Tracing the outsourcing growth

India has one of the preferred destinations for services companies – specially in the IT and high technology sectors. It began (initially onsite) with companies like the Tatas initiating software services in the 1970s, and Infosys in the early 1980s. This was followed by multinational companies like TI setting up captive development facilities in the latter half of 1980s, followed by Motorola, Analog Devices, etc. These captive centers started as “internal” outsourcing centers for their companies. Outsourcing - being a generic term for work given by one company to another company, or by a multi-national company to its captive center in India.

The 1990s saw an explosion of multinational companies setting up their design and development centers, as well as the growth of Indian services companies into high technology areas. This is now a thriving industry. While most of the outsourced design and development started as services and solutions - things have started changing in the 2000s. There are services companies which develop complete products and end-to-end solutions. Hence outsourcing is not just for design and development services, but for products too.

Semiconductors

The semiconductor industry (which requires specialized skills in the areas of microelectronics, devices, firmware, embedded software, etc) has similarly seen significant changes in India. An important turning point is the change in perception of India as quality engineering destination, rather than just the provider of cheap labor. India is also seen as a growing market for semiconductor and electronic products. As an example, the recent study by India Semiconductor Association (ISA) and Frost & Sullivan (F&S) points out the growth of semiconductor and electronics markets and business. Electronic companies and semiconductor fabrication plans are changing the ecosystem for various types of outsourcing to India.

In the initial stages, companies outsourced projects that were simple, modularized, and could be done by smart people with some training. These could be maintenance projects too. Good quality deliverables, along with commitment, hard work, and passion for more has resulted in outsourcing of start-to-finish product development. While cost (salary) escalations have been a concern, India has come to be recognized as a destination for high talent in engineering and applied sciences, along with a good base for pure sciences in the areas of mathematics, physics, chemistry and biology.

Feeding the frenzied growth of outsourcing and development is the growing talent pool of engineers. It was the presence of universities and colleges, along with low cost of operations and resources, which attracted initial investments. This created more work being outsourced to India. The positive feedback loop into the universities resulted in a closer interaction between industry and academia, modification of course syllabus, setting up of R&D labs, etc. Many universities and institutes are turning out high quality engineering talent, along with the more established IITs and NITs.

The maturing of the Indian industry scenario (both with home-grown, as well as multinational companies), has generated a powerful base of management talent. People who have grown with the industry in India over 15-20 years, as well as experienced Indians relocating back to India from abroad – have been increasingly responsible for high-end work to be outsourced to India. Many of the Indian operations have established high-quality processes – and have been certified either under ISO9K, or the SEI.

Outsourcing

Outsourcing is not just restricted to software and design. Many Original Equipment Manufacturers of electronics equipments (Nokia, Samsung, Solectron, etc) have set up their operations in India to cater to the local market and customer base. Outsourcing in the areas of Packaging and Testing of Integrated Circuits has already commenced with setting up of such facilities. On a different note - outsourcing of manufacturing to India in other industry segments like automobile (Toyota, Honda, Daewoo, etc) has been well established for quite some time. And if the Integrated Circuit fabrication, takes off in India, this will give a different dimension to outsourcing. The growing customer base, local market, increasing middle-class segment, high percentage of young population, etc add fuel to the fire.

Hence design, software and manufacturing services will continue to grow due to the above reasons. Various companies are also evolving their business models to adapt to changing situations. Many Indian companies have started acquiring companies abroad, as well as starting their operations in countries where services are needed. This is giving a different angle to outsourcing to Indian companies.

It is important to note that services should not be interpreted as being “inferior”, and should always evolve into product development. Services are very important parts of the growing system – and generate the talent and resource base which is critical. Services and product development will need to co-exist, with each feeding into the other. It has to be a positively growing spiral of competencies, services, products, market, industry-academia interactions, government support, infrastructure development, etc.



You can reach Dr. Madhusudan V. Atre at madhu.atre@lsi.com