LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

Three innovations driven by Indian Outsourcing Service Providers

Author: Carl Esposti, CEO, Crowdsourcing.org

2012, Crowdsourcing, LLC

LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

The world is full of willing people; some willing to work, the rest willing to let them.
Robert Frost American poet, 1874-1963

EXECUTIVE SUMMARY
One of the most notable business events in global sourcing during the 20th century was the emergence of offshore outsourcing of professional services. This phenomenon is firmly associated today with India and often referred to as the Indian Miracle. Through hard work, political will, and the help of their countrymen abroad, India managed to create a 100 billion-dollar industry with millions of new employees, all highly paid by local standards. Although the fledging crowdsourcing model seems new and distinctive, it has much in common with more established traditional outsourcing models, and as such we have a case history that we can learn from which will help us accelerate the wholesale adoption of crowdsourcing. This white paper looks at the growth of the traditional outsourcing industry in India and the strategies of Indian Outsourcing Service Providers (OSPs) in an effort to help replicate their success and catalyze the broad adoption of crowdsourcing.

research@crowdsourcing.org 2012, Crowdsourcing, LLC

LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

THE INDIAN MIRACLE

In the twilight of the 20th century, India which, at the time, was a primarily agrarian country with low literacy levels managed to give birth to an industry that: Contributes ~$100B to Indian GDP Accounts for ~35% of all the countrys exports Has reverberated across the world, changing the way Information Technology (IT) and certain business processes are delivered today (see exhibit 1)

EXHIBIT 1

GROWTH OF OFFSHORE OUTSOURCING TO INDIA

$, Billions

32% CAGR

42 38

58

64

BPO

3.1 7.3
2004 2009 2010

ITO

Source: NASSCOM Many internal and external market factors contributed to the Indian Miracle, including Indian economic liberalization, a global shortage in IT skills resulting from a spike in demand driven by the Y2K bug and the Internet boom, and economic globalization, especially in the United States. But the most important factor was initiatives by powerful industrial groups with a strong entrepreneurial culture and a willingness to invest. These groups created Indian offshore powerhouses like Wipro, Tata Consulting Group, Infosys, Cognizant, Genpact, HCL, and several others. These companies, which we call Outsourcing Service Providers (OSP), are the creators and

research@crowdsourcing.org 2012, Crowdsourcing, LLC

LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

the main benefactors of the Indian Miracle. Twenty-five years of industry experience shows us that crowdsourcing is a provocative model that will reshape, disrupt, and also augment more established forms of sourcing. Nonetheless, there is much that we can learn from how the Indians conquered outsourcing, a lot we can replicate to establish the broad adoption of crowdsourcing, and finally, a lot we can thank them for. Back in the 90s, Indian outsourcers werent considered competition for the large national or global ITO and BPO providers. While the larger players were competing for transactions with tens or hundreds of millions in annual contract value (ACV), the Indians were winning pitiful contracts a million here, two million there so small that they were off the radar of large traditional OSPs. In the early stages, the total yearly contract value of deals signed by Indian OSPs was so small that their large multinational competitors paid very little attention. What happened, however, was that a million-dollar deal in one year became a 5 million-dollar deal upon renewal a couple of years later, and a 25 million-dollar deal several years after that. The Indians deployed a strategy of penetrate and radiate. Small became aggregated; over time, aggregated became large (see exhibit 2).

EXHIBIT 2

IT INFRASTRUCTURE OUTSOURCING DEAL SIZE (ACV) OF INDIAN OSPs

$, Millions

24% CAGR

3.5

2.9
2.3 2.5 2.5

1.4

0.8
0.5
2004 2005 2006 2007 2008 2009 2010 2011

Source: Everest Group

research@crowdsourcing.org 2012, Crowdsourcing, LLC

LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

GLOBAL SOURCING: INNOVATION NUMBER ONE

The first thing we have the Indians to thank for is that they catalyzed the globalization of the workforce by introducing the use of offshore centers as integral to the global delivery models being deployed in every major enterprise. As the pioneers of globalization, Indian OSPs have proven to the world that labor arbitrage can go beyond the cost difference between New York and North Carolina and applies just as well to virtually any country in the world. In doing so, they have had to overcome major constraints, such as privacy and security guidelines, industryspecific regulations, and technical challenges such as poor telecommunications infrastructure. The advent of offshore delivery models and the subsequent maturity of the market and technology enabled work and workers to be separated: even in tightly regulated markets such as financial services, where data privacy and protection is paramount, they have figured out how to send work to thousands of workers in India, Philippines, Poland, and other global service delivery centers. In essence, they have proven that security and privacy concerns, along with geopolitical risks, can be handled and successfully mitigated. This has paved the way for crowdsourcing to become the next competitive lever to pull in achieving a step-change reduction in worker costs. Crowdsourcing will expand the benefits of globalization beyond labor arbitrage by introducing additional levers of effectiveness achieved via improved resource utilization through rapid on/off deployment of crowdsourced workforces capable of performing tasks in a wide variety of skill ranges.

GLOBAL SOURCING: INNOVATION NUMBER TWO

The second thing we have the Indians to thank for is that they helped enterprises in multiple industries better understand their business processes and internal workflows and engage in the disaggregation of these processes with an idea to integrate best of breed providers throughout the supply chain. Many end-to-end processes, previously considered monolithic, were decomposed into smaller tasks. This decomposition of processes was a critical success factor for Indian OSPs. Facing significant challenges in adoption of end-to-end offshoring in Business Process Outsourcing (BPO) due to various proximity requirements, privacy rules, and the

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LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

need for specific in-depth expertise, the Indian outsourcers didnt embark upon a strategy of broad execution instead, they focused on a narrow scope and subsequently became experts in the proficient delivery of specific processes and subprocesses. Indian OSPs also drove the formation of new workflows. The disaggregated parts of a monolithic process started coming together into new, smaller, and more agile end-to-end processes. For example, instead of Revenue Accounting being seen as a stand-alone F&A process, it gave birth to a smaller, more operationally straightforward end-to-end process: Order-to-Cash, commonly outsourced to offshore OSPs. By leading the disaggregation of end-to-end processes, Indian OSPs proved a very important concept and paved the way for the next wave of business process reengineering in order to integrate crowdsourced workforces into enterprise processes, leading to new, unprecedented opportunities in cost savings.

GLOBAL SOURCING: INNOVATION NUMBER THREE

The third major point of reflection is in regards to how the model for Indian outsourcing has changed over time. If we accept and embrace this model in the crowdsourcing industry, it can fundamentally change the way we build our delivery model and develop our capabilities and go-to-market strategy. In earlier years, in much the same way that the bulk of the crowdsourcing industry approaches the market today, providers approached enterprise buyers with capacity. A typical message would be: We have qualified Indian workers in call centers. This sounds painfully similar to the messages of many OSPs: We have 100,000 workers in 50 countries. The issue with deploying this approach today is that enterprises dont buy capacity anymore. Capacity is about inputs, while enterprises buy outputs. Selling access to thousands of crowdsourced workers is turning the clock back 10 years in terms of how enterprises think about global workforces. This approach is already limiting CSPs to a handful of industries that are more flexible than others and historically are faster adopters of internet-based

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LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

solutions (e.g. Internet Services, Media and Entertainment, and Technology, which account for more than 2/3 of crowdsourcing industry revenue). The stalwarts of outsourcing, such as Financial Services, Manufacturing, and Healthcare, drive a relatively small share of crowdsourcing industry revenue (see exhibit 3).

EXHIBIT 3

CROWDSOURCING REVENUE COMPOSITION BY INDUSTRY SECTOR, 2011

Percentage, based on a sample of 15 CSPs

TRAVEL AND HOSPITALITY RETAIL DISTRIBUTION

3%

OTHER

2%

1%

HEALTHCARE

6%

29%
INTERNET SERVICES

FINANCIAL SERVICES

8%

MANUFACTURING

13%

20%
TECHNOLOGY (INC. SW and HW)

18%

MEDIA AND ENTERTAINMENT

Source: Crowdsourcing.org Initially, Indian OSPs did indeed sell human resources based on projects in much the same way that most crowdsourcing work is performed today. The projectbased approach is evident in the types of work performed by leading CSPs: e.g., translating archived records, building online catalogues, and cleansing database records. Every one of these projects has a beginning and an end. This brings several additional issues: These projects require disproportionate setup costs which need to be recouped during the limited duration of the project, significantly affecting profitability of crowdsourcing projects. These projects are not easily leveraged across clients. The skills, learning, and technology solutions are often project-specific and deployable only once.

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LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

Finally, as with any other project, these projects have to be resold every time. Closely associated with a project-based selling model is the issue that projects are often funded via CAPEX budgets, which require special approval and sign-off and are often subject to stringent procurement rules governing them. The game changed as soon as the Indian providers figured out how to change it. They figured that they sold more when they sold capability instead of capacity and aligned it with ongoing enterprise needs. They focused on drivers such as the enterprises need to constantly acquire or deploy new capabilities. This led to a subtle change in their messaging. Instead of selling capacity in processing centers that can handle a buyers current projects, they sold solutions that can streamline a buyers Order to Cash process by deploying qualified workers when the buyer needs them. They helped buyers define work in the form of business processes or subprocesses and identified how they could integrate their capabilities into buyers ongoing operations. As a result, outsourced resources became an integral part of day-to-day operation, no longer at the mercy of CAPEX approvals, but funded out of operating budgets, which are approved once for multi-year contracts. This was a challenging task for companies that used to price their services per man-hour. They had to change their pricing to a new model in which price was measured per unit of output, e.g., price per invoice, managed server, purchase order, etc. It is interesting to point out that most CSPs in the crowdsourcing industry are already at this point. More than 75% of them already price their services per transaction, such as task, article, processed page, or any other measure of output (see exhibit 4).

research@crowdsourcing.org 2012, Crowdsourcing, LLC

LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

EXHIBIT 4

PRICING MODELS IN THE CROWDSOURCING INDUSTRY

Percentage of OSPs using the model

7.9% PERFORMANCE

16.4% PRICE PER WORKERS TIME

75.7% PRICE PER TRANSACTION

Source: Crowdsourcing.org Nonetheless, one of the greatest challenges that crowdsourcing providers are facing today is to change the nature of the value proposition and the sale away from people that can perform tasks and towards capabilities and solutions that can be deployed to improve existing business processes.

research@crowdsourcing.org 2012, Crowdsourcing, LLC

LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

CONCLUSION
The success of Indian Outsourcing Service Providers paved the way for crowdsourcing to introduce a step-change in the adoption of globalization in the enterprise market segment. By (1) proving the concept of a global workforce, (2) prompting enterprises in multiple industries to disaggregate their business processes, and (3) developing a winning engagement model for offshore outsourcing, Indian OSPs opened the enterprise market for Globalization 2.0 in the form of crowdsourcing. Their success also gives us an excellent case study and a blueprint for the adoption of crowdsourcing in the large enterprise market segment. The key lesson that Crowdsourcing Service Providers should learn from Indian OSPs is that selling capacity (i.e. crowdsourced workforce) is, while a logical starting point, not the most effective way to promote the industry and lead it to the next wave of adoption. Better results can be achieved by developing solutions that aggregate the business processes of large enterprises and offer benefits that go beyond less expensive global workforces. This can only be achieved by studying the operational processes of large enterprises and plugging crowdsourcing solutions into their existing operations.

research@crowdsourcing.org 2012, Crowdsourcing, LLC

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LEARNING FROM THE PIONEERS OF OFFSHORE OUTSOURCING

ABOUT MASSOLUTION
This research has been produced by massolution, a unique research, advisory, and implementation firm that specializes in crowdsourcing solutions for private, public, and social enterprises. massolution also operates Crowdsourcing.org, The Industry Website. We work with leading organizations to deliver crowdsourcing business models that access an on-demand scalable workforce to deliver improved business performance, drive product and service innovation, and enhance customer engagement. Our team has experience working in large enterprise environments, designing, implementing and managing crowdsourcing initiatives.

Crowdsourcing, LLC
Telephone: Email: +1-310-948-1258 contact@massolution.com

Web:

www.massolution.com www.crowdsourcing.org

Twitter:

@crowdsourcing_

research@crowdsourcing.org 2012, Crowdsourcing, LLC

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