India and Procurement Outsourcing: The Spend Matters Take

To me, the massive IT sector growth in India -- and related wage inflation -- paints a quintessential picture of why labor arbitrage sourcing games will become short-lived strategies (perhaps effective, but not sustainable over the long term). And what's more interesting is that skills and process knowledge growth has not kept pace with wage inflation in India's technology sector. Indian firms remain great at automating routine tasks and developing code, but most still lack the capabilities to manage true complex integration, consulting, and BPO assignments that involve anything besides coding or basic process mapping.

Vinnie Merchandani, an expert in scoping and negotiating complex outsourcing and systems integration deals, waxes eloquent on his blog on the subject: "The core strength of Indian firms continues to be in application maintenance. They have not made meaningful dents in the systems integration market -- especially in projects which call for complex program management, industry knowledge or change management (something their focus on engineering talent has actually prevented them from developing organically). I was talking to a partner at a large US SI this week, and he said 3 years ago he was worried about the Indian firms but he still does not see them qualify for large systems integration short lists In 3 large SI deals I have been involved in over the last few months, the client in each case did not feel comfortable with an Indian firm as a prime contractor -- they were ok with portions being sub-contracted to Indian firms, but the prime Western firms usually propose their own growing offshore resources in such deals. Even in areas like testing where Indian firms emphasize their quality certifications, functional testing tends to be somewhat weak given the lack of business process depth."

It is this lack of process depth and industry specific knowledge which will come back to hurt Indian firms that fail to invest the necessary resources in developing end-to-end procurement outsourcing offerings. That's why I must admit I'm a bit skeptical of Infosys' recent announcement with Ketera. (Not based on Ketera's technology, mind you, but how it will be deployed and used by Infosys in outsourcing situations). According to the announcement, "Infosys BPO will leverage Ketera’s on demand spend management solutions to deliver procure-to-pay outsourcing services with scalable, easy-to-use and fast time-to-value benefits. Ketera also will work with Infosys BPO to provide offerings to enterprise customers that require coordinated procure-to-pay capabilities."

Now, perhaps Infosys will succeed at getting companies to outsource individually inefficient procurement processes like accounts payable where US-or European-based clerks add little value, using technology and low-cost resources to deliver results and savings. But I fail to see how Infosys will bring the process expertise to offer an end-to-end outsourcing capability that competes with the likes of Accenture, IBM, ICG Commerce and Ariba including category management, procure-to-pay, and contract compliance. Call me a curmudgeon, but outsourcing and IT maintenance and application support is not the same thing as sending the strategic components of Spend Management offshore. And besides, given wage inflation in India, it won't be long before the cost of an Indian AP clerk approaches that of one based in the West (especially in low salary cities such as Indianapolis or Kansas City). In my book, it's a far better option to streamline the AP process and eliminate unnecessary rework and waste -- including actual positions -- than simply toss in a bit of technology and transfer jobs based on labor arbitrage, which sounds like the primary value proposition from Indian outsourcers in the sector.

- Jason Busch