14 July 2009

Being Irrelevant - State of Outsourcing

Right from Globalization and the day when outsourcing came to mainstream in the name of software exports, Indian IT industry has been revolving around a single business model. I give you "1000000" hours and you give X dollars. To start with, the business model of this kind may be apt and for a matured industry and some may comment the industry has saturated, it may be unhealthy. I would say the industry has not saturated but the business model has saturated. There are two questions that needs to be answered

1. How will the buyer of the service know that the service provider has in fact worked for X hours? Is there a mechanism? While one may argue that both the buyer and provider will have "mutual trust", but is "trust" alone sufficient? If you are a much capable service provider how are you going to show that you are in fact delivering more in X hours? How is it reflected in your revenue?

2. It is pretty reasonable to ask for warranty when you buy electronic gadget of $20 (or even less). In most of the cases, it comes with one year warranty. This means that when you go to shopping mall and buy something, you expect that it will work well at least for a year without you requiring to pay additional cost. But when you are spending huge dollars in outsourcing, don't you need to push some risk to service provider.

With the current model, the software is never seen as product but software development activities are seen as service. The buyers need to shift their focus from buying service to buying product and this can only happen with a different business model. With the help of new business model, the buyers will be able to push some risk to the providers and at the same time the providers will be able to get increased compensation for their products. This also gives flexibility to buyers as they can focus on multiple products and geographies.

If you look other industry, for example, energy industry, the companies have already started to think about charging customers based on the amount of output that is produced not on amount of input used. This is the right time for us (Indian IT Industry) to get away from old business model and take up something which shows signs of maturity.

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