“Employee first, customer second” sounds like the battle cry of a political party fighting for workers’ rights. In fact it is the slogan adopted by HCL – one of India’s big five IT service companies – as a way of adapting to the new market demands in the outsourcing business. “If you want to do different things, you need to be radical,” says HCL chief executive Vineet Nayar. “We believe the value [in the IT business] is created in the interface between the employee and the customer. Therefore, it is essential to take care of the employees. Once you get that right, they start to deal with customers properly.”

In HCL’s case, this means empowering its 50,000 employees across 18 countries to rate the senior management and to open up ‘trouble tickets’ on any issues that are bothering them, whether to do with work or personal issues.

Mr Nayar says: “It can be on any issue – administration, accommodation, chairs not working, air conditioning, a bonus not being paid, someone being unhappy with their boss – and the company has declared SLAs [service level agreements], that is, time guidelines, under which all those issues will be closed.

“We believe the employees should raise whatever is bothering them. If you don’t then you may become unproductive. The worst thing that can happen to a company is having demotivated, unproductive staff. ‘Employee first’ does not mean that we will always say ‘yes’.

“Our commitment is that the employee will always have an answer. It creates a lot of extra work for management but we believe it is the most important work we do.”

Rival IT outsourcers – the other big five players are Infosys, Satyam, Tata Consultancy Services and Wipro – may disagree as to how much HCL is the leading innovator in the industry. But what they all agree on is that the industry is changing.

Humble origins

India is no longer the sole location for operations; the major players have spread themselves across the globe. The work being done is not only for large Western employers but also for big Indian, Chinese and other emerging market banks that need to build their IT operations almost from scratch.

The big five are moving from their origins as simple outsourcers to re-engineering business processes and systems integration. Pricing models are changing from the old-fashioned time-and-material contracts to being paid by results and even sharing of revenues. Indian outsourcers, as well as competing with each other, work together (and with banks’ own captive operations) to service multinational clients with diverse needs and which need to spread their risk.

Transformation and challenges

The Indian outsourcing business is undergoing a transformation and faces huge challenges in keeping itself internationally competitive. Among these challenges are the need to keep costs under control, and to source engineers and software developers for an industry that employs 1.6 million people and is set to earn $60bn a year by 2010, according to a McKinsey report.

Senior big five executives are confident, however, that they can rise to the challenges and that India will remain the hub of the international outsourcing business.

“India is no longer unique in terms of being the sole location [for outsourcing],” says Wipro chairman Azim Premji. “What we are doing is giving global delivery to a customer for a complete solution in the most cost-effective region. Some customers require certain language skills, so you build critical mass in areas that have those language skills, such as Bucharest, which brings you skills in Italian, German and French.

“China is required because we do local work for global customers in China. We have a centre in the Philippines that supplements our BPO [business process outsourcing] facilities in India, we have a centre in Mexico, a centre in Brazil and two centres in Portugal,” he says. “In developed countries, we have centres too, but they are more like proximity centres for customers. We just opened one in Troy, Michigan, because Boeing is a large customer and General Motors is a large customer.”

But Mr Premji believes that, despite the challenges in India – industry staff attrition rates average 20% a year – the country will remain the dominant supplier. “You cannot get the scalability of India and the English-speaking talent in other countries,” he says.

Wipro was started by Mr Premji’s father in 1947, dealing in edible cooking fats. Mr Premji took over in 1966 when the company had revenues of $4m. IBM’s departure from India in the 1970s left a huge gap in the IT market and Wipro went in first as a product designer and supplier and later in 1987-88 as an outsourcer. Today, the company turns over $5bn, of which $4bn is IT revenues.

Flexibility pays off

By staying nimble and flexible, the big five have been able to track the various changes and permutations as the industry developed. And there has been no let-up in demand.

A Deloitte study last year said: “Offshoring has matured at a rapid pace. Less than 10% of major financial institutions had moved processes offshore in 2001… by 2006 over 75% of major financial institutions had operations offshore. US and UK banking and capital markets institutions continue to lead this shift but mainland Europe is showing increasing interest.”

B Ramalinga Raju, founder and chairman of Satyam, charts the industry’s development in terms of what he calls “heartbeats”. “In the past 15 years, we have seen enormous change take place [in outsourcing] and we have had to reinvent ourselves half-a-dozen times,” he says.

Birth of offshoring

The first heartbeat was in the early 1990s, when IT companies sent skilled personnel to the client’s premises overseas. “They owned the resources and we were supplying bodies,” he says. In 1991, Satyam sent up a satellite to send data between the US and India, which led to the offshoring model. Heartbeat three was upgrading quality systems, says Mr Raju, and heartbeat four was the implementation of the ‘rightsourcing’ model, putting development centres overseas near to customers. “We had to strengthen the local interface while continuing to operate out of India,” he says.

Next came a stage of investing in high-end technology and skills, which involved buying overseas companies and recruiting international talent. Now, Satyam is focusing on leadership and innovation. “Customers are no longer satisfied with the services they can access from the global systems integrators,” says Mr Raju. “This means adopting business models that are conducive to distributing leadership and empowering the people who are interfacing with the stakeholders.”

This model is called “full lifecycle leadership” – which sounds a bit like “employee first, customer second”. The big five are all trying to push their business up the value chain and put in place the skills and pricing models that can satisfy the new market demands.

Financial institutions are noted for being particularly demanding outsourcing clients, and the Deloitte study shows that average costs savings amounted to 40% in 2006, with the financial institutions offshoring more than five processes reaping the greatest benefits.

Wipro president of finance solutions Girish S Paranjpe, says: “Financial institutions have two characteristics: one is that they are highly conscious of time and set aggressive time lines; the other is that products change fast and all products become obsolete or get copied in 24 months.”

Addressing complexity

“We are addressing scale, we are addressing complexity, we are addressing reach, we are addressing analytics, all at the same time. That’s the challenge,” says S Ramadorai, chief executive and managing director of Indian IT pioneer Tata Consultancy Services.

“The time dimension has compressed a lot. Before, people might wait 12 to 24 months to roll out the systems or the changes. Now the customers say: ‘Can you give me something to create a wealth management platform very quickly? Can you give me a custody platform very quickly?’ Or in the pharma/life sciences sector, they want tools to deal with their data management. We can now do a wealth management platform in less than six months or the integration of IT resulting from a merger in 90 days. Five years ago it would have taken a year or 18 months.

“We have created frameworks, methodologies and process discipline, and we have reduced the modifications and customisation to a large extent. The same platform plugs and plays different things. In the future, we believe that the assets we create will be plug-and-play assets that are quickly assembled, and that is the kind of direction the industry is taking,” he says.

However, there is an issue among banks of how much of their core business they should outsource and whether they should mitigate risk by spreading it among different outsourcers and locations. For a variety of reasons, some banks have set up their own operations in India – so-called captive centres – but the Indian IT firms doubt that this will threaten their business and are happy to work alongside captive operations.

Mr Ramadorai says: “You will have variations: what is core and non-core will be deliberated in the boardrooms. The bold ones will not worry about it because they know how to engage with institutions like us, and know how to protect their data or satisfy their regulators with the right risk management and control procedures.”

Flawed thinking

A Forrester report on captives published last April was highly damning. It said: “The majority of the reasons firms cite for building their own facility are flawed. Our research shows that in the majority of cases it is driven by personal reasons, such as an expatriate employee’s urge to go back to India for family reasons.” The eagerness of Indian IT talent to return home is also helping the big five with their skills shortage.

Infosys senior vice-president Ashok Vemuri says: “One of the reasons people left India was for a better life and opportunities. A lot of those jobs are now available in India, the standard of living has gone up and the economy is booming, with 8% to 10% growth a year.”

Infosys started out in 1981 and now has $3bn in revenues and 525 clients, 125 of which are Fortune 500 companies.

“Our model is long-term relationship-oriented. We are not a transaction-based organisation,” says Mr Shibulal. “We are part of [our clients’] budgeting process; we work closely with their management and we have multi-level relationships with them.” This allows Infosys to approach clients with new solutions that may work for them, he says.

“It’s very unusual for a client to move. We build a deep knowledge base with clients and the risks and costs of disengagement are high.” Companies may use more than one Indian outsourcer to diversify risk or to access particular expertise, but there is little in the way of competing on a transaction-by-transaction basis, says Mr Shibulal. This leads to the critical issue of pricing. Both clients and outsourcers are interested in looking at different pricing models and in moving away from the classic time-and-material contract in which the outsourcer gets paid for the work done rather than for the result.

Progressive models

New models in operation include adding in performance parameters and putting in place a bonus or penalty depending on whether targets are achieved. More progressive is to pay by results, such as the number of new bank accounts opened or number of life insurance policies completed. And there is the idea of profit or revenue sharing.

Tata’s Mr Ramadorai thinks that this final option presents challenges. “Price and performance are now being linked, rather than in the past when they would have said: ‘I am buying a resource from you, so what is the cheapest you can supply that resource for?’ [Sharing the profits] will take a while because the question is how much of the profits should be shared. It’s good to go that way but it will take a while,” he says.

“The industry has some way to go before a technology provider and a bank completely share in the risks,” he adds. “The model that will emerge is that a bank may give us the platform – or enable us to build a platform – and then let’s use this platform to bring on another bank and let’s make money that way.”

How quickly this materialises is uncertain. What is certain is that Indian IT suppliers have not run out of ideas for reorganising and reinventing the business.

IN FOCUS

New model for a changing market

HCL chief executive Vineet Nayar thinks that the image of a CEO flying around the world to close deals on the back of a napkin is outdated and that clients select an outsourcer for price and service. The HCL revolution came about by noticing the way the business had changed and trying to deliver ahead of the competition.

“The year 2005 was a watershed for HCL, when we launched this strategy in response to some destructive trends in the marketplace,” says Mr Nayar.

HCL was started in a garage 30 years ago and has grown into an international operation with a $1.6bn turnover. In 2001, it bought the Apollo Contact Centre in Northern Ireland and has expanded the business so that it is now the largest Indian employer in the UK.

One trend Mr Nayar refers to is the tendency of Indian IT service companies to sign long-term contracts that lacked flexibility to scale up or down. “Customers were feeling suffocated,” he says. Employees were not allowed to create value. “We were counting heads like counting chickens. Relationships with clients were efforts-based. We were paid for efforts rather than results, which encourages inefficiency.

“We thought that if we did things differently, we would create a new trend and be first off the blocks.”

A vindication of the firm’s efforts is frequent visits from major companies’ human resource directors to view HCL’s operation. The firm’s approach has also been turned into a Harvard Business School study.