IT.India Part I : Offshore R & D

For the past month or so the Indian rupee is getting stronger against the American dollar, which has come down to 39 INR compared to 45 INR. This is already bleeding Indian services companies and their Q3 numbers speaks for that. When the rupee was getting weaker these service companies used to make 4-5% of their margins just by keeping their money in dollars and converting them back during the results announcement. Nowadays Indian service companies are mulling multiple options to resolve this problem -- six day working week, reduced hike for employees, productivity improvement, moving to lower cost geographies (like China and eastern europe) etc. With STPI tax sops are getting withdrawn by 2009, Indian IT companies are having challenging times ahead.

Let me take the example of product R & D happening in Indian companies as an example. Of course value creation can be done at multiple levels apart from R & D as well. Majority of MNCs which are having their engineering centers in India are working in the 'Offshore R & D' or 'Engineering services' model. In this model, the offshore team owns majority piece of the SW that goes as a part of the product and take the complete 'delivery ownership' from India. This is slightly better than the 'pure-vanilla-service' model which Indian service companies (like Infosys, Wipro etc..) are offering majorly.

To understand this slightly better, let me take 'Core vs Context' framework introduced by Geoffrey Moore's latest book 'Dealing with darwin'. Let us understand the four quadrants with
some new definitions:

Core: Processes that enable and amplify your chosen vector of competitive differentiation
Context: All other processes

This Core and context can be again classified on 'Mission critical' and 'Non-Mission-Critical' which leads us with four quadrants. See the picture below to get a better idea:

Indian service companies, which are offering 'pure-vanilla-service' come under the bottom right side of this model, which is popularly known as 'outsourcing'. There is very little value addition can happen here as it falls under 'non-core' activity.

The offshore R & D organizations are operating under the top-right quadrant. This means the activity is 'mission-critical-but-non-core' portion. For example: if a company is working on a enterprise router, the offshore R & D team can work on adding new features, maintaining the existing code and do some level of program management. From the business point of view this is critical, because the product is generating revenue for the company at present. In a way this quadrant is higher in the product value chain, but still it is not coming under the 'core' portion of the company's strategy. Because the work the offshore entity doing is not providing any 'competitive differentiation' to the parent company. On the other hand, the parent companies will place all the resources into developing core portion of the product.

Sitting in places like India, contributing into the 'core' portion is extremely difficult. Following are the major challenges Indian companies are facing now:

• The offshore team is totally un-aware of the customer needs. They are far away from the customers and most of the technology products won't get deployed in countries like India. I won't see this changing in the near future because these 'emerging markets' need to mature a lot before they start adapting any new technologies. Except for the areas mobility I don't see any technology has taken off in countries like India.

• The local job market is over-heated where retaining talent has become uphill task. Engineers jump jobs every 1-2 years and its very hard to build the product building expertise with this mindset. I have personally seen engineers dedicating 30 years in a same product and understanding 'nuts-and-bolts' it. Its very very hard to such stuff here.

• The offshore leadership team is primarily grown in the engineering domain and lack business acumen. For example a second level manager don't have much idea about the big picture of the overall product. They only possess expertise in areas like: resource management, delivery management and to certain extent program management.

Now, how does the future looks from here on?

At one end its hard to imagine any US/UK based company to offshore the 'core' work because it doesn't make business sense.On the other end the offshore entity can't do much because they don't know the customer. In a way the 'offshoring' is stuck in top right portion (quadrant-III) of the Geoffrey Moore model. In my perspective, it will continue to stay there for a long period
of time until the local market gains significance. The local market growth will mainly depend on multiple factors like: Good governance, robust infrastructure, litracy and technology awareness. I would say the 'india-offshore-story' has just begun and it is foolish to start celebrations at this point in time. These companies have got to cover much more distance before they really achieve 'value creation'.