Cloud Computing Is Going To Rain on India’s Outsourcing Parade
Transform or be transformed
“It is only going to get cheaper and easier for companies to switch to the cloud, outsource providers need to get ready for the storm and modify their business models and move with the digital times, or risk being transformed by the market”
There are dark clouds on the horizon of India’s information technology and outsourcing industry.
AstraZeneca PLC is sharply scaling back the business it gives to the Indian outsourcing companies that it has long relied on for tech help. David Smoley, AstraZeneca’s technology chief, said he expects to cut in half the $750 million the drug maker used to spend annually on outsourcing over the next two years. He said the number of people working on information technology also would drop by 50%.
The changes at AstraZeneca are part of a major shift toward cloud computing, which is starting to bite into the revenue and profits as well as hiring in India’s critical outsourcing industry and poses an existential threat to the players that fail to adapt.
Outsourcing executives are bracing for a big disruption. “It’s like what happened when Amazon arrived,” said C.P. Gurnani, chief executive of Tech Mahindra Ltd., a large Pune-based outsourcer that specializes in work for telecommunications companies. U.S. bookstore chain Borders closed and Barnes & Noble had to reinvent itself, Mr. Gurnani said.
Mritunjay Singh, operating chief of outsourcer Persistent Systems, predicts a “bloodbath” in which only nimbler companies will survive.
Outsourcing accounts for around 20% of all of India’s exports of goods and services. The industry employs millions of Indians and has become an important route into the middle class in the world’s second-most populous country.
The impact of the move to cloud computing — where servers and software are accessed via the Internet rather than on local networks or personal computers — is being amplified by other trends, from automated code-writing to increased competition and falling corporate information-technology budgets.
There are dark clouds on the horizon of India’s information technology and outsourcing industry. Profit growth at even India’s most successful and sophisticated software companies could be doused as companies, governments and consumers around the world do an increasing amount of their computing on the cloud, says outsourcing services advisory firm ISG Inc.
Companies that have traditionally used in-house servers running on custom-made applications are putting more of their business on external servers and using off-the-shelf software. Using the cloud often means using fewer people so Indian software companies—once dubbed “body shops” because they could supply as many computer engineers as a project needed—are going to suffer as they lose much of their competitive advantage.
“It is only going to get cheaper and easier for companies to switch to the cloud, outsource providers need to get ready for the storm and modify their business models and move with the digital times”, said Craig Ashmole, Founding Partner of London based IT Consulting CCServe Ltd.
This means, developing software that allows businesses to (interact) faster and more efficiently with their external stakeholders – customers and suppliers, rather than focus on changes to the internal workings of a client.
Around one in four of the deals ISG helped advise involved cloud computing last year. That’s more than three times more than the percentage of cloud deals it saw three years earlier.
India’s software and outsourcing companies are still too reliant on the business model that uses lots of relatively inexpensive Indian engineers and sends them to client sites to build software and fix problems, ISG and other analysts say.
Cloud providers use external servers, sophisticated technology and automation to manage clients’ data using fewer employees. Where a traditional service provider deploys one employee to monitor up to 200 servers, cloud players can use one employee to monitor up to 10,000 servers, ISG estimates.
The cloud infrastructure players are drastically cutting down prices and starting to create pricing pressure on service providers in India and elsewhere who continue to set contracts based on the number of engineers deployed in a project.
Cloud infrastructure providers such as Amazon Web Services, Red Hat, Rackspace Hosting and others are emerging as a formidable threat to Indian outsourcers and other traditional service providers and consultants including IBM and Accenture that earn revenues from managing the technology infrastructure of clients.
Traditional service providers now have to strive to get more cloud contracts–where they help clients shift data to cloud infrastructure providers–rather than focusing on creating their own clouds, ISG said.