Offshore invasion

With its huge development centres, India has established itself as the offshore market leader. However, other countries are now trying to challenge it, both globally and within the region.

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By  Neil Denslow Published  September 23, 2002

I|~||~||~|When the Kuwaiti Danish Dairy Company (KDDC) decided to deploy Oracle Manufacturing, it needed an implementation partner. Khaled Daher, IT manager, KDDC, scoured the market for one, but found that there were few companies in the Middle East with the experience it required.

“Only a few people locally have implemented Oracle Manufacturing, so there isn’t much expertise here in Kuwait. Even in the whole region, there aren’t many big manufacturing companies, so there aren’t many people who have implemented it,” he says.

After an extensive search, Daher turned to an Indian company, Satyam Computers, which was able to supply the expertise needed by flying consultants in from India. During the nine-month implementation, up to 20 consultants worked on the project in Kuwait, implementing the solution, developing reports and integrating Maximo, a preventative maintenance package, with the Oracle suite.

KDDC is not alone in looking to the subcontinent, as a growing number of Middle Eastern companies are turning to offshore companies for both implementation and development. Traditionally, Indian companies have had a stranglehold on the offshoring market, both globally and regionally, but now other countries are seeking to loosen India’s grip. Pakistani and Sri Lankan companies are already active in the Middle East, while China is starting to eye up the region as well.

Globally, the growth of the offshore market is fuelled by US spending. Recently, this growth has slowed as companies cut back on IT investments, but offshoring is still racking up figures that are the envy of other market segments. Gartner Group, for instance, says that while only 5% of US companies currently use or plan to use offshore resources in the next 12 months, 26% of these plan to double their offshore budget in 2003, while another 69% expect to increase their spending by more than 150%.

Within the Middle East, vendors from the subcontinent also report a growing interest in the offshore model, as companies here begin to realise the benefits it offers. “Offshoring has great market potential in the next two to three years as the market matures,” says Mohantha Anthonis, business development manager, CharterSoft.

Unlike other regions around the world, the main focus of this growth will be on product implementation rather than development, as the region has few companies with sophisticated enough IT requirements to justify large scale developments of any kind.
Ajith Menon, director of operations, MEA, Satyam Computer Services, says that globally, the oil & gas sector, governments and banks spend the most on offshore development, but most Middle Eastern banks “are really too small to afford large custom developments.”

The development focus is therefore on the oil & gas sector and governments, with some large-scale projects already being undertaken. Tata Consultancy Services, for instance, is currently engaged in a development project for Saudi Arabia’s General Office for Social Insurance (GOFSI), which will take 120 man-years to complete. An estimated 80% of the work is being done offshore in India.

Generally though, implementation projects are much more common as companies deploy large scale off the shelf products, such as ERP solutions. The vendors contend that there are a number of reasons for using an offshore partner, including the ready availability of skills. The large Indian IT companies, for instance, have over 10,000 permanent consultants with wide-ranging skills and they can be quickly deployed anywhere in the world.

“We have a tremendous advantage in being able to augment resources very rapidly,” says Hari Padmanabhan, president & CEO, Insyst Technologies (MEA). “If we get a project that needs to start in two or three weeks, we can get experienced people on board very quickly,” he adds.

Deep Singhania, director, business development, Middle East & Far East Asia, Tata Infotech, adds that the time difference between India and the Middle East also speeds up implementations.

“When the offshore team has a query in the evening, we send it to the Middle East, which is a couple of hours behind. When we come back to work the next morning, we have the answer,” he explains.

||**||II|~||~||~|While speed and resources are attractive, for many companies the main reason for offshoring is the price. “The one constant throughout the entire evolution of offshore development has been cost. It’s very much an issue of labour rates, there’s no getting around that,” says Stephan Lane, research director of IT services, Aberdeen Group.

This cost saving is potentially huge for US companies, and even though labour is cheaper in the Middle East, Syed Mansoor Ahmad, regional business head, Middle East, Wipro, estimates that an offshore company can undercut the local market by up to 30%. On a large project, Indian companies can charge as little as US$20 for an hour’s coding.

Lane says this cost saving can make a significant difference to an organisation’s IT team, as the tasks that are commonly sent offshore are “the kinds of activity that can eat into IT budget and always keep the internal team from being able to focus on new issues.”

Examples that fit this model are application migration, integration or creating a web interface for a legacy application — essentially tasks where the requirements are relatively stable and well known. The Millennium Bug also fitted this model, as companies needed someone to go through several million lines of code to check that the date fields would work.

“[Y2K] was a big boost for the Indian IT industry, as companies there gained experience with a wide range of applications as well as creating relationships with new clients,” says Lane.

When a company offshores a project, the work is usually divided up between an onsite and an offshore team. Implementation projects are usually all done onsite, but the vendors try to do as much work as possible in their offshore development centres so that clients can benefit from lower overheads.

Although coding can be sent back to India, certain aspects of a project must be done onsite. This is particularly true of the primary requirement gathering and high level design, as the client and project team need to talk face-to-face. “You can’t pick up a telephone from India, it just doesn’t work very well,” says Menon.

Once the design is drawn up, the coding can be done offshore, along with the unit testing. The project then returns onsite for implementation and integration testing. If an Arabic presentation layer is required, this is developed using local skills.

“However, the architecture, the design and the core functionality can all be done using the offshore model. That’s not a problem at all,” says Farooque Khan, business unit manager, Zamil-Tata Infotech.

||**||III|~||~||~|During the project, the offshore partner keeps a project manager on site, who acts as the communication channel for the client with the offshore development team. “The client never speaks to the offshore guys,” says Menon. “It’s the responsibility of the onsite coordinator to bring those elements into picture when required.”

The relationship between the onsite project management and the client is vital to an effective project. However, an offshore company also needs to have a permenant presence in the country they are targeting in order to build up a client base. A local presence provides the client with comfort in terms of possible legal redress, but also shows the commitment needed to provide long-term support.

Middle Eastern companies are aware of the importance of a local presence, as Pakistani firms are finding out as they try to break into the region. Ali Sheikh, director of marketing, Acrologix, says that at Gitex Saudi he found a lot of interest from companies in the idea of offshoring. “The only thing they were concerned about was that we had to have some sort of partner or office in Saudi itself,” he says.

Pakistan is targeting Saudi Arabia as it looks to break into the Middle East and global offshore marketplace. The country is confident that its similarities with the region will help it overcome India’s entrenched position

“The Middle East is an extremely interesting market for us, because of its proximity [to Pakistan] and because of its cultural and religious affiliations. We are being received very well, even though we are starting out late compared to India,” says Waqar Butt, director of international marketing, Pakistan Software Export Board (PSEB).

Sri Lanka is also establishing a presence in the region. CharterSoft, for instance, has been working with, Emirates Airline’s IT spin-off, Mercator, on a number of projects for three years. Anthonis says the company has recently opened an office is Dubai and is seeking out more partners to work with in the region.

However, Indian firms seem unperturbed by the threat posed by Pakistani and Sri Lankan companies, as they believe these countries are too small to challenge them. “We do not feel that Pakistan and Sri Lanka are a major threat. What is the advantage that they would have?” asks Menon.

This confidence is based on India’s huge English-speaking resource pool, the size of the IT education sector, established relationships with global clients and the experience Indian companies have. “This has been developed over many years,” says Padamanabhan.

“It’s not like you can go and a get a few people together in an office and say we’re an offshore development company. It takes a lot, lot more than that,” he adds.
Lane believes the Indian sector can be threatened, although he asserts that Pakistan and Sri Lanka are not big enough to make the Indian model work for them. He adds that 9/11 greatly hurt the Pakistani industry as companies, particularly American ones, cancelled projects there because of security fears. Sheikh admits that this is also a factor within the Middle East.

||**||IV|~||~||~|“One company [at Gitex Saudi] was a little hesitant. They said that as much as they wanted to do business with us, we would have to go to Saudi every time to meet them because they didn’t want to travel to Pakistan right now,” he says.

The recent India/Pakistan Kashmir border dispute also created security concerns for companies offshoring work to either side. However, the vendors reassured clients by pointing to their extensive business continuity plans. Ahmad, for instance, says that Wipro has multiple backup facilities spread around India and beyond, as well as 20% excess capacity in each of its development centres. This means that if there is a localised problem at one centre, the staff there can be quickly moved somewhere else.

Despite their confidence about facing down the Pakistani and Sri Lankan threat, Indian firms are clearly nervous about potential competition from China, which has the size to be a major player on the global stage. Traditionally seen as a hardware player, China set a goal last year of growing its software industry 600% by 2006. The government is taking a series of steps to boost the industry, such as clamping down on rampant piracy and easing travel restrictions.

Leading the charge into the Middle East is corporate banking specialist, China Systems, which moved its development centre from Taiwan to Nanjing four years ago. Digby Bennett, regional sales manager, China Systems, believes that Middle Eastern companies aren’t reluctant to work with a Chinese partner.

“People used to think China was a backward country, but that’s certainly not the case and perceptions have changed very dramatically over the last four years… Before that it was a bit of a stigma,” he says.

What makes China such a threat to India is that it has a big enough population to compete on cost. However, the demands of China’s own economy may mean that it does not have the extra capacity needed to enter the offshore market.

“If predictions about the Chinese domestic market are true, then a lot of the IT skills that are being developed there will be absorbed [internally], so [China] may not be a big player in the offshore service sector,” says Lane.

Indian firms also draw comfort from the lack of English skills in the Chinese market, which means that China may well focus its offshoring efforts on Japan.

However, a number of Chinese companies are trying to overcome the shortage of English skills by working with foreign partners. For example, Butt says Pakistani companies have plans to work with Chinese firms and he believes that together they can challenge India in the offshore sector, both globally and regionally.

“We are going to collaborate with Chinese companies on several fronts.… both in marketing and technical mergers to address two key markets: the Middle East and Japan,” he explains.||**||

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