New venture outsourcing blog

A.T. Kearney compiled the Global Services Location Index (GSLI) for 2007. 

Perhaps surprisingly, most of the 50 countries in the index rated comparably well on financial attractiveness.  What really set India and China apart from the rest of the pack was primarily their people and skills availability scores.  The two mainstay outsourcing destinations were the second and third rated countries for people and skills availability trailing only the US, with Germany and France filling out the top 5.

This is the fourth year the top 50 countries providing IT services and support, contact centers, and back-office support were ranked on 43 measurements that determine financial attractiveness, people and skills availability, and business environment.

This year saw the addition of two additional measurements critical to determining global competitiveness: compensation costs and relative experience of BPO analysts.  The experience of IT professionals and contact center agents were already part of the index.

I decided to dig into the numbers a bit more, why is it that people and skill availability are determining the winners?  It sure seems like having favorable financial & business terms should be super valuable as well.  The answer is that these two other factors tend to cancel each other out.  If you look at the chart below, you can see that countries who have relatively strong cost advantages tend to have less favorable business environments.  In fact, the correlation between financial attractiveness and business environment was -0.81!

This tendency for the business environment & financial environment to cancel each other out, seems to be what tips the balance in favor of abundant supply of skilled people & processes.  The risk of unfavorable business environment obviously impacts the overall financial opportunity for a company looking abroad.  This study seems to support the idea that as policy leaders decrease the barriers for business to be conducted in their country (free trade restrictions, reliable contract enforcement, etc.) the financial incentives to go offshore tend to catch up and offset that gain. 

Given the tradeoff between these two dimensions, the smart money seems to be on the countries with abundant talent supply.

Even if you think you’ve decided already, the final decision may not be up to you!  Venture capital firms are continuing to push their portfolio companies to outsource, which just another indication of how important it can be to improving valuations, time to market, and productivity of a startup.

Ann Grimes, who now works at Standford, wrote Venture Firms Seek Start-Ups That Outsource in the Wall Street Journal about six venture backed startups in 2004 who were using outsourcing: Solidcore Systems Inc., July Systems Inc., 24/7 Customer, ServGate Technologies Inc. (acquired by Cirond Corp. in 2006), ReaMetrix Inc., and Open-Silicon Inc.

These companies and their investors were all quoted in the article saying that the additional value provided by globalization and outsourcing were on the rise.  They fully anticipated (correctly) that the outsourcing trend would gain momentum as communication & other infrastructure barriers were removed.

John Shinal wrote in VC firms push for outsourcing that the VCs are not just accepting this or monitoring it from the outside, they’re aggressively pushing it on their portfolio companies!

“There isn’t a board meeting that goes by that we don’t ask, ‘Why aren’t you being more aggressive (with software development) in India and China?’ ” said Jim Breyer, managing general partner of the Palo Alto venture firm Accel Partners, which has backed more than 200 companies.”

The majority of startups that receive investments from the Menlo Park venture firm Kleiner Perkins Caufield & Byers have operations in India, Kleiner partner John Doerr recently told a group of Indian entrepreneurs in Santa Clara.

Now, nearly all the business plans that [Peter] Barris and his colleagues evaluate for the firm’s new venture fund include an offshoring component. “It’s not an unusual event anymore,” said Barris.

It should go without saying that a VC who’s got any kind of agenda, including an outsourcing agenda, that the startup firm doesn’t want to explore is a bad fit.  There are very good reasons why outsourcing for startups isn’t appropriate, but for well prepared startups the list is getting shorter every day.

As we mentioned in our previous post about outsourcing providers moving up the value chain, the trend of improved focus on opportunity-oriented outsourcing is likely to continue.  I would urge startups that are inclined to keep everything local to ask themselves why the trend seems to be so strong?  Perhaps your business is different from all the others… but probably not.  Look at this chart from R&D magazine to see that the number of outsourced functions is pretty broad now.  It’s not just customer service and tech support.

More likely, you just haven’t found the right partner yet, and as you look be sure to keep your eye out for firms that specialize in helping startups like we do.  As we all know, startups are defnitely a different breed of company!

I recently received two interesting requests- one from the US and the other from India. One of our customers who had used our outsourcing services for his start-up asked me if I could help him find a printer in India. His family has a printing business and they are being squeezed by the Chinese. So they are looking to cut costs by outsourcing some of the routine, simpler orders to India. The second request was from a local business friend. He wants to setup a couple of mini golf courses and asked me to help him find a mini golf course manufacturer in US. Another client of ours, CRM learning (www.crmlearning.com) a producer of management training videos, already has a distributor in India. India is a growing market for educational products and services and I will not be surprised if CRM starts seeing sizable revenue contributions from here in the near future. I am sure there are a lot more small businesses in both countries trying to benefit from each others products and services. 

These two unrelated, yet connected events reaffirm my belief that small businesses can benefit greatly from globalization. That does not mean its all good- but on the margin it is doing more good than bad. Job loss in host countries is still a concern in large scale outsourcing deals. It is less of an issue when a start-up or a small but growing firm buys outsourcing services since the jobs are not yet created. In fact, outsourcing allows them to grow faster and more economically than they would otherwise, which in turn creates more jobs in other functions which need to stay onshore. Clearly, there is a case for small and new businesses to gain from offshore or other forms of outsourcing services. New, low cost yet very effective technologies like wiki are enabling companies to outsource even smaller projects cost effectively. Google recently  bought JotSpot which has such a technology- http://googleblog.blogspot.com/2006/10/what-joe-said.html .
The other half of the story is equally compelling. What Indian professionals are gaining through offshore outsourcing services to US and other parts is also helping create demand for services and products from US and elsewhere. Rising income in India and elsewhere due to business and IT outsourcing services is creating unprecedented demand. This is going to help all businesses- start-ups, small and large businesses.  As a small business owner, the question you need to ask is- are you ready to take advantage and grow your business or are you going to let your competitors get the better of you?   

 

A recent WSJ article by Antonio Regalado highlights the strength of Brazilian firms as trusted outsourcing partners. Some major companies have decided to partner with Brazilian groups to get software projects done quicker and cheaper than domestically. But where is the rest of the story? The new model in outsourcing is dual-shore companies which eliminate all cultural and time-zone issues. There is substantial room for innovation in the outsourcing or distributed work business model (if a coffee shop can be innovative, than certainly you can too). India’s experience in this space allows for the next generation of outsourcing businesses which include specialty services, more efficient operations, and increased offerings. While Brazil comes online as do many South-east Asian nations, American companies will become more selective in choosing overseas partners. It remains to be seen what Brazilian or Malaysian firms will do to differentiate themselves from their Indian competition – simply showing up in this space isn’t enough to build successful companies. Will India call itself the Brazil of Asia?

In the last couple of weeks, a number of flights were either diverted or had suspicious passengers eased out of the plane. Many Asian travelers found themselves getting unwanted attention from fellow passengers and authorities. Last week, 12 Indians on a NW flight from Amsterdam to Mumbai were detained and then released without charges. The flight had entered the German air space when the crew diverted it back to Amsterdam due to suspicious passenger behavior. Similar incidents elsewhere in Europe have led to strong protests in Asia and charges of racial profiling. A lot of people I have talked to in India since that incident have told me they will avoid traveling to Europe if they can. Even for travelers inside EU and across the Atlantic, UK authorities are enforcing strict measures for cabin baggage. So much that RyanAir is planning to sue them for flight delays!Most governments around the world already use tough security measures while screening in-bound cargo. It has added both costs and delays to international cargo movements. Are all these security measures hurting trade? On first pass, it does not seem so. However, a closer look paints a different picture. World trade and globalization were facilitated by a softening of state sovereignty that allowed a less restrictive flow of goods, ideas, information, money and people across borders. The onset of internet facilitated it further through a free flow of information across the world. The stringent security measures, whether necessary or not, works to re-erect some of these barriers. As the states try to reassert their sovereignty, free flow of goods and people is the first casualty. There have also been efforts in some parts of the world to restrict access to internet in order to deny terrorists an opportunity to use the web. What’s next- a national internet that filters out users from other countries?Globalization, while raising fears in some parts of the world, is also responsible for enabling millions of people around the world and bringing prosperity. So while Boeing is buying cheaper IT services from India, it is also selling the finished planes by the dozens to India. The same money that reaches Indian workers then creates demand for air travel leading to orders for new planes. These orders, in turn, help create new jobs or sustain the existing ones in the US. If the world trade becomes a casualty of terrorism (or anti-terror measures), then we would have handed the terrorists a real big victory. What do you think? Join the discussion on our forum.

This week, we will look at why LG has been so successful in India. While a blog is too small a place to discuss the details, I will try to highlight some of the important reasons behind their success. When LG entered India in the middle of 1990s, few people in India had heard of it. Leading Japanese brands like Sony, Sanyo and Panasonic were much better known and respected. Some of them have had a market presence in the television market for some time. However, over the next ten years, LG became the market leader in almost all major appliance categories, ahead of even local brands at the low end of the market.

While there have been major factors at work, the most important one has been PG’s approach towards the Indian market. They restrained from transplanting strategies that had worked well in other markets. They understood the peculiarity of the market-each part of India is a different market and consumers are extremely value conscious meaning they look for not just the cheapest but the best that fits the budget. Also, a lack of established distribution channel means the manufacturers have to rely on third party distribution, especially in tier-2 cities and beyond. LG has done rather well on all counts- it established a local sourcing base, even before the volumes could justify one, to cut down the costs. It used third party distribution to penetrate smaller cities and gain scale. LG also priced the entry level products aggressively to compete with local players. It created new products for the market- like an entry level TV to capture the low end of the market and a more refined, flat screen 21” model used as upgrade bait. The model was priced about 10% higher than the entry level model and has been surprisingly successful. Of course, it had the traditional, premium product retailing at the higher end. The volumes game allowed LG to achieve the manufacturing and distribution scale that enabled it to sell premium products with lower overheads as the costs were spread over a larger base. The company also tied up with aggressive local and foreign finance companies for financing consumer purchases, an area so far overlooked by major players. LG also did something unusual in its market entry strategy- it avoided getting into joint ventures (JV) with local companies. For a long time, management gurus and their ilk have championed the cause of joint ventures for entering new markets. However, the ground realities are quite different- most JVs have been utterly unsuccessful in India (more on this in a later). As an independent entity, LG India was not constrained by the limitations and interests of the local partner. The freedom allowed LG to invest freely and expand the product lines as it saw fit. Many other companies were unable to invest or bring in new products due to their partners limitations.

The result – LG had sales exceeding $2.5 billion in 2005 and expects to increase it to $10 billion by 2010. There is a lesson in this for everyone planning to sell to Indian consumers. However, LG’s situation was unique. It was a fairly large company and could afford to invest before seeing real results. It could also keep prices down due to economies of scale. But what if LG had been a small player? Had this strategy still worked? It’s doubtful. For starters, if you are a small player, you cannot hope to achieve scale, and therefore compete effectively at the low end of the market. But then, you probably don’t need to. Since LG was large, it needed to have a large business for it to make any sense. But for a small company, say $10m in revenue, even a $2m per year market will be attractive. It means that if your product sells for $100, you need to sell about 20,000 in a year to get to $2m. Is that doable without investing lots of money? Absolutely! We will see how in the next post.

This morning, as I was driving to office, I heard this ad on the local FM station- “NBA Star Kevin Garnett is coming to town this weekend. Meet him at the new Adidas store”.

Sitting in Bangalore, I felt kinda strange- An American star coming to India to promote one of the most respected European brands! Isn’t that strange? Well, not really. Its just another facet of globalization. Being in Technology industry for over a decade, I have had more than a passing interest in globalization. Still, the ad intrigued me enough to go out and do a quick research of my own. Here is what I found out.

When I went out shopping on Sunday, I consciously started looking around for more symbols of globalization. I looked at the home appliance stores, toy shops, cars parked on the roads- just about everything. Here is what I found- LG, Samsung, Sony, KFC, Citibank, Pizza hut, Honda, Suzuki, Ford, Fischer Price, Mattel, Reebok, Nike, Coke, Pepsi, Nokia – it did not look like I was in India today. Some of the world’s most recognized brands are also the most recognized in India. What is also true is that an equally large number of famous brands have been either a failure or only marginally successful.Clearly, some have managed to benefit from globalization while some have lost out. Over the next few weeks, I will attempt to answer these questions through my blog:

• Why some big international brands succeeded in the local market while others failed? Is it that big businesses managed to outspend the smaller local guys?
• If that was the case, why did some of the equally strong foreign brands not do well enough?
• Why is it that some local firms are still alive and kicking, even expanding overseas?
• Can small firms benefit from globalization? More importantly, how can we make globalization work for us- both as an organization and as an individual?

I believe, and have enough reasons to do so, that globalization provides enormous opportunities for individuals and smaller firms- sometimes even more than it does to the larger firms. In fact, I would go to the extent that it actually helps the smaller guy against big business. Stay tuned for some interesting stories to see how small businesses around the world are using globalization to their advantage.