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India Inc. becomes another outsourcing gold rush: unwary firms get red ink

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India Inc. is Twice as Fast as Japan Inc. should be a must-read on two levels, growing US uncompetitiveness coupled with a declining educational system, and loss of intellectual property (IP) assets at both the data and algorithmic level. Unfortunately only the former -- uncompetitiveness -- is central to the article. The latter -- threats to IP -- again go unmentioned.

Keller's central message that "India’s rise in IT and other areas means U.S.-based companies must radically change their view of competition and what becomes strategic domestic employment" is true enough as is his admonition that the mental timeline, the safety belt if you will, of many US managers familiar with the Japan Inc. progression in electronics and automotive must be halved when considering India's progression in IT. Keller properly notes that Indian labor costs are significantly lower than Japan when it began its climb, but that Indian quality often rivals or exceeds current US quality. His detailing of Indian skills sets a clear, high bar for US industry that demands active response.

The section that commands my attention is the relocation of "core product development" to India:

The fastest change is occurring with the major software vendors that have moved much of their core product development to India. For example, nearly all of SAP’s BW product development and much of NetWeaver resides in India. Oracle and PeopleSoft have accelerated deployment of Research and Development (R&D) and support resources in India; Oracle has more than 6,400 people now employed in India and plans to have nearly 10,000 by the end of 2005.

Some companies, such as Kana, have taken an extreme view and have sent all R&D to India. Venture capitalists require that any startup have a plan and capability to deploy R&D in India. While technology-oriented companies have embraced offshoring, most end-user organizations continue to be cautious about how much and how fast they can offshore IT operations. In the next few years, however, their internal IT cost models will prove too high and force them to change.

I refer readers to Intellectual property theft: the unspoken unknown of offshoring and Hemorrhaging intellectual property to Asia. Relatively speaking, India has not exhibited wide or state sponsored IP collection, being content at present to compete in terms of lower cost, thus:

the larger risk is the placing of critical IP resources in an offshore environment where they are vastly more susceptible to exploitation by one or more collectors -- often many collectors from the same entity each intent on gaining specific bits of corporate information. The risk is effectively present in varying degrees for US offshoring in India, China, Korea, Russia, Belarus, or European nearshoring to the Czech Republic, Poland, Hungary, the Baltic states, Morocco and Tunisia.

At the VC level, investors are driving their stable of firms to create product and to produce revenue without sufficient consideration to risk. Risk assessment is very low on their horizon. Private conversations reveal that VCs preach the mantra to their portfolio companies, for example: "Outsource hardware development and manufacturing to China or become uncompetitive." Most VC conferences conducted today direct firms to go low cost without an understanding of the risks to the underlying assets. Some VCs have already taken the next step of forming development groups in Asia precisely to serve their entire stable of firms.

Keller concludes in part:

The availability of inexpensive and reliable network and computing technology implies that any job or task that does not require the physical presence of a person can be sent offshore. India followed by others, including China, Eastern Europe, Russia, the Philippines, and Vietnam, are creating a sophisticated pool of highly specialized and educated workers who have shown the ability and willingness to deliver high-quality, low-cost work.

The reader will note the significant overlap between the two country lists. Lowest cost is rarely lowest risk. It is our experience that firms effectively loose control of IP when it is outsourced as little as two levels. We have observed IP theft by nations both in-country and in adjacent countries where they have either penetrated or bought stakes in local firms. Paradoxically, countries without strong police powers also permit the entry of secondary collectors that use the more permissive environment to collect what they could not feasibly or financially obtain in a stronger security environment.

Firms are overdue in considering IP diversion by multiple collectors in their cost and risk planning for offshoring and nearshoring. India "inc" should not become red ink.

India Inc. is Twice as Fast as Japan Inc.
Erik Keller
AMR Research
October 20, 2004

Gordon Housworth



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