integration and smooth handovers between centers as they work in a follow the sun relay.

Innovations are driven by Centers of Excellence that focus on emerging technology and transfer practices to operations.

References

1. Hamm, S. (2006). Bangalore Tiger. Tata McGraw-Hill.