Is it time for Western and Indian services cultures to blend?

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Today’s outsourcing industry is balanced on a knife-edge as costs continue to level-out across service providers for operational work.   Business leaders are demanding more innovation and productivity from their outsourcing endeavors, but their delivery teams tend to be more concerned with the work culture of their provider. 

So how can leading service providers deliver all the goodies CFOs and CIOs want, in addition to being really flexible and easy to work with?  Quite an ask, but those who can deliver both will win out.  So how did we arrive at this impasse?

During the early years of this Millennium, the onslaught of the Indian-headquartered outsourcing providers was centered on low-cost service provision, and a willingness to do whatever clients wanted to win the business.  This strategy has proved especially effective for the less-complex IT application development and maintenance work, and several operational business processes, such as invoice or claims processing. 

In today’s market, the Western providers have been forced to bring their costs in line  to be competitive for the “lower-end” work, by expanding and optimizing their offshore/nearshore operations.  Once their prices are within 10-15% of the offshore-centric providers, the provider selection decision veers away from price, and towards one of  with whom do we actually want to work? 

Two different services cultures have defined today’s outsourcing business

We’ve witnessed an incredible dichotomy of styles in the outsourcing business over the last decade -  one of top-down dictation from our traditional incumbents, in stark contract to the bottom-up tenacity from our growth machines from the sub-continent.  To put it quite simply, the Western incumbent providers show up at the CIO’s or CFO’s office and tell her/him how they can change their world to do things their way, while the Indian-headquartered providers have typically operated a rung or two down, offering to do whatever their clients need to get the job done – and make them look good in the process.

One set of providers has grown considerably over the recession years, and continues to outperform the industry, while the other is maintaining a status quo, with far more modest growth.  And, as we’ve mentioned, it’s not all about price anymore – several hundred thousand Indian and Philippines citizens are proudly showing up to work in an Accenture, Capgemini , Deloitte  or IBM polo-shirt.  Both the traditional providers and the newer Indian breed can offer low-cost services to take on new business.  So if it’s not really about cost anymore, and the Indian-headquartered providers continue to gain marketshare in this environment… the secret sauce must really be about work culture.  Let’s examine further…

C-levels don’t get so involved in service provider selection.  Most IT or discreet business project decisions are overseen by the direct report to a C-level (or even lower than that).  If you’re a VP / director level executive, why would you want some flash MBA-infused team of hotshots telling you what to do, while constantly trying reach over your head to your boss to let him (subtly) know you could run your department a lot smarter, and more cost-efficiently?  In this post-recession environment, people are incredibly nervous about their job security, and the last thing the VPs and directors want is a provider that is going to threaten their cosy world. 

Conversely, a team of humble, dedicated and determined service provider staff, who see you as king of their world, and are prepared to do anything for your business – and promise you outcomes you probably realize are unrealistic (but who cares, right?), are far more appealing providers for your custom.

Peer pressure up the chain trumps a round of golf.   In the old days, when CIOs were wined-and-dined at offsites in Monte Carlo, they made the provider selections.  They could afford the occasional $100m project-wastage and no one really cared (hey – it’s just IT, right – it’s just a black hole of lost cash, right?)

Today, most CIOs are tied to their desks staring at a spreadsheet trying to keep within budget, while trying to prove they can deliver value to their board – they are in a pressure-cooker environment, with ever-decreasing tenures.  They are completely reliant on their teams to bring them results.  When their two, three, or four direct reports come to you with a suggestion to “use this provider”, it’s very hard to challenge a consensus from your own team – you’re the boss and you need you team to like you, or you’re in serious schtuck.  You don’t have time to mess up, and you may be out of a job soon anyway, so short-term success works better for you anyway.  If you recommend your consulting partner buddy (who just three-putted to let your win on the 18th) propose work for your managers down the ranks, the chances are they’ll find every excuse not to use them.   If your team isn’t happy and you’re making multi-million dollar investments, you can’t afford mistakes, or a lot of dissention from the ranks beneath you.  Might be easier just to keep everyone happy as long as you’re staying on budget.

So what can the CIO do?  Risk upsetting your team, or keep the costs low and find a way to keep the machine ticking over and meet the operational goals?

The next wave or productivity requires a new approach from the industry.  Quite simply, most of the managers, a rung down from the CIO, have squeezed as much as they can out of the easy work.  The app support, the testing, the simple coding is running about as cheap as you can – you even bring in sourcing advisors to keep the contracts running as low as you can manage.  There’s no more room for maneuver. That nice Indian head-quartered provider – who still loves you as much as the first day they showed up at your office – can’t find anymore wiggle room to keep making you look good.  Besides, today they’re a multi-billion dollar eneterprise with a lot more overhead, and have sales heads forcing them to start raising prices. 

At the same time, some of the old Western providers you abandoned a couple of years ago, can now match the prices you’ve just been quoted from the “low-cost” provider.  They want you back and are begging for that second chance, promising delights that you forgot that failed to deliver in the old days…. WHAT DO YOU DO?

Bottom-line: the Indian providers are trying to be more like the Western providers, and the smart Western providers have studied the Indians who’ve been eating their lunch, and are working out a game plan to win back lost business.  The cultures are moving closer together.

Does that mean we may actually see one of the Indian biggies merge with a Western one?  I’ll put a stake in the ground and say we will. In the next year it has to happen – a blending of the two cultures to form a mega-provider which can do it all.

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19 Comments

  1. Siddharth Ahuja
    Posted August 13, 2010 at 2:30 pm | Permalink

    What do you mean by “Indian biggies”, Phil? If you mean one of the top 4-5 firms (TCS, Infosys, Wipro, Mahindra Satyam, HCL) merging with one of the top western firms (Accenture, IBM, Cognizant) then you’re dead wrong. It’s not going to happen. The top western firms already have a large employee base in India. IBM has more employees in India than HCL does. There is nothing for them to gain by making a large acquisition. I’ll put my money where my mouth is – care to wager?

    The reason western firms (other than Cognizant, I guess, which was born with a split personality) have been unable to replicate the Indian model is an interesting case study in organizational structure. For example, IBM India is still a stepchild of IBM Global. IBM India employees in the U.S. are managed differently from IBM U.S. employees (lower pay, different bosses) so there is no “one team” or “we’re in this together” mindset. It’s unclear where the ultimate responsibility for project delivery lies – with IBM U.S. team or the India team.

  2. Posted August 13, 2010 at 2:44 pm | Permalink

    @Siddharth: For a long time, I shared your view that it would never happen: Indian government is over-protective of its leading Indian-headquartered firms to let one of them get taken over, and the Western providers have built out their own offshore operations.

    Here’s the crux of the problem – how can the Indian firms keep apace with their current growth without investing in more onshore expertise (domain-specific process knowledge and consultative/business transformation skills). And how can many of the Western providers ever compete effectively for the less complex work, based on the arguments outlined in the article? Accenture, and to some extent IBM, are now competing effectively on price when they need to, so my prediction is for one of the other Western providers to potentially get merged with one of the major Indian firms over time – there are already about 20 struggling European IT services providers, and a handful of US-dominated providers who simply can’t compete effectively anymore. If I had to wager, I’d put it on one of the major Indians buying out a Western provider, where both companies agree they need to merger to remain competitive.

    The ultimate provider will have the onshore consultative expertise and the superlative offshore set up that is run both operational and higher-value work for clients. Something has to give….

    PF

  3. Posted August 13, 2010 at 2:55 pm | Permalink

    Phil:
    That has already been happened in my industry. The Indian conglomerate Essar acquired an American Customer Care BPO several years ago and integrated their operations with their Indian BPO industry and existing Vodaphone captive centers in India. (Essar owns a piece of Vodaphone).
    Herb

  4. Posted August 13, 2010 at 6:26 pm | Permalink

    The cultures will not merge. At best you will get interfacing people and companies that will bridge the gap more seamlessly, but you will never get a culture merge. You’re right, once you’re within 10%-15% in price it becomes a matter of who you want to work. For the West that will not be Eastern or near Eastern providers, the difficulties in off-shoring coupled with the massive cultural gap will drive the West away from Indian outsourcing, not toward it.

    The Indian software machine will have to learn to be creative and stand on its own with its own products. Within 20 years either India will be both its own client and provider or it will implode and collapse in on itself. We have many examples that demonstrates this, think manufacturing in Japan in the 60s-70s, or Korea in the 80s-90s. They started as outsourcing to the West, then followed the predictable pattern of rising costs and salaries. They became less and less viable as outsource providers and evolved into making their own products (as opposed to just putting the West’s products together). China is the 2000′s example and they are evolving.

    India will have to follow this pattern and evolve into its own right or die. Given the incredible lack of infrastructure, a 35% illiteracy rate, competition with China (which is no contest), and the instability of neighbors like Pakistan, I would not make bets in favor of India evolving or being viable over the next 2 decades.

    Alexander Katrompas

  5. Dan Sobel
    Posted August 13, 2010 at 8:08 pm | Permalink

    They are blending.

    About HALF of the Recruiters I’m getting responses from are Indians who are recruiting for openings in LA (which is about 400 miles from here).

    Dan

  6. Posted August 13, 2010 at 8:11 pm | Permalink

    One other factor to consider here: the cost of bringing over H1-Bs and L1s is getting too exhorbitant, and will further encourage Indian providers to explore more mergers with onshore providers:

    http://business.rediff.com/report/2010/aug/13/obama-signs-border-security-bill-ignores-indias-concerns.htm

    PF.

  7. Wallace Jackson
    Posted August 14, 2010 at 3:31 pm | Permalink

    I think they have been blending, and rates are also rising across the board… ;)

  8. James Wheeler
    Posted August 15, 2010 at 2:38 pm | Permalink

    Phil,

    Great piece. Clearly, the Indian vendors can’t maintain these growth rates for ever, and some (and only some) of their Western competitors have closed the price-gap somewhat. Natural market dynamics are screaming “consolidation” – it’s all down now to which vendors have the money and investment appetite to develop more of an offshore-led model supported by onshore expertise. I’ll second your prediction we’ll see at least one major Indo-Western merger before long,

    James

  9. Prasanth Nair
    Posted August 16, 2010 at 6:57 am | Permalink

    Phil, you have brought in very interesting points. I agree that there is clearly some business value in the merger of the east & west. However, the point to ponder is on it making immediate financial sense.
    With the PE multiples of Indian biggies being 4-5 time that of global giants; the deal may not be value accretive to the acquiring companies shareholders.
    The scenario you painted can happen may be in 5-10 years time (or longer if it is a lost decade for the west)…but then we do not know how the evolution & adoption of cloud services would have transformed the services industries landscape.

  10. Posted August 16, 2010 at 7:18 am | Permalink

    @Prasanth – you actually reached the pivotal factor in all of this: the stock valuations of the Indian firms. Most of the Indian providers have opted for cash-based, small “tuck-in” acquisitions, which is largely why we haven’t seen any significant acquisitive moves from them. For large-scale mergers to take place, there have to be stock-based transactions, as opposed to cash-based. With the current multiples are the levels they are, surely it makes sense for one of the Indian firms to leverage this strengthto take over a struggling western firm via a stock-based merger? If they wait for their multiples to decline too much (which they eventually will), then the acquisition potential will actually recede,

    Remember, these are unique times with little historlcal precedence, and some bold firms will make bold moves – expect the unexpected!

    PF

  11. Pratik Maroo
    Posted August 17, 2010 at 4:50 am | Permalink

    Great topic!
    I do agree that Indian firms are looking at inorganic growth and move by one company will make it imperative for others to follow. But do you think that stage is set for a large-scale acquisition or will we see gradual increase in the acquisition size over a period.

    The real question is not on the benefit that can be accrued by pairing western companies CxO reach with delivery competency of Indian firm, but is more on the risk and challenges of integrating consulting with delivery services. In past few years many of the tire-1 Indian companies have tried to build a consulting practice, and have realized difficulty in scaling up and making consulting & delivery work as one engine. Also most of the Indian companies consider stock price as an important parameter for employee retention+motivation, so there will be resistance to make a big move that can reduce the stock price in short-term.

  12. Posted August 17, 2010 at 7:17 am | Permalink

    @Pratik – all good points. While a few of the Indian firms continue this current phase of stellar growth, they are unlikely to upset the apple cart. But this is a temporary phase in the market for most IT services firms. The lower-end support/maintenance work that can be moved offshore is not a bottomless endless well – it’s a globalization phase that will slow down over the next few months. The only way to maintain this growth, is for IT services firms to take on more of the complex IT infrastructure / middleware projects, which require onshore consultative and business-alignment knowledge. Not to mention the BPO opportunities that are developing, which tend to be in small, gradu incremental steps, and becoming increasingly tied to IT initiatives.

    Some firms will simply be happy remaning as successful IT services operations shop – as long as they can maintain healthy profitability. And for some, they will continue to make do with small cash-based “tuck in” acquisitions. But some providers are never going to make the timely move into the larger market moving at this pace. I can already pinpoint some suppliers who are already out of the BPO game (for example), and have to acquire to get a seat at the table. The same with IT infrastructure. Moreover, there’s only a certain portion of infrastructure/cloud work you can pull offshore – you need the onshore expertise and consultative skills. Remember, 75% of ERP support work still runs onshore and a lot of that will necessitate a more onshore-balanced set up to be outsourced.

    I’m not saying a mega-acquisition are the appetite of every provider, but for some, it will provide the immediate consultative and domain capabilities they need to move up the client value chain. With Indian valuations so high, and several western provider valuations struggling, surely the time is coming where a stock-based aquisition make sense?

    PF

  13. Mrinal Singh
    Posted August 17, 2010 at 2:46 pm | Permalink

    Gartner Estimates that global IT spending is expected to grow by 6.6 percent in 2010 to $568 billion putting it in perspective of India based service providers whose revenue forecast for this year is $57 billion, there remains a huge market for Indian corporations to tap. In my opinion Gartner in its figures has not included the federal spending budget that forms the mainstay of some of the corporations especially the like of SAIC, IBM, CSC and Accenture.

    India based IT service corporations have been able to move up the value chain, and are today winning business not only because of cost saving but because of their capabilities, take the example of Wipro a corporation that I follow closely, they are increasingly involved in some of the most challenging SAP engagement and have replaced some of the big 5 US based service providers for global SAP projects.

    The comment on India based providers loosing their competitiveness because of rising prices is valid and that that is something that needs to be addressed, this is happening not only because of unavailability of resources but because of certain macro economic issues like inflation which the policy makers in India need to address.

    My two cents………

    Mrinal Singh.
    twitter: mrinalasingh
    mrinalasingh@gmail.com
    Blog: blogs.ittoolbox.com/emergingtech/trends/
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    offshoring to India:
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  14. Posted August 18, 2010 at 11:28 am | Permalink

    I agree with Phil, an outsourcing company of the future will be one that can provide transformational services and offerings that are a perfect blend of onsite domain expertise, lean processing capabilities and technology powered. Labor arbitrage will cease to be a differentiator very soon for the Indian Companies.

    What needs to happen with outsourcing companies is a huge paradigm shift in the way they embrace the other side (organically or inorganically) and not be tied down by their legacy. I recently heard a BPO presentation by one of the large IT services company that is expanding its BPO capabilities and it sounded like they were talking more about a piece of software and what it can do.

  15. David Schutzman
    Posted August 20, 2010 at 10:24 am | Permalink

    Brazil has risen to be an appealing nearshore IT destination for US-based companies. David Shpilberg, Vice Chairman, CPM Braxis explains why in this Nearshore Americas video — http://www.youtube.com/watch?v=IeBdTEJb4eQ

  16. Posted August 26, 2010 at 2:40 am | Permalink

    One has been hearing of this for the last eight years at least from the time the “western” providers set up operations in India. But it has not happened so far. While there is room for consolidation in the market, it will be among the Tier 2 western providers and Tier 1 India-based providers, with the latter acquiring the former. The challenge like you mentioned lies in ensuring that cultural fitment is achieved. Very difficult given that consulting and delivery require two very different mindsets. But not impossible – watch this space for more.

  17. Steve
    Posted September 2, 2010 at 8:05 am | Permalink

    @ Phil

    Although there are some excellent points raised both in the article and in the comments I think the point has deviated from the point of the article (as I read it anyway)

    If culture is a differentiator how do you define or understand a companies culture?

    Culture of the approach of the sales and marketing teams is not going to win my business. Reputation, experience and cost are factors that will.

    I guarantee it’s not realistically represented by the Sales people that are involved at the point of engagement or possibally even the transition team! It’s absolutely represented by the delivery team.

    I manage a French IT provider delivering BPO services in Delhi and Pune with a UK based account team and can’t comprehend how we would either gauge or anticipate culture fit at the point of tender.

    One of the challenges I have is the culture differences between the two cities and the operation vs account team. We have no dealings with the French head office (cultural location?) or any of their staff so anticipating or commenting on a companies culture just seems fruitless.

    If it’s me that missed a point do let me know.

    Cheers

    Steve

  18. Posted September 2, 2010 at 8:56 am | Permalink

    @Steve – the point of this blog post was to contract the different sales and delivery styles of the Indian providers and their Western competitors and how there needs to be a balance of the two to help the Indian providers move into more onshore-based complex work, and for the Western providers to protect what they have left with the lower-value work – i.e. both sets of providers need to become a bit more like each other. You experiences seem to highlight cultural differences across an actual operation,

    PF

  19. Posted October 27, 2010 at 4:17 pm | Permalink

    Aditya Birla Minacs is a perfect example of a company that has merged Western and Indian cultures. In 2005 the Indian BPO TransWorks, a subsidiary of the Aditya Birla Group, acquired the Canadian BPO, Minacs. At the time, the acquisition resulted in some forced and unforced attrition among management. Basically, those people who found it difficult to work in an atmosphere of cross-cultural convergence left. Today, five years later, members of the management team who remained loyal during the merger and adapted to the new culture, learned to work together effectively providing clients with “the best of both worlds.” I’ve seen first hand that making geographically disparate teams work is much more complex than simply offshoring transactional tasks and keeping complex processes onshore. The corporate culture must support an environment of mutual respect, a heavy dose of internal communication, and a governance structure that effectively bridges oceans. Only in this way does everyone win — most importantly, the end client.

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