According to Sudhakar Ram is chairman and managing director of Mastek, a Mumbai-based IT solutions company, Another wave of IT outsourcing is brewing.
Here is a summary of his article from businessweek:
Over the last 30 years, the Indian IT outsourcing industry has gone through two stages. The first wave was characterized by staff augmentation—"body shopping," as it was then called—and established that Indian IT professionals were as good as their Western counterparts. The second wave saw the establishment of offshore development centers. Started during the 1990s to fix the Y2K bug, these centers evolved to deliver software maintenance and incremental developmental services for a fraction of the cost U.S. companies would pay for similar work at home. Second-wave firms now also deliver ERP implementation and maintenance, infrastructure management, and testing services. Today, India exports more than $25 billion of IT outsourcing services and is the mainstream destination for offshore programming. It commands more than a 70% share of the global offshore outsourcing market.
Over the last few years, we have seen a third wave emerge: a growing reliance on outsourcing companies for high-end strategic work. Indian firms have won a significant portion of the work through strategic outsourcing deals like the one announced recently with BP (BP). Large Indian IT services firms are today seen as being on a par with companies like IBM (IBM) and Accenture (ACN) for delivering strategic cost advantages.
Leveraging Third-Wave Indian IT Companies
While the problems of legacy systems have been known for quite some time, corporations have been reluctant to address this issue for two reasons—risks and costs.
The risks associated with legacy modernization are twofold: requirements management and large program execution. Requirements management is a risk because of scant organizational knowledge and documentation about these core legacy systems. Many have tried reverse engineering with little success. In many ways, reverse-engineering software code is like assembling a jigsaw puzzle. Imagine putting together a 1,000-piece puzzle without the picture on the box.
The only viable method for addressing the requirements challenge is a combination of forward engineering, reverse engineering, and pragmatic business support. In brief, this approach entails strong teams of local domain and subject matter experts re-specifying requirements in conjunction with the business users. This effort must be supported by teams of business analysts and technical analysts who reverse-engineer the software code. From time to time, executive support must make pragmatic decisions on inventing new business rules/logic where the old rules are indecipherable or obsolete.
Third Wave Indian firms recognize this need for multiskilled teams. They have strong domain experts and subject matter experts in the countries where they operate, supplementing the technical resources from India. They recognize that the Second Wave approach of working to a customer-given specification will work for application maintenance and minor enhancements, but will fail in large-scale transformation programs. These firms bring in deep domain expertise and are committed to co-creating the application vision in collaboration with their customers. They work side by side, in an iterative fashion, to develop and deliver the ultimate solutions.
In the area of large program expertise, Third Wave firms have the track record of much higher rates of successful delivery, largely due to their mature software engineering processes. The offshore model brings in cost efficiencies which make the legacy transformation programs more affordable. In addition, the collaborative requirements and design processes actually help in increasing the proportion of work that can be performed offshore, making the economics even more attractive.
In summary, it is imperative for large U.S. and European financial institutions to modernize their legacy IT infrastructure in order to survive, innovate, and flourish in the coming years. The costs and risks associated with embarking on such major transformation programs locally may be prohibitive. Third Wave Indian firms offer a more attractive alternative to deliver these programs successfully.
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