Dr. Kalakota : Four core trends boil down to every business, Cost, Quality, and Productivity & Innovation. Everybody looks for lower cost. The continuous pressure on the cost is the fundamental mega trend. Many people think that the trend adds on to the flow, that is, if the trend remains very high for six months, it is less pressure. However, the trend is never the less; it is a long-term trend. Quality is another major issue. Initially, a lot of outsourcing was driven by cost; as cost started rising, quality became a major issue.

Right now with India, quality is a big problem. Initially the quality was good as you could get good people but now the quality is declining as you can see in certain areas the quality is varied. It will be more improved if matured people come in. productivity is another major issue in offshore outsourcing. Developed countries like France, Germany, & USA, have better productivity & it seems to be stagnant at present in India. Contrary to all the hype about technology leading to productivity improvement, there is still no better productivity.

Innovation is another aspect wherein for some companies cost becomes low priority but innovation is the main driver.

Dr. Kalakota : The single vertical model is largely driven by the cost of sales. If you do not focus on a single vertical, and you chase everything in the US, the cost of sales becomes very prohibitively expensive. In addition, the win rate becomes very low. Therefore, to maximize your win rate you are better off with a single vertical model, so that when you go in for the next mortgage-processing client, you can already point at seven to eight clients you have already worked for. It matters for US clients, the more the numbers, the less hesitation you face from them.

Dr. Kalakota : It is a true challenge to pick up the right model. When you think of setting up a captive centre in India or China or Eastern Europe, often the captive centre does not give you enough flexibility. One of the core issues when you think up of cost, productivity, quality & innovation, one should also look for flexibility. Business environment changes all the time, especially in North America, wherein hurricanes can wipe of 50% of the state where you have your business and you have to adjust very quickly by moving from service to service.

When you think about a global outsourcing methodology, there is a difference between the strategies you would have opt for a product company vs. the strategy you would opt for a service company. In India, both the strategies do not work together in India. The services are always in two folds: consulting services and steady stage services like mortgage processing services. Projects which are time-based, to work them out becomes very tricky, especially managing the captive centre model. If you deal with one or two vendors only in a relationship based outsourcing model, the vendors a re not broad enough to deal with large companies as they are specialized in one or two models only. They can deal with application development services if you need a call center capability, then you need a third vendor. Then you are not getting the advantage you are looking for. It is becoming very hard for multiple functioning areas. Many companies have hybrid strategies and they captive center for one function and another centre for other functions.

Dr. Kalakota : In vendor selection, you look for quality & integrity in a vendor. For quality, you have to try them first and gradually build up trust. Outsourcing has become very prominent in large companies. Unless you demonstrate a consistency of quality, nobody will trust a vendor. It is an important issue with large organizations how to make people trust the relationships you are building with vendors. Since you cannot mandate such things in corporations, as the corporations make their own rules. This concept of internal education and change management is also a part of vendor selection. Building up brand value with large number of employees helps in vendor selection too.

Dr. Kalakota : The key issue is the cost. From last year to this year, it’s a 30% increase in Bangalore, which is now rapidly getting competitive. If you hire a senior person its $37 to $38 an hour, that equivalent to $80,000 p.a. That is why vendors who are not single city oriented, but have a global delivery model themselves, are a critical factor while hiring a vendor. The vendor has to have the flexibility to say that today I am offering you $25 an hour, and I can guaranty that I will be able to give you $27 an hour. Their ability to move up from $25 to $ 27 is a great thing, as they will have to move up some of their work to Philippines or to some other country to maintain that and that is where the larger vendors have an advantage over small vendors.

Dr. Kalakota : The key challenges right now are that we have offshored very simple tasks. It is still very difficult to offshore knowledge work although it looks easy, because a lot of knowledge work cannot be codified to be offshored effectively. Financial services when they go away from commodity process and they start getting into more complex things like risk arbitrage or research, the context becomes very critical. You cannot just have an employee offshore who does not understand the concept and comes up with the stuff. Therefore, that is one of the negating factors or barrier to the growth of offshore. Future may have solutions for this, but at present, it is a barrier. Knowledge work again can be broken down to commodity work and knowledge work, where the companies are doing commodity outsourcing but can get to a point where outsourcing can be around 60%. The next thing then can be how we can attack the knowledge part of it.

Dr. Kalakota : The best practices in ‘Transition Management’ are, having a long-term plan and then executing it. People try to do it very fast. That is where the concept of doing it in a structure way without hurrying up comes in. The best practice is if you are trying to move a large number of people or jobs having very robust team leadership become very critical. In transition management, we interview people very carefully, but we do not interview the team leads very carefully. That is, we interview them for their qualifications but not leadership capabilities. Because the Team Leads have to grow and what we normally look for is, if the person is able to lead 5 or 10 people, but we normally do not look at if the person is able to lead more numbers of people. Attrition during transition is a killer. One never plans it beforehand therefore, one should always have contingencies for this.

Dr. Kalakota : The critical parameters for ROI are that you should not over promise when you create your business case. The other head on costs should be kept in mind. It is unpredictable. You have to plan ROI over a steady period of 3-5 years. In India, you see ROI after 18 months. You have to stick with patience and discipline until then. Attrition in the US is also a killer for offshore outsourcing. For example, the Manager who has planned and executed it, if he leaves, then the whole thing collapses. In USA, too attrition is problem. The average tenure of a CIO in India is 20 months and a CEO is 25 months. Even in USA there is no consistency. When USA companies re-organize much as an acquisition that also kills the ROI. Many people do not like to either point this out as every company is re-organizing, to merges or changes and these too kill the ROI. When a new person comes in or the same post, it takes 3 months for him to figure out what is happening.

Equinox : On the ROI front how would you comment on process re-engineering as a tool for reducing the total cycle of ROI?

Dr. Kalakota : It is a very critical and useful tool probably underutilized right now, because applying process re-engineering takes a lot of skill as it is not only in India but also in US that you have to re-engineer. The entire process end to end is re-taught and re-architectured. It takes a lot more time than people think. If it is re-engineering in the terms that you are telling an agent to ask this question vs. that question, it is just task oriented re-engineering. However, if you are trying to re-engineer an entire mortgage servicing process or an application process then many things have to be considered, like data security and privacy issues regulatory issues etc. end to end has to be taught through and that is why not so many people go in for process re-engineering.

Equinox : What is the best model for offhoring or outsourcing especially in the terms of location or particular destination?

Dr. Kalakota : You always compare it to what you are doing. When you start offshoring, the best thing to do is to hire a senior director in the competitor’s zone who knows the market well. If that is the start of your strategy, then the best place is to go to India. Because the people in India are being trained very rapidly, and there is a ready pool of knowledge rich labor, as training somebody is a lot of work. India will do fine because the quality of training in India has reached a height now, where other countries will take time to reach as it takes time to teach and train a million of people. The barrier to entry for other countries is very high. The better India gets, the higher the barrier gets for other countries. Tat is why India has better chances for both finance and IT services.

Equinox : What are the best practices in evaluation of processes to offshore?

Dr. Kalakota : Best practices are still very self-contained that do not have a lot of interaction from other things, where if you can lift process and drop it in India, things will work the same. Head count is another major factor. You need thousands of agents. Volume and cost savings are also available in India. You have to look out for the value of money as pay back against the amount you are spending and that is very important.

Equinox : What are your outlook for the next 3-4 years?

Dr. Kalakota : The outlook is positive. However, challenges like security issues are lacking in India. Data accuracy and security issues are two most important issues are the two most important issues India needs to handle immediately. From a long-term perspective, the trend cannot be reversed, but can be slowed down. It may not be a growth like it was in 2003 2004. Largely, because the costs are rising, people are spending more time, decision cycle in the market are very long-term. It takes a very long time to incubate these things. Some realistic expectations are required.