A conversation on outsourcing
Don McPherson is a senior executive of a global software company. During a visit to CMU, he agreed to give a lecture on globalization and answered student questions. Following is a conversation between Don and the students about IT outsourcing.
A student asked: “Why India is so successful in outsourcing but not China even its cost is lower than India?"
Don: “China has not been able to compete with India in software outsourcing because they are late. India provided software outsourcing since 1995 but China did not start until 2005. That ten years gave Indian companies significant advantages: they know what customers want; their companies are well established; they build good reputation for their business; their workers speak English well, and with ten years of experience, they learned more about their customers business and be able to align their business with their customer's needs.”
Another student asked: “Do you think China could have any chance to compete in outsourcing business or it is too late?"
Don: “It is still possible to get into this lucrative business. Today the demand is high and India does not have enough skilled workers to meet the global demand. China and other countries could do well in software outsourcing if they know how to compete. Today, most IT outsourcing business goes to the top five Indian companies, (TCS, Infosys, HCL, Wipro and Mahindra). These companies are big with over hundred thousand workers. Most software companies in China are small, the largest only has about ten thousand workers but the majority of Chinese companies have few hundreds to few thousands which make it very difficult to compete with India. Size is needed in global business, it assures customers that they are dealing with a viable and professional company that can retain quality staff, deliver on its promises and still be in business to support them. Small companies have high risks of bankruptcy. As an executive of a large software company, I can say that I am not interested in doing business with any company that has less than thousand workers. For global business, the company must have at least five to ten thousand workers because small company will not be able to do anything significantly. If China wants to compete, it must grow their companies to larger size and expand their business globally.”
Student asked: “Beside size as a key factor, is there anything else?”
Don: “Of course, they must be able to demonstrate that they can effectively operate globally with minimize risk for customers. Today, many Asian companies are still operating as a “Family business” rather than professional businesses. I have seen companies with father as CEO, mother as CFO, son as President, daughter as vice president and uncles, aunts, nephews and other relatives as managers. For small business, it may be acceptable but when do business globally, they need a different model, a more professional model. They must have standard management processes, well established financial reporting and credit standing. This is a major weakness of Asian company. Their financial is sloppy, their book-keeping record is not standardized, and it is difficult to track their credit rating. Without an established management and standard finances processes in place, it is impossible for them to do business globally. Small business can do well in local market where everybody know each other but in global business, the company must established standard practices based on international laws and regulations. This is why many Chinese companies failed in global business. To succeed, they need professional management; they need well established processes, standard accounting and finance. They also need effective marketing to establish “Brand name” and focus on quality and understand service business to stay ahead of their competitors. This will require a major change in management thinking and significant training for management. Today the only thing that I heard from China is about low cost or better prices. It is good to have lower cost, but cost alone is not the key factor to get business, quality and competency are also needed. Low price is only the beginning but without effective management, quality products and know how to keep the customer happy, no company can be successful. If customers find quality problems due to the lack of knowledge and skills, it is difficult to maintain the business for very long. Customers can change their mind and move business elsewhere easily. In this competitive world, company must be prepared with good strategy and global know how. You cannot count on just low cost.”
A student asked: “In that case, how do you choose supplier to do business with?"
Don: “Every global company selects suppliers very carefully based on rigorous criteria. The key factor is capability not cost because cost can be negotiated but capability is what they have or do not have. This is where many Asian countries do not understand and keep focus on low cost as the main factor. Cost is the reason that global companies outsource but without the ability to deliver quality products on time, there is no reason to do business there. If the price is low but the quality is bad then it is bad business because the cost of fixing defects would be much higher. Capabilities can only be built on good education system. That is why the first thing most global company is looking for is the education system. They send people to collect information about the training programs, the qualification of professors, the students graduation ratios, the rate of their employment in local company, and how current is the training programs. They do their own investigation before making decision. Of course, country often claims to have good education system with impressive record but overstating capabilities could lead bad consequence. If a global company invests in a country then failed then it results in a loss of confidence in that country among other global companies. Most would avoid doing business there so it is better to start with the right approach to build customer confidence and when good customer relationships are established, business can grow quickly. In global business “short-cut” must be avoid as reputation is everything. When a company lose money, has bad investment in a place, it is a signal to avoid that place and it would take years for that country to recover.”
Student: “If education is the most important for foreign investment then India also has issue with its education too …”
Don: “It is correct; every country has good universities and bad universities. Ten years ago, India has very good education system. The engineering schools such as The India's Institute of Technology (IIT) is among the best in the world. Of course, many decisions were made based on the reputation of that great school. Overtime when the IT demand increased, the need for skilled workers increased, many private schools are opening just to capture the market then the education system there began to have problem. Today India has high unemployment of IT workers because of the massive training to provide “IT degrees without real skills” but it also opens a huge opportunity to other countries. China has good universities but for many years, the focus was on manufacturing, not information technology. China has millions of engineers in electronics, electrical, chemical and manufacturing. The number of IT students is still insignificant and the training is backward with focusing mostly on programming and testing rather than the entire spectrum of software engineering. I believe with the right training and approach, any country could compete directly with India today. With the right leadership, the right training, any country can develop a strong IT industry. Today the demand is large, the IT outsourcing market is valued at $300 billion dollar per year, even India has captured about $100 billion so there are another $200 billion remain. If China could revise their training, expand their business, grow their company then it is possible to catch up with India. Currently, India is experiencing a critical shortage of skilled workers and this is a good opportunity for any country to compete by having a good skilled workforce based on a solid education system and vocational training.”
A student asked: “But it would take years to develop a quality training program, do you think the opportunity is still there?”
Don: “The IT industry is changing rapidly. Knowing the direction and the trends can help any country to refocus and plan on what they can do rather than just follow someone else. The current trend is moving toward business-value and customer relationship rather than low cost labor. The new trends are cloud computing and mobile platform with large network-centric, more complex applications which require better skills such as architecture, design, integration rather than programming and testing. This trend does not mean low cost IT outsourcing business will go away but the industry will be opening many new opportunities for countries that can provide customers with these new skills. If you only focus on programming and testing then you always follow someone but if you can upgrade the training then it is possible to catch up and capture new business. It may require changing the training programs, it may require government directions, it may require new skills training but in global business, you must have strategy and cannot depend on following somebody. To do business globally requires communication skills in multiple languages such as English. It is essential to start English training as early as possible because to compete with India, You need workers to communicate in English too.”
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
