The Hindu Business Line : ‘No choice but to offshore’

All the more reason why clients should let vendors manage their processes rather than insist on price comparisons, says this veteran in the offshoring advisory space..

“Some of the cool work you do is being put on hold. There is a wait and hold attitude among clients now.”

Stephanie Moore

K Bharat Kumar

The best compliment a company could get is for an analyst evaluating it to join its top ranks. UST Global, a 6,000-strong software services company with development centres in India, the Philippines and Chile, now falls in that league.

Stephanie Moore, formerly with Forrester Research, signed up as UST’s chief marketing officer recently. She spoke to eWorld as much about the industry as about UST, given her wide exposure as offshoring advisor to companies big and small.

Never been in the marketing function before, she says, adding “I am focused on our ability to deliver — so I need to take delivery excellence and turn it into marketing.” Since she has worked with marketing officers of vendor companies in her advisory role in Forrester, she says she has a “pretty good idea of what we are doing well and not doing well in marketing.”

Recession

She feels that these are scary times and that it’s best to prepare for the worst. We would see in the next few months how bad this really is. The industry we are in is somewhat insulated, in a way, because outsourcing increases during a depression. Of course, some of the cool work you do is being put on hold. There is a wait and hold attitude among clients now. I was able to see it when at Forrester.

She isn’t so sure that the pick up would happen in the middle of the 2009 calendar. “It is too soon to expect a turnaround – we need to manage expectations. By June, we’ll see how bad it is.”

So, is the slowdown making clients clam up completely? Are they put off offshoring? Negative, is her answer. She says the slowdown has benefited companies like UST in that customers want to reduce costs or expand their global outsourcing. “Big clients outsourcing with us are doing more of it now.”

As to smaller clients? “Smaller companies that never did or approved of offshoring are beginning to, very seriously, engage in offshore relationships. It is interesting — I am used to working with big banks and big MNCs. And all of a sudden, at Forrester, I was beginning to work with a small $5-billion aerospace manufacturer.

So, I don’t know if that would make up for lost income from big BFSI (banking, financial services and insurance) firms but there is certainly an opportunity there for big and small vendors.”

With smaller companies becoming clients, deal sizes also follow suit, in size. She says deals in the market are “much smaller — between $ 0.5 million and 5 million per year — as opposed to the multi -100- million dollars which is why you are seeing the shrinkage. But as more companies start doing this, you will see it even out a little bit.”

In which case, are bigger IT vendors disinterested in this, leaving the market open for smaller vendors such as UST? “The funniest thing in this industry is that it turned into a buyers’ market from a sellers’ market overnight.” She recalls the instance, some time ago, of a $5-billion retailer wishing to outsource testing. She referred them to one of the top 3 Indian IT vendors and, “the IT vendor simply said it would not service retail clients smaller than $8 billion in revenues. I couldn’t believe it.” But that would certainly not happen today, she says.

Every customer is important, “Which is what the Indian vendors used to do in the old days, before they got so big. That is the difference now — I hope we at UST can benefit from this state of intimacy.”

But does that mean UST does not walk away from deals or customers? “Bad customers are risky — they want us for cheap bodies, they don’t want to follow processes. That’s why we walk away — not because they are too small.”

What else would she watch out for among ‘bad’ customers? Internal customer is not enthusiastic about offshore outsourcing or is unwilling to be specific about what exactly what he wants. “That could cause dissatisfaction at a later stage for our customer’s customer and that is dangerous for us. So it is important to lay expectations right.” It is important, she says, to figure out if the sales team wants to use offshore outsourcing or have a costly resource sitting right next to them coding salesforce management.

Also, a client without one person managing vendors is a little bit of a warning sign. “Do they know what they are doing if they don’t have someone who knows as much about outsourcing as I do in managing UST, TCS or Infosys?”

Where has the slowdown hit IT vendors the most? “The ones impacted most are ones doing hiring for new projects — discretionary work — nice-to-have as opposed to must-have. At UST we have been able to replace income lost in that area with outsourcing maintenance or application area.”

Customer expectation

If new clients are experimenting with offshoring for the first time, there are bound to be unpleasant experiences, as happened in the aftermath of the 2000 slowdown.

She agrees, saying, “Immature and unsophisticated customers think that by deploying cheaper bodies you can cut costs and increase quality. It is important to manage customer expectations there.”

After all, she feels, the customer has to do a lot of things right before the vendor can help him. “We will see a little learning curve there as newer customers begin to outsource. The good news is that new customers can learn from early adopters — there are tonnes of them there. And we (as an industry) know how to do offshore outsourcing really well now. So there is no reason why vendors should not be bringing lessons to the new customers.”

Are these steps enough to offset the fears about offshoring? Stephanie Moore says there is no choice for customers but to offshore. “So it is really important vendors train clients, provide ‘client schools’ for new customers so that we explain to them this is what we will do but this what the client would have to do as well, for maximum value.

“Indian vendors have struggled to bridge that gap — I think I can help there. Cognizant is pretty good there but even some of the big vendors struggle here.”

And she is surprised about talk of India rates going up. “But the offshore rates were not going up by much. A bit, if anything. Onsite rates are going up,” she explains. She says that onsite rates for Indian personnel are anywhere between $65 and $100 an hour. “You can get a local US resource for less than that. You have to get work offshore.” In the case of the $5-billion aerospace company, it wanted everyone right next door. “But the goal is to move everyone offshore.”

Talk about rates. Aren’t prices top priority for clients? How are vendors coping with the cut-throat competition? She says clients do harp a bit on price. She cites the example of an RFP (request for proposal) last year. “It had 47 different job discussions, one column for offshore rate and another for the onsite rate — that was it. The client cares about prices. It was a big RFP. But price was top priority.”

And rates have been dropping bizarrely. Stephanie Moore says of a client in Texas outsourcing its ERP project “As an advisor, I was helping them sort it out. I saw a $-17-an-hour rate for offshore support. I have never seen a rate like that. If you pay a little extra you’d get some good quality people but that wasn’t their mentality — they were so happy with such low rates.”

Logically, that must mean that clients, after bad experiences, may be backing off from offshoring for the wrong reasons. No, she says. “Even in Forrester — we were so busy with people doing more and more offshore and trying to do it better — so much more focus on doing it better now vs 1999-2000 when we didn’t know what it was then.”

In fact, she says, clients should let vendors manage their processes instead of insisting on price comparisons.

“One of the ways to cut costs is not only to ask vendor to cut rates — it’s not about cheaper bodies — but optimising their processes. That is what they should be asking vendors — ‘teach me how to do this efficiently so that I don’t need many people for these processes or to be able to get more value out of them’.”

And she feels, IT vendors are better at managing client processes than clients themselves are.

“It’s a paradigm shift, but look at CapitalOne. It does a great job of working with its vendors that way. It recognises its core is providing credit card services and the vendor’s is high quality IT services.”

More US centres?

Would the American stimulus package actually stimulate more offshoring, what with visa caps and tax disincentives for using immigrant workers?

For Stephanie Moore’s response to this, and more, log into our Internet edition.

“I don’t know — there are bound to be incentives to use US resources — but (the country) doesn’t have the talent base to get where we want to be.” She says that some vendors are exploring the idea of transplanting their processes in North America. “Like Japanese car makers making their cars in the US. That would solve a lot of trade and ‘Buy American’ issues’.”

In times of slowdown, it is logical that customers having once worked with a vendor would stick with them, other than when vendor consolidation hits. But with new clients experimenting, how does the market look now? “We have a good repeat business rate — 90 per cent or so. But I know that those numbers may be skewed this year as we take on more new accounts — it would be positive for us and am hoping it would be lower but that is what Indian companies are good at — landing and expanding accounts.”

Vendors keep churning customers all the time. That means that if a customer does not grow the team size, he is often shown the door. But is there a thumb rule — say, unless the client shows a 10 per cent rise in manpower, the vendor walks out? “Size is not the only thing. It’s also about profitability. If it is a small account but very profitable, they would still retain it.”

Has UST benefited from vendor consolidation at all, i.e., with clients deciding to work with fewer vendors to minimise vendor management issues and increase volume discounts? “Among our clients, we have seen both — moves to consolidate and moves to diversify. A lot of companies looking at India-plus-one strategy — one more vendor from India or another location plus India.” She says it could well be a reaction to being neglected by a huge vendor and seeking out a smaller vendor.

“UST is a beneficiary of that. Whenever we are competing with Indian biggies, it’s good for us because we are more flexible, and willing to go the extra mile for the customer. That is easier to handle compared to a vendor of similar size, who is equally enthusiastic.”

UST’s acquisition plans

We are actively looking at all kinds of acquisition targets.. Geographically, we are already in the Philippines, Latin America (Chile). We are seeing demand on the ERP front — we have high-quality SAP capability, but need to expand it. An acquisition in Continental Europe would be critical for us, in the next 18-24 months.

Her agenda as CMO

We have not yet done a good job at productising our service offerings. That is the real big focus for me. Another area of focus is account-based marketing — that is exploiting existing relationships, making them bigger, supporting the sales organisation to understand what they need to sell within those accounts.

She also has an eye on service offerings that UST currently does not have. Unwilling to elaborate, she says, “There are hot areas for clients where we don’t yet have strong enough skillset or at least a good enough market offering.”

bharatk@thehindu.co.in

Related Stories:
India advantage thinning: Forrester
Vendor consolidation gaining popularity

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