India Outsourcing Industry- Increasing number of Fixed Price Contracts but Time & Materials Contracts still dominate for Major Vendors

The outsourcing contract is critical document in an outsourcing relationship which typically contains: scope of services, assumptions, deliverables, pricing, intellectual property and deliverable ownership, contract duration, service levels, customer responsibilities, Vendor responsibilities, conflict resolution, and termination process. There were 472 outsourcing deals struck in the third quarter of 2011 compared to 516 transactions in the second quarter of this year according to Everest Group. Indian IT Vendors constantly write contracts with clients every quarter. Indian ITO vendors contracts are based on two types of pricing Time & Materials based pricing and fixed Pricing. Most clients still negotiate for T&M or Fixed Price contracts with T&M contracts more than 51-58% of total revenue and rest is fixed price contracts. Fixed-price projects to mitigate the impact of the rising rupee and wage inflation on their profitability.

Time & Material (T&M) Contracts are the major type of contracts done by the Indian IT Vendors. In the initial days of outsourcing of work to Indian Vendors the outcomes were unknown and both vendors and clients were not sure how effectively the work will be done by the resources provided by the vendors. They were not sure about the time and resources required, hence the T&M contracts were the best options. Clients wanted to have control on the resources and track vendor resources including the approval and clearance of time-sheets and the risks totally existed with the client. In the T&M contracts the risk lies totally with the clients. People are thrown at the problem and are billed on hourly basis and there are instances of unutilized resources in this scenario. Projects can be easily ramped up or down according to the clients needs easily. These contracts are best suited when the relationships between the clients and vendors are just starting fresh and the projects or process are new with no significant view of the outcomes and their impact. As long as uncertainty exist T&M contracts will be there and despite the fact some experts believe the golden age of T&M contracts is going to end in next ten years.

Fixed price (FP) contracts are clearly defined and deliverables agreed between client and vendor. Standard IT procedures, periodic reviews of performance and phased billing are other features of FP contracts. Risk is shared between the vendor and clients and vendors have to invest in the relationship and technologies required. This is a rigid model and mid way changes are difficult to make. Clients have to be very careful in choosing the best vendors for significant ROI and the vendors too have the scope on investing on the infrastructure and technologies as they are well aware of the client needs. Both clients and Vendors have to invest in building a relationship. Fixed price contracts are being favored by the Indian ITO vendors as they can efficiently complete the work using lesser resources and do it without much interference from the clients. In the past four years Indian vendors are trying to increase the Fixed price contracts percentage to total revenues as the client IT budgets/spend are being tightened due to the financial crisis, debt crisis and economic slowdown. Indian IT vendors looking to maintain 40-40% of total revenue through fixed price contracts. Fixed-price outsource contract attracts the customers due to immediate cost reduction followed by 3-5 years of cost control. Fixed-price projects are also more short term in nature, while the time and material are long-term contracts that give longer revenue visibility for companies

Tata Consultancy Services Limited

TCS has a higher ratio of fixed prices contracts in comparison to the competition and suggest TCS is undertaking more complex and mission critical end-to-end engagements.TCS has been looking to maintain the fixed price contracts in between 40-50% which they feel is optimal. The recent recession and financial crisis has tightened the client budgets and spends which forced to look for more fixed price as it helps them in controlling the resources and do the work more efficiently. 

TCS also increased the working hours of employees so that they can increase billable hours for T&M contracts. Fixed price contracts also have higher pricing compared to T&M and carry risk for the vendors. Fixed price contracts have to be signed constantly as the existing contracts get completed overtime and if there are no signings for some time then the overall revenue gets impacted. TCS in 2011 is facing such situation where they have seen fall in fixed price signings but confident to overcome as they have good pipeline. Margins also increase with fixed price contracts.

Infosys Limited

Infosys has successfully increased its fixed price contracts since 2008. Financial crisis and subsequent recession forced Infosys to start look for ways to curb the slow revenue growth. The US clients have changed their offshore outsourcing strategy and this prompted Infosys to look for fixed price strategy. But Infosys still have major revenues coming from T&M contracts as most of its clients want to stick with T&M and there are risks involved in fixed price like if the scope of a fixed price bid is unclear, it can lead to cost overruns. The share of fixed price contracts for Infosys in 2010-11 stands at 42% as compared to 28% in 2005-06. Infosys focused on shift to fixed-price contracts as part of the bigger effort to de-link revenue growth from manpower growth and move up the value chain. In long term, Infosys expects the proportion of fixed price bids going up.

Wipro Limited

Over the last 2-3 years, Wipro have increased focus on fixed-price contracts. Wipro has been able to increase the proportion of fixed-price contracts to 45.7% in FY11 compared to just 34 percent in FY-09. Fixed-price contracts ensure better realizations compared to time and material. Wipro is also is aiming to break the “linearity”, or revenue growth linked to the number of people added, and earn better prices through fixed-price contracts. Wipro was also forced to look for more fixed price contracts to overcome the recession. Wipro has in the past couple of years have been signing more fixed price deals as these deals provide revenue visibility and reduce the pricing pressures. 

HCL Technologies Limited

HCL Tech have increased its fixed price contracts to total revenue percentage in 2011 to 42% from 30% in 2006. HCL had move to more fixed-price contracts as it offers more certainty in contract execution and revenue. Fixed-price contracts require greater planning in terms of resource allocation and utilization and definitive timelines of implementation and were more relevant in the turbulent times where clients of HCL are demanding output/outcome-based pricing with service-level agreements. In the last two years HCL has seen good traction in the fixed price deals and it is planning to do more such deals in future.

Discussion Points:

1. Are the Indian ITO vendors doing well on the Fixed Price contracts front?
2. How comfortable are clients with Fixed Price contracts and how to manage risk?
3. What will happen to T&M Contracts in future?
4. What is the optimal balance for T&M and Fixed Price contracts?

Innovation & India Outsourcing Industry – Case Study of Top Indian Vendors (TCS, Infosys & Wipro)

Indian outsourcing companies realized that clients are more interested in innovation along with cost and process efficiencies.  Clients are interested in paying more for the transformational and innovation projects and product offerings. Initially it was sending technology workers to companies in the west for work onsite, then came the offshoring which is the traditional model of outsourcing based on the client needs and the latest third wave in Indian outsourcing is where companies design the platforms and systems that facilitate innovation and efficiency. But the fact remains that till now there has not been a disruptive offering from the Indian Outsourcing vendors. According to a 2011 Forrester survey, 41 percent of outsourcing clients cited lack of innovation as the biggest challenge with their existing IT services relationships.

Clients interviewed by Jan Erik Aase, (Sourcing & Vendor Management analyst-Forrester Research), identified three types of activities offshore vendors may try to pass off as innovation that failed to meet their expectations: innovation-for-pay (vendors creates a solution for one client and then licenses it back as a product to that client and the larger market), innovation for innovation's sake (emerging tech from vendor R&D labs that don't solve a customer problem), and administrative innovation (IT services buyers don't view process improvements, project management tools, relationship dashboards, and the like as real innovation). Clients want innovation relevant to their specific needs such as solve business problems, transformation in doing business, commercially viable solutions, creates competitive differentiation, improve market share, or have "an ROI with a multiplier of at least two”.

Innovation @ Top Indian Outsourcing Vendors (TCS, Infosys, Wipro)

Indian Vendors realize that Innovation is lifeline of business and is a critical factor for success in outsourcing industry. They know innovation is a complex process and is a vital component in their business strategy and in order to stay ahead, companies should increase the speed of innovation, be focused on the customer experience, understand their behavior, and co-create with customers and partners. Innovation has to be instilled into the organization at all levels and companies have done this successfully. The top three Indian outsourcing vendors have around 500,000 employees working in their organization for clients across the globe. They constantly innovate and improve the process efficiency there by leading to cost and other benefits for the clients. They work 24/7 for the clients and the innovation which most of the employees do on the day to day basis is called derivative or sustainable innovation.

All the three vendors are using their in house intranets, employee engagement and social media platforms for the idea generations. These platforms provide an opportunity to express their innovation ideas to the management. Managers and Leadership are being trained to act upon these ideas by the employees, evaluate them, commercial viability of the ideas and finally implement them and develop product and service offerings. Formal trainings for the employees include innovation and creativity. For the training programs they are employing third party consultants and experts and also tying up with the academics and other research institutions. Rewards and recognitions are provided for the employees who provided successful innovative ideas and Innovation is also part of the employees’ formal annual performance reviews. The vendors have invested on the training of the employees, provided them with necessary platforms and are investing and developing the ideas into final products and services.

Annual Innovation Events are being conducted where the employees are allowed to present their ideas, conduct demos not only to the management and leadership but also to the academic, clients, research, alliance partners and other stakeholders. These events bring together all the stakeholders of the innovation process and provide a platform to discuss and debate on the various innovations. All the vendors have tied up with the academic organizations, consultancies and other specific research organizations and do work with them in developing the innovative offerings. Wipro Technologies and Knowledge@Wharton together started conducting this tournament in 2010 which selects the most innovative managerial "tools" that companies can use to improve their business by increasing revenues, reducing expenditures and improving customer experience

TCS and Infosys have setup exclusive Innovation labs and these labs TCS Innovation Labs and Infosys SETLabs have been in existence for the past 30 and 20 years respectively. These labs has developed several process frameworks, methodologies, service platforms and work with standards bodies on future technologies, share best practices and maintain peer relationships with academic bodies, industry forums, conferences, and journals. Around 600 and 800 associates work in the R&D in the TCS and Infosys labs respectively. Wipro on the other hand provide third party R&D outsourcing services to their clients and they dominate this market. Infosys' SETLabs incubated the Innovation Lab in collaboration with Prof. Venkat Ramaswamy in 2005 as part of its research and innovation capability.

Frameworks are used by these vendors like TCS adopted Professor Clayton Christensen Innovation frame work and Co-innovation network with Clients and other stakeholders, Infosys adopted a Co-Creation framework based on the book published in 2004 “The Future of Competition: Co-Creating Unique Value with Customers" by Prof Venkat Ramaswamy and management guru the late C K Prahalad. Co-creation is the practice of developing systems, products, or services based upon innovative ideas from stakeholder experiences, that enhance strategic capital, increase returns, and expand market opportunities.

Wipro’s Innovation initiatives were developed based on a study of innovation methods in companies like Nike, 3M, and Home Depot that were reputed for their innovative practices and Applied Innovation which is the ability to infuse newer ideas and newer ways of doing things into all parts of the organization, and improve business outcomes, often without major disruptive change. Wipro Technologies, Innovation Evangelism happens through a series of vehicles that include: Wipro’s Innovation Camp, Innovation Bazaar, Story Book on Innovation, Systematic Creativity Workshops, and Inflection Point newsletter, etc

Despite all these efforts and investments India Vendors have innovated products which are more of sustainable kind and platforms that are mid range platform innovation but they are not able to innovate a disruptive offering. They have involved the employees and managers, provided tem with necessary infrastructure, established labs with exclusive focus on innovation and creation of new products, employed PHds and highly qualified people in these labs, provided with necessary infrastructure and other technologies in the labs, collaborated with all the stakeholders like clients, industry groups, research and academic organizations etc. Co-Creation with the stakeholders and forming strategic alliances with product companies and technology startups and investing significant amounts of money and resources are the major strategies adopted by these vendors. But success still eludes them.

Clients too have to make serious investments to profit from the vendor’s innovation strategy. Clients should treat the vendor not just as the cost reducing and process efficiency improvement partner but have to look at the vendors as strategic partners for the business growth. Clients should provide the vendors with the overall organization business strategy and make them understand that their role is not only limited to the IT department but also towards the overall organizational performance improvement. They should foster such relationships with their vendors and look for vendors with good innovation culture and strategies in place. It will be a win- win situation for the vendors and clients if they work collaboratively towards developing the innovative products and services.

All the players in the Indian Outsourcing industry realize the fact that only way to survive in this highly competitive outsourcing industry is to constantly innovate products and services that are relevant to the clients and lead to revenue growth to both of them. Innovation is highly complex and critical process that need significant amount of resources like monetary investments, technologies and highly skilled and trained professionals. The innovation Return on Investment is essential factor for both clients and vendors and they have to work together for this.

Further Reading:

Innovation @ TCS

Innovation @ Infosys

Innovation @ Wipro

Global SaaS, PaaS, IaaS and BPaaS Market 2011 and Forecast

Cloud computing includes Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS) and Business Process as a Service (BPaaS). SaaS is the highest level of the cloud and includes actual cloud applications. SaaS segment is the largest segment in the overall Cloud Computing Market. Customer relationship management (CRM), Content, communications and collaboration (CCC) market and Enterprise resource planning (ERP) revenue are the key sub segments respectively. North America, followed by Europe is the key markets for SaaS. Asia Pacific and Latin America are key growth markets too. Adoption is being driven by availability of on demand software, understanding of the model, increasing interest and pressure on IT managers to reduce costs. Data security concerns, outages, lack of understanding of the cloud and infrastructure, and integration with existing infrastructure are concerns. According to Gartner SaaS market is expected to reach $ 21.5 billion in 2015 from $12.1 billion in 2011. IDC estimates it to reach $ 40.5billion in 2014 from $ 21.8 billion in 2011 and Forrester estimates it to reach $78.4 billion from $21.2 billion in 2011. Google, Citrix, Salesforce.com, NetSuite are key players.

PaaS is the middle level and builds upon the IaaS layer and provides an application development platform for the cloud. Gartner says, PaaS products primarily supported application server capability, but the market has expanded to other middleware capabilities as a service, such as integration, process management, and portal and managed file transfers (MFTs). Gartner analysts said PaaS offerings are likely to expand the application integration and middleware (AIM) market by bringing in a new range of organizations that otherwise would have been packaged application and office software users. Vendors in this space include Windows Azure, Heroku and SalesForce’s Force.com. Salesforce.com has the most mature PaaS. According to Gartner PaaS market is expected to reach $ 1.8 billion in 2015 from $707.4 million in 2011. Forester estimates it to reach $9.8 billion in 2015 from $820 million in 2011.

IaaS is the lowest level of the cloud technology stack. It provides operating system support, storage and processing. Vendors in this sector include Google App Engine and of course Amazon’s (news,site) latest whipping boy AWS EC2. Infrastructure-as-a-service (IaaS) will shift from public clouds to virtual private clouds, Forrester Research projects. While adoption remains high, the size of the market will shrink and public cloud services will cost less in the future because the cost of inputs will continue to decline. According to Gartner IaaS market is expected to reach $ 22 billion in 2015 from $5.6 billion in 2011. IDC estimates it to reach $ 15 billion in 2014 from $ 3.4 billion in 2011 and Forrester estimates it to reach $78.4 billion from $21.2 billion in 2011.

BPaaS is even higher up than SaaS and it includes technology, people, process and smart analytics wrapped in a simple "pay-as-you-go" commercial model. It allows companies to minimize or eliminate substantial upfront costs.  BPO outsourcing providers such as India, China and Latin America will likely make a play in this area. Traditional BPO providers are setting up data centers to offer cloud computing services to their clients and Cloud computing inclusive of BPaaS provides a big opportunity for service providers. According to Gartner BPaaS market is expected to reach $ 133.5 billion in 2015 from $71.7 billion in 2011. Forester estimates it to reach $3 billion in 2015 from $530 million in 2011.

Impact of Thai flooding on the Hard Disk Drives, PCs and Storage Devices Supply

Thailand’s worst flood in 50 years has swamped more than two-thirds of the country, shutting down many factories, businesses have been impacted and hundreds of lives have been tragically lost. Thailand is the world's second-largest producer of HDDs and accounts for 45 % of worldwide hard-drive production, after China and is a major supplier of hard drive parts too. The major hit has been to 2.5in drives produced in Thailand and typically targeted at the notebook, rather than the larger 3.5in drives more commonly produced in Malaysia or mainland China facilities. Seagate, Western Digital and Toshiba have extensive production facilities in Thailand that are affected. Seagate facilities are not submerged but the component suppliers and Western Digital factories are submerged in water still. Nidec supplies more than 70 percent of all global HDD motors, to major manufacturers like Western Digital, Seagate, Hitachi Global Storage Technologies, Toshiba and Samsung.

Technology Research View:

According to research firm IHS iSuppli, HDD shipments in the fourth quarter will decline to 125 million units, down 27.7% from 173 million in the third quarter, resulting in a significant shortage of HDDs, and an increase in price of about 10 percent compared to third quarter prices. Disruption to notebook shipments is not expected in 2011, as the PC industry appears to have sufficient stockpiles to last through the fourth quarter. With HDD production disruptions expected to last at least six months, the shortage could impact notebook PC production in the first quarter of 2012.

Digitimes Research reported that the flood will create a 12% HDD supply gap in the 4^th quarter of 2011 and the gap may increase into 2012. Digitimes estimates the 4Q11 hard disk drive shortage to reach 19 million units. 

Noble Financial Equity Research estimates 120M drives will be shipped in Q4 versus the TAM (total addressable market) of 175M to 180M units. Charts below highlight Digitimes and Noble Financial Equity Research respectively. 

Gartner currently estimates that 50 million HDDs will be taken out of the planned 180 million-unit 4Q11 production runs, and there may be an additional 50 million HDDs taken out of the projected 175 million-unit build plans in 1Q12. More impact for the Regional OEMs and White box system integrators compared to the PC, Server and Storage OEMs.

According to IDC, major part of PC production for the fourth quarter had already been shipped and it expects the negative effect of the flood on PC shipments to be limited to 10% lower than earlier expectations. For the first quarter of 2012, the firm expects total PC shipments to be slashed by more than 20% from previous forecasts. IDC had previously projected 8.2% PC unit growth in the first quarter. HDD industry will begin to recover in the first quarter of 2012, and HDD pricing will stabilize by June, with the industry running close to normal in the second half of 2012.

HDD Manufacturer’s View:

Seagate's hard drive and component assembly factories in Thailand were not submerged, but manufacturing at those facilities has been curtailed due to external component constraints. Seagate now expects to report a total production of 41 million to 45 million hard drives for its December 2011 quarter, compared to the 48.9 million drives it shipped in the fourth calendar quarter of 2010. Seagate had been expecting a relatively flat total hard drive market of about 180 million to 200 million units per quarter through 2012, but that will no longer be possible and significant shortfalls in the 50 (million) to 70 million (units per quarter) range by end of year.

All Western Digital's hard drive and component manufacturing facilities in Thailand have been shut down since the week of October 10. Company expects its hard drive shipments during the December quarter will be 22-26 million units in contrast to the 58 million units shipped in the September quarter and overall hard drive industry unit shipments in the December quarter will also be supply constrained. Company expects the suspension of its operations in Thailand and that of some of its suppliers will continue into the March quarter and possibly beyond and is exploring alternatives to maximize existing capacity in other locations, including its Malaysian hard drive assembly facility and a third-party slider fabrication facility in the Philippines.

Samsung, Hitachi Global Storage Technologies and Toshiba are also affected by Thai floods. Samsung is more affected in PC business and a reduced demand for dynamic random access memory (DRAM). Toshiba Corp suspended the planned sale of a unit in Malaysia to Amkor Technology Inc due to the impact of flooding in Thailand and is shifting production to Malaysia unit from Thailand. WD believes the flooding in Thailand puts greater impetus on the European Competition Commission to green-light its proposed acquisition of Hitachi Global Storage Technologies.

Original Equipment Manufacturer View

Dell has warned its revenues could be hit by a worldwide shortage of hard drives caused by the flooding in Thailand. Company has to give priority to "higher-end customers and products" and also warned that the company may have to raise computer prices after the flooding forced the closure of factories and pushed up the global cost of hard drives.

Lenovo aims to maintain its profit margin in coming quarters despite floods in Thailand disrupting hard disk drive supplies. Lenovo believes it can source enough hard drives to meet customer demand and try to manage the cost situation with minimal impact on profitability.

Samsung and Acer have said that PC supplies will be lowered due to shortage of HDDs and subsequently prices will rise. Drive prices have increased 20% since the flooding started and Acer have to increase PC prices to cover the higher costs for disk drives.

NetApp says severe flooding in Thailand, which is hurting hard-disk drive production, and revenue growth is slowing as the data-storage company deals with the fallout from the devastating flooding in Thailand and choppy spending patterns by customers. Difficulty in forecasting revenues and big impact will be felt in second half of 2012.

Goldman Sachs lowered its expectations of Microsoft Windows revenue for both 2011 and 2012, citing ongoing damage to the PC market from Thailand flooding. Goldman Sachs report put fiscal 2011 Windows revenue at $5 billion, down from $5.1 billion, and 2012 revenue at $19 billion, down from 19.4 billion.

How to best manage the scenario

There is no doubt that there will be shortage of HDDs in 2012 which will impact the PC business. Since there is more demand than supply prices of HDDs are bound to go up. Since the manufacturers and OEMs have accepted these facts, they have to plan for the scenario. Manufacturers are trying to move production capacity to their plants in other countries. But the fact remain the supply shortage cannot be completely filled. Taiwan and China manufacturers can also increase production and cover supply to some extent.

Pricing is another issue as the prices have already rose by 20% since flooding and HDD cost is around 7-10% of total cost. OEMs will try to pass on the cost on to the customers but the question rises to what extent. Already the PC business is running with very tight margins as the OEMs are trying to keep the prices at the affordability levels to the customers in the coming holiday season. To what extent OEMs manage and absorb the costs is a major issue?

Another suggestion is adoption of Solid State Drives in place of HDD. But SSD are very costly right now and there is still couple of year’s time further for its adoption. SSD may pick up in high end corporate market and data centers market but not in the PC market. But Thai floods have definitely signaled a move towards SSD adoption and with DRAM prices fall overall SSD prices are expected to fall in future.

Sourcing of HDDs from Taiwan, China and other countries like Malaysia is another strategy adopted by OEMs. OEMs have started to pick up HDDs from these markets and trying to keep up the inventory and stockpile for next year. They already have four – six weeks of supply and are confident that they will source HDDs they require but at a higher cost.Overall HDD manufacturers expect their shipments in the first quarter of 2012 to decrease 40-50% and factories impacted by flooding in Thailand will resume normal production in February-March at the earliest. They will normalize their operations by second half of 2012. 

India Legal Process Outsourcing Industry 2011 - Key players and growth forecast

According to The LPO Program, the Global LPO market is expected to grow 34% ($217m) in 2011, from a base of $640m in 2010, to $857m. Corporate legal departments followed by UK-based law firms and US law firms are very active in the market. According to Research and Markets the global legal process outsourcing (LPO) market was worth $400m in 2010 and is expected to be worth $2.4bn by 2012. The Forrester report estimates the global market for legal services to be $250 billion with the US accounting for more than two-thirds of the market, the vast majority of which comes from U.S. companies and law firms ($170 billion). LPO includes include legal research, case briefing, para legal services, documents management, case research and study etc. The charts below highlight ValueNotes estimates and Evalueserve estimates respectively.

 

 According to NASSCOM-CRISIL study, LPO in India with a share of 17.5 per cent of total KPO market, i.e., USD 356.5 million, in FY2010, is the fastest growing segment, driven by impetus from a post-recession environment characterized by higher bankruptcy cases, regulatory compliances, and cost pressures. Legal Process Outsourcing is also expected to record robust growth to a USD 1.3 billion market by 2015. According to eprobe research Indian legal process outsourcing (LPO) industry was valued at USD 640 million last year and is expected to grow to USD 4 billion by the end of 2015. According to Evalueserve, there are over 5,200 professionals in the LPO industry in India and the Philippines, contributing an annual revenue of USD 300 million, and this is expected to reach 18,000 professionals with an annual revenue of USD 960 million by December 2015.

India is commonly preferred destination for LPO and hold around 85 percent of the market share, with advantages like cost savings, similarity in legal systems of both the US and UK legal system, availability of 1.8 million lawyers as skilled manpower with English proficiency and ‘time factor’ which is time zone advantage. Quality of the legal professionals, ethics and regulatory policies are some of the key challenges. US law firms are very active in the market, but continue to be cautious relative to their UK counterparts but some US law firms are shaking off that traditional caution. Law firms can reduce the overhead expenses cost which constitute 17% of total cost by approximately 10%. India is likely to face challenges from the emerging LPO destinations such as Philippines, Kenya, Mauritius and South Africa.

The Indian LPO space is controlled by exclusive LPO service providers such as Pangea3, CPA Global, Unitedlex, Integreon and Evalueserve which are large players with 500 lawyers. Pangea3 is expected to have annual revenue of $25-30 million. CPA Global has a turnover of $1 Bn globally. Integreon has annual revenues of $100 million. Large Indian players like TCS, Infosys and Wipro have entered into LPO market and are investing for future revenue growth in this segment.

Infosys LPO engagements account for 60 per cent of the total KPO business, with over 500 professionals and Rs. 70 crore ($15 million) in annual revenue. Bulk of the work is done from Pune, followed by Bangalore and Gurgaon. According to media reports Infosys plans to start LPO service delivery from Manila, Philippines, by the end of 2011. Wipro Technologies provide legal process outsourcing (LPO) to Microsoft’s intellectual property (IP) and licensing group worldwide. It has been providing US patent and trade marking filing and docketing services to Microsoft’s IP and licensing group since July 2008.

HCL Technologies is another major player and it has been doing well in LPO since last 4 years. TCS does not have a major presence in the LPO segment but is planning to explore the Legal Process Outsourcing (LPO) market. The company has in fact already begun the LPO services on a smaller scale with very few clients and is hoping to compete with its business rivals Infosys and Wipro who already have a share in the multi-billion LPO market. Cognizant debuted in the LPO space just two years ago initially by reviewing contracts for our financial services clients. The company has since graduated to regulatory reporting, disclosure-related processes, and anti-money laundering compliance.

LPO services go beyond simple cost-cutting and focus more on the quality of services like Litigation and business document review, contract management, electronic discovery, legal analytics and document preparation etc. There are still very few offshore legal service providers that provide specialized high end legal services. With demand for LPO on rise, bigger players will enter into market and the outsourcing of specialized high-end legal outsourcing and variety of legal work outsourced in large amounts will definitely attract new players into the market. Post recession large US law firms are also outsourcing the legal work to India; earlier it was large companies that use to outsource their legal departments. LPO industry is expected to grow in the next five years with revenue growth of 26% annually.

Source: Deloitte - The resurgence of corporate legal process outsourcing

India KPO Industry 2011 - Growth Forecast till 2015

KPO refers to process of outsourcing knowledge intensive tasks and functions and India is a dominant player in this market with 70% market share. Indian KPO players offer market research, data analytics, legal services, content and publishing services, pharma data processing etc. Evalueserve estimates Global KPO industry to grow to $ 17 billion by 2014, from current $9 billion in 2011 and is expected to grow at an annual rate of approximately 24% for the next four years (2010-14).

Chart: 1 Global KPO Industry Market Size and Number of FTEs (2006-2014)

KPO firms in India would employ approximately 205,000 professionals generating revenue of $ 10 billion by 2014 from current $ 5.95 billion and 135,000 professionals in 2011. Evalueserve predicted Global KPO market will reach $17 billion revenue by 2011 in 2005. KPO market slowed down due to the Global financial crisis. With tough competition form Latin American, Eastern European and some Asia Pacific countries, India KPO market is expected to grow by 20% annually lower than KPO industry annual growth rate of 24%. But India is expected to retain its dominant position in near future.

Chart: 2 India KPO Industry Market Size and Number of FTEs (2006-2014)

NASSCOM estimates on KPO Market

According to Nasscom-Crisil study, knowledge services outsourcing industry in India is expected to grow at a CAGR of 22.2% over 2015 from $2 billion in 2010 and touch $5.6 billion. Globally, knowledge services landscape is expected to grow from $2.9 billion in 2010 to $7.9 billion by fiscal 2015. Business research would continue to be the most widely adopted service line with a 39.4% share, representing a $2.2 billion opportunity. Share of data analytics, on the other hand, is expected to increase from 18.5% to 20.6% ($1.15 billion) over the same period. Legal Process Outsourcing is also expected to record robust growth of $1.3 billion by FY15. In terms of verticals, financial services would continue to be the largest contributor with a 32% market share ($1.4 billion), followed by healthcare at 19.5% and hi-tech and telecom and retail at 13% each.

ASSOCHAM estimates on KPO Market

The Associated Chambers of Commerce and Industry of India has projected KPO industry’s size growing to US$ 8 billion in 2011 and 10 billion mark by 2012 with a growth rate between 25-27%. Currently, the KPO size is estimated to be around US$ 5.7 billion and the sector has grown at around 15-17% in last few years. According to ASSOCHAM, domestic KPO industry is facing stiff competition from countries like Philippines, Russia, China, Poland and Hungary as these are emerging strong contenders.

Advantage India in KPO

Indian KPOs have significant competitive advantages in terms of low-cost offerings, skilled manpower with sales and marketing capabilities, domain expertise and knowledge of regulatory compliances. Highly educated professionals in engineering, medicine, management, accountancy, company secretary, legal fraternity are available in India. The Indian KPO providers offer a range of solutions to various industry segments such as FMCG, engineering, automobile, telecom, R&D, BFSI, etc. Specialized professionals with specific domain knowledge, problem solving and analytical skills and experience are required who demand 15-20% higher salaries that BPO professionals.

With tight SLAs and quality services, Indian KPO vendors deal with confidential data, including financial data, treasury and cash management functions and investment portfolio decisions. Indian KPO Vendors not only ensure safety of confidential client data but also have better work tools and processes, more sophisticated client centricity, higher billing rates and more domain focused organizations.

India KPO Industry - Future Concerns

The KPO industry was affected by Global financial crisis that caused significant slow down in revenues and presently KPO industry is maturing. The range of services has expanded from initial research and analytics. And as the market has developed, variety of offerings such as legal process outsourcing and clinical trial management are included. KPO industry is also facing the challenge of adequate talent availability and high attrition rate among young professionals. Skills shortages particularly relating to pharma clinical trials etc are major concern in India KPO. Wage inflation is another cause as India is loosing out on the lower cost advantage.

Investments are to be made in developing the infrastructure, buying tools and technologies, develop risk management and to protect confidential client data. The KPO market is expected to grow significantly in coming five years and so is competition from other countries, In Asia Pacific, China, Philippines and Sri Lanka are becoming viable destinations particularly for Pharma, healthcare and Accounting related KPO respectively. Russia and Eastern European countries like Poland, Hungary are also emerging as attractive KPO destinations for engineering and design related KPO. Near shoring is advantageous for Latin American countries as they are near to US and Canada.

Current European debt crisis and US Economic slowdown are causing concern for India KPO industry. Global Financial crisis in 2008 had a drastic affect on the industry where clients cut down spend and KPO industry slowed down and missed its revenue targets. India KPO vendors are gearing up to such a scenario with reducing prices, improving the skill sets, investing in new technologies and looking for high end work that is going to help the clients to overcome slowdown and crisis. Particularly there is focus on improving and acquiring the Pharma, healthcare and life sciences related skills and professionals as significant investments are announced by US and other governments.

India KPO Vendors understand the challenges that exist and they are developing the necessary strategies and acquiring the relevant skills to overcome short term challenges and significantly grow revenues in long term. 

India IT Spend Forecast – 2008 - 2014

According to Gartner, India information and communication technology (ICT) spend is forecasted to reach $71. 9 Billion. By 2011, a 10.3 percent increase from 2010 spending of $65.23 billion and expected to grow with CAGR of 10.9% and reach $95 billion by 2014. Hardware (CAGR 20.4%), Software (CAGR 13.4%), IT Services (CAGR 17.1%) and Telecom (CAGR 7.9%) will drive growth in spending. CAGR is for 2009-2014. Hardware growth is driven by rise in demand of computing needs of people both in rural and urban. IT services growth will be driven by Government and defense segments, large systems integration projects for application services and managed services around IT. Software segment is expected to grow with business intelligence, middleware, database management systems (DBMS) and application development (AD) tools. Verticals like manufacturing, retail, transport and hospitality, government, telecom, financial sectors and IT services will drive IT spend growth. Chart- 1 – Source - Gartner

IDC India IT Spend forecast 2008-2013

According to IDC, from the end of 2008 to the end of 2013, IT spending will grow 11.8% a year, compared to GDP growth of 7.1% a year. Overall IT spending is expected to reach Rupees 1643 billion by 2013 with a CAGR of 11.8%. IT Hardware (CAGR 9%), Software (CAGR 15.2%) and IT Services (CAGR 16.4%) is expected to drive growth. The growth in IT spending will be driven by demand for computing by citizens, businesses and government organizations. Demand across verticals like Banking, Government, manufacturing, retail, telecom etc will drive growth in IT Spending.  IDC is expecting growth in India IT spending despite the current economic crisis and emerging markets are expected to drive growth in Global IT spending. Chart -2 Sources: IDC

India Third Party /Hosting Data Center Market - Major Players

Note: Co-Lo- Co-Location & hosting, MNS- Managed Services, EDC- Enterprise Data Capacity, VAS- Value Added Services. Source: IDC & Company Websites

The third party data center market is dominated by telecom players as they are providing services like broadband and leased lines for the customers and the data center offering will be a value addition service for the clients. Apart from telecom players there are players like Ctrl S who is a specialized data center provider and Sify and Netmagic that are specialized in the internet services. Some small players like Cyquator, ESDS, Net4 with capacities ranging from 10,000 to 20,000 sq ft exist in the market that also offer services to small and medium enterprises. Data centers small or big are all maintaining global standards and getting themselves certified accordingly. Facilities provided are world class.

Blue Ocean Strategy adoption by Indian Outsourcing Industry – Examples

HCL Technologies

Vineet Nayar adopted the Blue Ocean Strategy immediately and his four pronged strategy focused on service innovation, pricing innovation, creation of new markets and technology disruption. Also he adopted the policy of Employee First philosophy and full service co sourcing model. The company saw revenue YoY growth of 26 %( 6200Cr) in 2007-08, 41% (8764Cr) in 2008-09, and 25% (10983Cr) in 2009-10 under the leadership of Vineet Nayar as CEO. It has been an up and down performance during the time where financial crisis and recession played a spoil sport. Company still sticks to the Blue Ocean Strategy.

For full article please visit:

http://analysiscasestudy.blogspot.com/2011/02/blue-ocean-strategy-bos-hcl.html

Infosys Limited

K V Kamath took over as the chairman of Infosys this year, and talked about a ‘Blue Ocean’ strategy with focus on healthcare and government verticals, and expansion into emerging markets India and China. Infosys revenues from healthcare (1.1%) and government (1.3%) verticals are negligible compared to BFSI (30%), Telecom (15%) and Manufacturing (10%). Healthcare and Government verticals followed by expansion into China and India are the key aspects of the Blue Ocean Strategy.

For full article please visit:

http://analysiscasestudy.blogspot.com/2011/10/blue-ocean-strategy-infosys.html

Aditya Birla Minacs 

Aditya Birla Minacs has set a target of US$1 billion in revenue by 2013 and it plans to achieve this through both organic and inorganic routes. To achieve this target company is looking for further acquisitions in FAO space and it is also looking at acquisition in the cloud computing area and infrastructure management segment. The company adopted Blue Ocean Strategy in FAO segment by focusing on three aspects Target Market, Process & Domain Expertise and Technology.

For full article please visit:

http://analysiscasestudy.blogspot.com/2011/10/blue-ocean-strategy-aditya-birla-minacs.html

Other Blue Ocean Strategy Related posts:

Blue Ocean Strategy Samsung:

http://analysiscasestudy.blogspot.com/2011/02/blue-ocean-strategy-bos-samsung.html

Blue Ocean Strategy LG Electronics:

http://analysiscasestudy.blogspot.com/2011/02/blue-ocean-strategy-bos-lg-mobile.html

India Outsourcing Industry 2011 – Focus on Healthcare vertical for Growth

Healthcare has become focus vertical for majority of the Indian IT Vendors. Most of the IT/BPO companies like Cognizant Technology, WNS, TCS, Firstsource Solutions, Genpact, Mahindra Satyam, Pacific BPO, CBay Systems, etc already cater to global healthcare industry. Infosys is looking at Healthcare vertical as one of the critical vertical for future revenue growth. Indian IT vendors have been slow in tapping this vertical as major focus earlier was on BFSI and Manufacturing. Indian IT vendors are making use of technology as a platform and offer their service offerings.

US is major market

US healthcare reform announced by President Obama provides a huge opportunity for Indian IT vendors and the policy focuses on controlling healthcare costs and provides universal coverage. The US healthcare bill, valued at US$ 940 billion, will provide healthcare coverage to 32 million Americans over the next 10 years. Currently US healthcare is estimated at $2.5 trillion, which is projected to grow to $4.6 trillion by 2020. Major opportunity for Indian Outsourcing vendors lies in revenue cycle management, electronic medical/health records (EMR/EHR), billing & coding and medical transcription. According to ValueNotes, EMR/EHR is a $20 billion IT outsourcing opportunity. Revenue cycle management (RCM) is a $50 billion market in the US.

Medical transcription business is estimated to be worth $25 billion annually and growing at around 15%. According to CBay Systems the size of the US medical transcription (MT) industry is estimated to be approx. US$17 billion for the year 2011 and is expected to reach US$21.2 billion by 2014. 67% was in-house while the remaining 33% was outsourced. CBay also expects the MT industry in India is expected to touch US$1 billion in 2014 from US$ 435 million in 2009. According to ValueNotes, the MT boom phase is over. Speech recognition technology, being used by most healthcare providers has resulted in shrinking the requirement of a medical transcriptionist’s skills to 10-15% of its original requirement. Medical transcription started in India 15 years ago and India is one of the primary locations and there are number of companies providing end to end medical outsourcing services in India.

Rising Indian Domestic Healthcare Sector

According to a report titled, “India’s New Opportunities- 2020” prepared by the All India Management Association, Boston Consulting Group and the Confederation of Indian Industries (CII), the Indian healthcare sector is poised to reach US$ 280 billion by the year 2020, thereby contributing an expected Gross Domestic Product (GDP) spend of 8 per cent by 2012 from 5.5 per cent in 2009. A US$ 36 billion industry in 2009 and growing at 15 per cent compound annual growth rate (CAGR), the Indian healthcare industry will reach the market value of US$ 280 billion by 2022. Indian IT vendors have to look for growth opportunities domestically as the US and European Markets are struggling to overcome the economic slowdown and European Debt crisis. The domestic opportunity may not offer huge profit margins as healthcare in India is mostly government owned but the rising private participation and Public and Private Partnership model is a good sign. State governments across the country have announced specific healthcare schemes sponsored by them for citizens and these schemes need to be monitored and properly implemented.

Indian Top IT Vendor focus on Healthcare Vertical

TCS has started looking at the healthcare vertical since 2009 and has seen annual revenues of US$ 395million in the vertical in 2010. TCS’ Q1 2011 Healthcare and Life Sciences revenue was at US$ 119 million. TCS has been gaining traction in this vertical.

Infosys does not report the healthcare revenues separately which highlights the fact that the company does not have much exposure in this vertical. To overcome this, company is looking for acquisitions in this vertical in US and Europe. Market rumors indicate the company is looking to acquire the Thomson Reuters Health Care vertical business in US.

Wipro healthcare vertical revenues for 2010 were US$429 million. Wipro is looking at healthcare as momentum vertical for growth and is planning to expanding its relationship with seven existing healthcare clients and looking to add at least two new clients on a quarterly basis.

Cognizant is the undisputable leader in healthcare market with more than US$ 1.17 billion in revenues. Cognizant owns IMS Health, which has a strong base in the healthcare practice. Cognizant provides solutions to 27 of the top 30 pharmaceutical companies; nine out of the top 10 biotech companies; nine out of the top 10 US health plans and 12 of the top 20 medical devices companies.

HCL technologies annual revenues from healthcare vertical in 2010 were US$252 million. Healthcare Informatics’ magazine has ranked the ‘Healthcare Practice’ division of HCL Technologies as the 39th largest healthcare company by revenue in the US in 2011.

Smaller players in the market like Firstsource, Genpact etc and pure play MT players like CBay, Pacific BPO also are focusing on Healthcare BPO market. These players have realized that the growth lies in the other than MT market i.e. Revenue cycle management, electronic medical/health records, and coding. These players are also competing with the bigger players in the market for the revenue share.

Healthcare vertical – Growth Driver

Indian IT vendors have to look for growth opportunities in healthcare as the US and European Markets are struggling to overcome the economic slowdown and European Debt crisis and the growth drivers till now BFSI & manufacturing verticals are slowing down due to the slowdown and debt crisis. Apart from the US healthcare policy, healthcare spend is also expected to increase in UK and India which also presents a growth opportunity. Mergers & Acquisitions are expected in this vertical as many big players in the Indian IT industry like Infosys are looking to acquire for jumpstarting revenues in this vertical. Other players like TCS, Wipro and HCL are focusing to increase their presence in this vertical and planning to add more clients in the coming quarters.

The ICD 10 conversion change by October 2013 is expected to impact the medical coding industry and is likely to spur a great demand for outsourcing and most of it may come to India. Technology helps in providing integrated solutions for the client’s healthcare needs, decrease healthcare costs, and improve efficiencies and Indian IT vendors with long experience in using such technology platforms are in a good position to provide the necessary services to the healthcare industry.