Why outsourcing IT product to India works?

McKinsey has put together a Project 360° for outsourcing BPO & IT work, including software product development, to India. The results of this research were a fascinating combination of insights about how companies who use outsourcing benefit, why they benefit, and how outsourcing companies will need to improve to stay competitive in the world market.
First, I’d like to start with expectations. The study asked outsourcing clients and outsourcing company senior managers to allocate 100% over these five areas which both sides agreed were the primary drivers for outsourcing services:
• Cost
• Quality
• Risk
• Speed and flexibility
• Innovation and productivity
The fascinating thing about the responses from 50 lines of business in a dozen different companies, shown below, was how the differences manifested themselves between outsourcing newbies and veterans.
This lines up pretty well with our own experience here at Inventure Global. Our clients tend to engage us for one or more of the cost oriented benefits, but soon end up realizing the tremendous potential available on the opportunity side of the equation. After the first year, the excitement of a one time cost savings wears off. The idea of increasing your growth rate year after year never gets old!
Another truly welcome surprise is how far behind the curve most of our competition’s senior managers are. From the chart above you can see that the vast majority of outsourcing firms focus exclusively on cost oriented benefits to their customers. This is a great place to start, but in the future cost alone won’t keep them in business. The study clearly found that the winners in tomorrow’s outsourcing landscape will need to help their customers innovate, get to market faster, and offer their help in a flexible manner - that’s almost Inventure Global’s mission statement!
Finally, the study surveyed a substantial number of companies that do their work in house and offshore (captive) and those that outsource and offshore. On average a 30% improvement in productivity appears to exist between outsourced service providers and similar in-house departments, even though both use an Indian based workforce. This dramatic difference is probably due to the increased competition among outsourcing companies who need to continually improve their people & processes in order to stay competitive. In the long run I’m sure in-house teams will catch up, but the market is less forgiving in the short run.
The survey concluded with some closing remarks about the outsourcing IT industry:
• A company culture of institutionalizing practices separates the winners from losers. The winning firms have been able to successfully absorb 15%-18% increases in wage inflation through added productivity.
• Despite good customer satisfaction & project outcomes overall, there is still significant variance. You can’t bank on the results from just any firm.
• Customers are increasingly looking for upstream value added services like requirements gathering & design, but existing companies do not have robust enough offerings to fulfill the demand.
• The industry needs to continue focusing on improving performance and consistency.
Inventure Global operates below the radar of McKinsey right now, but so do our customers! Startups are definitely a bit different than big companies in quite a few ways, but many of these results mirror our experiences as well. I think the opportunity oriented benefits are the real takeaway for us, our customers are constantly asking for help innovating and getting to market faster. You can’t run a business on cost cutting alone, you have to differentiate to survive, so in the final analysis this doesn’t come as too much of a surprise to us - hopefully it’s another two or three years before our competitors notice!

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