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Mar 18 2008

Geographic Diversification – Good Strategy for Business

As if the current economic climate needed to remind us, this old financial planning lesson is timeless.

For personal wealth: If you want to retire, diversify your investment portfolio.

For business wealth: If you want to sustain growth, diversify your product portfolio – according to customer segmentation and geographic distribution.

Last week, General Electric proved this theory still holds weight among senior corporate management. GE is globalizing all of its businesses. Emerging markets are growing fast and have a “tremendous need for capital” to fund infrastructure spending on power and water investments which is a core competency for GE.

For the first time, overseas sales accounted for more than half of GE’s total revenue of $172.74 billion in 2007. General Electric Chairman Jeffrey Immelt said in January that increasing global spending on infrastructure projects was offsetting weakness in U.S. consumer sentiment.

So if global diversification isn’t a part of your own association strategy, are you risking something by keeping all your eggs in one basket?

Mar 13 2008

Early Adopters Rethink Regional Office Strategy

 

In a recent article in the Wall Street Journal, some companies who initially chose to spend large investments in owning offices and hiring full time personnel in BRIC countries are now beginning to pull back.  Instead, they are reducing their costs by maintaining their presence through business process outsource companies.

Rethinking the India Back Office Some Western Firms Weigh Selling Their Units as Costs Rise, Dollar Weakens

NEW DELHI — Many of India’s back-office businesses — the industry that propelled this nation onto the front lines of global commerce — may soon be changing hands.

Some of the largest outsourcing units are still those belonging to Western companies, including Wall Street’s biggest banks, which set them up here in recent years to take advantage of India’s low-cost, educated labor force. Now, many of the big companies could soon be looking to get out of part or all of the business by selling either to Indian companies that specialize in outsourcing services, to private-equity firms or through initial public offerings.

The reason: The costs for big companies of having their own Indian units are rising sharply — India’s skilled-labor wages are shooting up — and many, particularly financial-service companies, are looking to cut their overhead as the U.S. economy slows and the credit crunch takes its toll. The dollar’s weakness, which makes doing business in India comparatively more expensive, is another incentive for Western companies to leave the sector.

Moreover, a study by consultants McKinsey & Co. and Nasscom, the Indian tech and outsourcing industry group, found that, on average, company back offices — or “captives,” as they are referred to in the tech and outsourcing industry — were less efficient than companies run by outsourcing firms that specialize in the business. For some types of back-office work, captives’ costs are 30% higher. The survey found that the higher costs didn’t lead to lower staff turnover or better-quality work.

Four or five years ago, setting up a unit in India made sense: Shift the accounts, tech department or customer-care center to India and cut costs by 45%. Many American and European companies rushed to do it. Swiss bank UBS AG has a back office employing about 2,000 in tech hub Hyderabad. Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and HSBC Holdings PLC have their own, too.For some companies, such offices have now become a headache. Once the initial benefit was felt, companies found it hard to keep on top of their costs. Salaries and the cost of office space jumped. Staff turnover has been high, and companies are having to spend on headhunting fees and training.

India, however, remains a low-cost destination that offers a large quantity of people with the often-special skills required to make such businesses work, says Pankaj Kapoor, an analyst at ABN Amro Asia Equities in Mumbai. Although costs have risen, they remain substantially lower than in the U.S. or Europe. While some companies have begun to move their back-office operations to lower-cost countries such as Vietnam, Mr. Kapoor says he thinks many — particularly the more complex back-office functions — will remain in India. But at the same time, Western companies are still likely to look for ways of getting those functions off their balance sheets, he adds.

But already, sales are happening. Genpact Ltd., a business-process outsourcing concern, was spun out of General Electric Co. and listed on the New York Stock Exchange in August. GE and private-equity concerns General Atlantic LLC and Oak Hill Capital Partners remain big shareholders.

Travelport Group, a U.K. travel-services company that is owned by private-equity concern Blackstone Group LP, in December sold Travelport ISO, its Indian back-office operation, to Mumbai-based Intelenet Global Services Pvt. Ltd., a company 80%-owned by Blackstone. At the same time, Intelenet unveiled a deal to buy Upstream, an international outsourcing company, from its major shareholders based in Fargo, N.D. Together, the deals were valued at $75 million.

Back offices also have changed hands as part of bigger outsourcing deals. As part of a $250 million outsourcing contract last July, Infosys bought three back offices in India, Thailand and Poland from its client Philips Electronics NV of Amsterdam for $28 million.

Citigroup Inc. has eyed a sale of its Indian back-office unit, Citigroup Global Services Ltd., people familiar with the matter say. Citigroup declined to comment. And United Kingdom insurance giant Aviva PLC said a strategic review of its Indian offshore business, Aviva Global Shared Services Pvt. Ltd., had come to the early conclusion that partnership, in a variety of forms, could be a better alternative to its current back-office set up. Aviva is now in talks with “a very small number of parties before reaching a final conclusion,” the company said in a statement.

Working with partners who have wholly owned foreign enterprise status in local communities combined with professional personnel to assist in market development, product adaptation and local management of constituent services should be a model to explore when seeking to open an office presence.

Feb 28 2008

The Applied Knowledge Gap in India

(Chart) – data showing a dramatic gap in knowledge taught at Indian universities versus the knowledge generated by India’s private sector over time.

In the summer of 2006, I was on a business development trip through Asia and spent a week in India meeting C-level executives from the Indian ICT industry including people from InfoSys and Wipro – two of India’s biggest and most successful companies. What I learned on that trip was illuminating on many levels. Just recently I am reminded of them again.

I have been following Anne Blouin’s posts on the ASAE and Center’s Acronym blog on the study mission to India. In her post she shared some interesting facts about India which I would like to highlight and amplify.

“The role of education and its globalization is assuming an increased role and significance
In India.

People with a high school certificate number 250 million, with 10 million getting a BS degree.

IIT receives 300,000 applicants and accepts only 5,000. However, 400,000 graduate each year with degrees in engineering and science (more than the population of New Zealand). There has been a much greater focus in the last few years on research and on innovation and creativity.

Industries are becoming proponents of partnerships with universities; universities are also working to build international collaborations with exchange of faculty and students, research centers, and joint degree programs.”

All of this is certainly true, but needs some further elaboration.

“The role of education and its globalization” is indeed increasingly more significant. The key to understand is where the growth is coming.

The non-formal education sector is huge in India (as well as China, SE Asia, and Africa). Think “technical schools meet computer learning centers” and you can get a feel for companies like APTECH who is one of the leaders in marketshare in India and China. When you don’t have very good infrastructure you create “high tech centers for learning” where all kinds of people can go from students to white collar professionals. Get to know the non-formal education sector and its players.

“400,000 graduate each year with degrees in engineering and science”…. another truth but there is more to the story. I learned from Kiran Karnik, President of NASSCOM (India’s leading ICT association) that India’s university system has fallen behind its private sector (see chart above).

Indian business executives confirm that even graduates from the top schools do not come prepared for the “real world” that globalization has brought to India. Many are not employable without significant further training. Why? Because the Indian university system is well behind its private sector in teaching knowledge and practice.

Which helps to explain “industries are becoming proponents of partnerships with universities.” They have no choice. Schools are way behind in teaching. Companies like InfoSys and Wipro spend millions of dollars a year running their own “private schools” where they send thousands of applicants from top schools for further training. The wash out rate is around 90%!! Can you imagine the constant need for locating quality talent but failing to find it even after they go through 12 weeks of corporate training?

Amazingly, the brainpower shortfall is so urgent that well known business process outsourcing companies actually outsource work to other SE Asian countries because they can’t deploy enough project-ready assets with any reliability.

Bottomline

This is an opportunity for associations with good training and certification programs.

The challenge is finding the right local partners to help manage, sell, and protect your IP. In addition, you’ll need to consider product pricing adjustments unless your product has the “gold standard” moniker. Typically, you can tell that by whether Indian business executives are familiar with your certification. If international corporate clients demand their professionals have a certification in order to be included in a project, you are half way home.