The software development sector of Indian economy has built itself up in the last decade or so on back of the work it has received from countries such as the US, the UK, Australia, etc. India has always attracted interest from other countries for several reasons. First of all, the English language competency of Indians is good enough for the companies to get their work done. Secondly, the professionals here are skilled and this is an important facet for the software industry that has taken up the lion’s share of the outsourcing work provided to companies in India. Thirdly, skilled labour in India is available at cheaper rates compared to what happens back at home. However, now even the Indian companies are facing it hard to retain the interest of their overseas clients.
The Case of Lowe’s
Lowe’s, a retailer based in the US, has been providing Indian companies its back-office software projects for the last 20 years. This list of companies also includes some of the top names in the Indian IT firmament like Wipro and Infosys. However, now they have started to take back their software projects to centres back home. This means that software exporters based in India are missing out on the chance to earn millions of dollars.
Paul D Ramsay, the Chief Information Officer of Lowe’s, has stated in an interview that the company is absolutely changing the outsourcing strategies it has taken till date and as a part of the same, it would take back a lot of its software maintenance and development in its centres back home. The company will be looking to insource its core capabilities and functions back in the US as well as in Bengaluru. Ramsay acknowledges that this will affect the third parties in India to a significant extent. Now, the company will not associate with as many third party partners and vendors as before. In fact, these entities will be asked only to perform some specialised jobs.
At present, Lowe’s reportedly associates with Infosys, Cognizant, a US-based company, and Wipro. Each year, it spends almost a billion dollars for IT-related expenses. However, Ramsay has not commented on which companies Lowe’s is working with in India. He has remarked, though, that some of their expectations from the IT outsourcing scenario in India have not been fulfilled properly.
Benefits of Insourcing
Ramsay says – and this could be quite interesting from an Indian point of view – that insourcing is better than outsourcing at times because of the quality of talent available back home and the focus that people have in general. He has also pointed out that a majority of outsourcing work has now been reduced to the level of commodity. Ramsay also acknowledges that selling hardware is not as profitable as before. The problems being faced by Lowe’s are similar to what some other companies may have experienced as well.
Hope amid Despair
Executives at some of the biggest software firms in India will be expecting that the strategies of Lowe’s fail as that will enable them to start business talks afresh. In any case, in 2015-16, it is expected that IT expenses will go down around the world. Gartner, a tech researcher, has stated that it could reduce by 5.5%. The economic situation in China is precarious and slowdown in this Asian giant’s economy can have global repercussions. At present, the IT industry in India is worth $146 billion and outsourcing is what helps it earn its keep. If such work goes away, then it will seriously jeopardise the whole software development industry in India. At the moment, Citigroup, Bank of America, and General Electric are the biggest overseas clients in India.
They are spending significant amounts of money and outsourcing projects to India. Experts feel that demand will just not vaporise in a short period of time. Thomas Reuner, the Managing Director of HFS Research, based in the US, has stated that discussions regarding insourcing keep popping up every now and then and it does not always imply that there will be a shift away from outsourcing. However, he has pointed out that experienced companies still like to be able to do some of their work themselves as it gives them an additional option.
Lowe’s Not the Only One
There are some other companies like AIG, Deutsche Bank, and AstraZeneca – these are some of the top outsourcing clients of Indian firms – that are now looking to change their outsourcing plans and are getting their software projects done in their own centres in India. In a recent interview given to the Wall Street Journal (WSJ) early on in 2015 David Smoley, the Technology Chief of AstraZeneca, stated that in the next couple of years, his company would reduce the outsourcing expenses by 50%. At present, the company spends around $750 million in that regard. It will primarily focus on cloud computing and bring down its usage of physical technology devices such as computers and local networks.
Reasons for Insourcing
Ray Wang, who has founded Constellation Research, a research firm working out of Silicon Valley, has stated that these days the CIOs of various companies are looking at adaptable skills and this is especially applicable of companies that are capable of developing apps on their own. Political issues have also contributed to changes in strategic requirements of various companies. Often it also happens that companies break new ground on their own and look to explore them on their own instead of passing it onto a vendor.
Where do Indian Companies Stand?
As things stand now, Indian IT companies are in a precarious situation and the future does not look too rosy either. Their traditional business model is going to be counterproductive in a few years and this is why, it is important that they devise new ways to stay relevant. They need to look at key areas as quality and availability of resources, employee turnover, communications and cost. What can further exacerbate their problems is the coming of automation that will make the very debate between insourcing and outsourcing seem out of place.