India's Next Outsourcing Wave

It's understandable that many in the U.S. are angry that workers lose jobs to offshore programmers. Despite the unpopularity of outsourcing in the wake of the financial meltdown, I am convinced that "Third Wave" Indian IT players—those outsourcing specialists that U.S. companies can rely on as strategic partners for high-end work—can help prevent future disasters. IT companies around the world have a huge opportunity to collaborate and join forces in the next few years.

There is no doubt that legacy platforms need to be modernized. The best and perhaps only way for this to happen effectively and efficiently is through a strong combination of onsite U.S. and offshore Indian resources. The point is not whether these programs are executed by a U.S. company with an Indian development base, or vice-versa. Without access to a global pool of talent, these programs cannot be executed successfully.

There are three reasons global teams and global collaboration are necessary to meet the modernization needs of the U.S. financial sector.

Availability of talent

According to Celent estimates, financial services companies spent more than $350 billion globally on IT last year, including $120 billion in North America. About half was spent on software, internal head count, and external services. (Companies spent around $60 billion in North America alone.) More than 70% of this spending has gone to keep the lights on and other routine maintenance expenses. The investment required to replace and modernize applications that are well past their sunset date is estimated to be between $250 billion and $300 billion. Most of these applications will have to be rebuilt over the next five to seven years if these companies are to survive, innovate, and grow. The industry has been postponing the inevitable for a long time, through patchwork and workarounds—and the global financial meltdown indicates that this will no longer be a viable option.

If health-care reform passes in the U.S., Americans will need to spend an additional $150 billion to $200 billion to implement systems in 3,000 hospitals and 400,000 physician offices across the country.

Currently, there is not a sufficient IT talent supply base in North America to take on additional programs worth $400 billion to $500 billion over the next five to seven years. Without access to a global talent pool, these major programs will never be initiated. The issue, therefore, is not about onsite professionals losing out to programmers from India. The issue is that onsite and offshore professionals will benefit from a surge in new programs only if they collaborate successfully.

Complexity of the task

An overhaul of companies' IT platforms is extremely complex and fraught with the risk of failure. Many large corporations have been burned badly by such major transformation programs in the past; no wonder they try to put them off as long as possible.

However, things are at a breaking point. The survival and growth of large institutions is contingent on the agility of their IT platforms to support innovation and business transformation. The systems that handle different product and service offerings need to be integrated to highlight and manage risks—risks that can sink the enterprise. This cannot happen when the structure is being held together by the technological equivalent of Band-Aids. Robust enterprise architecture is needed, along with a services-and-component view of the underlying applications.

Any large transformation needs teams with local experts, business analysts, application visionaries, and solution architects who engage closely with client teams in co-creating new IT platforms. Often, specialized consulting firms help the teams leverage their experience and insights. The planning is knowledge-intensive. It is also where mistakes take root and grow, especially in systems so old that the client has little or no internal expertise in its own systems. In such cases, requirements must be developed from scratch, almost as if it were a greenfield engagement.

Offshore resources can add speed and cost-effectiveness to the process. For example, companies can use offshore resources to reverse-engineer existing code to validate the requirements and capture the nuances and details of a legacy system. This is typically impossible—from a time and cost perspective—with only onsite teams. Increasingly, Third Wave offshore firms leverage their cost advantage to build intellectual property as well as intellectual capital for specific industry applications. In the case of Mastek, for example, we have end-to-end platforms, built around the latest architecture, for the insurance industry.

Cost Effectiveness

In the IT industry, we talk of the "Mythical Man Month," the belief that programmer productivity is not a linear equation in the software world. When we increase team sizes, per-person productivity almost certainly drops. For example, if it takes 10 months to complete a 100-man-month project with 10 people, doubling the number of people does not cut in half the number of months to finish the job. Rather, with 20 people it may take more than 6 months to complete it. Offshore development helps to slow the inevitable decline in productivity by relying on mature and rigorous software engineering processes. For another, it absorbs those inevitable declines in productivity through lower offshore labor costs. Many Third Wave companies also have a strong base of reusable software assets to help hold down the costs.

In these times of economic uncertainty, there is much debate around the practice of outsourcing. However, the overwhelming need for IT overhaul in the U.S. cannot be easily accomplished with the current U.S. IT talent supply and overarching budget constraints. The best way to take advantage of the many opportunities for the IT industry is to embrace global collaboration. We need to work together.