I’ve recently noticed a few  articles on a related theme – lessons that American businesses can learn from India.  Experiences in another culture or country are often the source of innovative ideas, and tapping this idea stream is one very good reason for developing a truly globalized business model (vs. a multi-country business, where each region operates as a silo).   All too often, American businesses can, like the stereotypical American tourist, focus on what they do better, and ignore the opportunities for learning from other countries.  We tend to assume that because a developing economy has more poverty or poor infrastructure, that they are “behind” the US and there is only a one-way learning process (see some of the comments on Navi Radjour’s article, mentioned below).  Nothing could be further from the truth.  I wrote about one example of this at John Deere here.  Here are some other examples in recent articles:

In an HBS blog post, Navi Radjour wrote about this concept broadly, arguing that ‘the US must learn to receive India’s “smart power” as much as it is willing to bestow its own onto India.’ He then went on to cite two examples – SELCO in the clean energy sector, and Aravind Eye Care hospitals in the healthcare sector.  These are examples of companies that have developed an innovative product (or process, in Aravind’s case) to greatly reduce costs, which expands the market for these products dramatically.  I don’t think either company’s products are directly transferable to the US market as is, but there is an opportunity to leverage the products or ideas to offer lower cost rural electricity and eye surgery in the U.S.

In another example, Gunjan Bagla wrote about how much better the customer service is on Indian airlines (at least, Kingfisher and Jet Air), versus on American airlines.  This is true of the quality of service in many Indian businesses targeted at upper income segments, such as department stores, hotels, car services, etc.  I think this is partly because these services are really luxury services in India, while they are commodity services in the U.S., and are able to support a higher level of staffing and customer attention.   Nonetheless, if I were in the airline business, I would look at Kingfisher and Jet Air along with Singapore Airlines and Southwest Airlines as great examples to learn from, regardless of the country in which they practice.

Finally, the Wall Street Journal ran an opinion piece earlier this summer discussing the values and lifestyle of the generation of Indians who left India in the 60s and 70s as a positive example for others to follow in the current economic crisis.  The piece had the same nostalgic tone as those written about the values of those who lived through the Depression in the U.S., yet it was interesting to see a positive spin on the limited resources in India at the time.

A recent article in the Wall St. Journal consolidated reporting on a number of recent changes in so-called captive centers (IT or back-office services operations in India owned by non-Indian, usually US or UK, businesses).  While the leading sentence talks about “reversing a  a decade-long trend,” I think the article reveals a more complex picture.

The author points to three large financial services companies (Citigroup, AXA and Aviva) that have sold their entire outsourcing operation – facilities and staff – to leading outsourcing firms, for cash payments and multi-year contracts for services from those same facilities and staff with the outsourcing firm.  Two airlines, Delta and United, have made similar deals.  These are all examples of businesses in industries that have been hard hit by the global financial crisis and recession, and are desperate for cash infusions.  The deals are not shutting down their Indian operations, just shifting the ownership and management to an Indian outsourcing firm, typically one of the top 10 IT or BPO firms.  What’s not discussed in the article are two other benefits of these deals: first, the company no longer has any potential “offshore” profits which could be taxed under Obama’s proposed tax law changes; and second, the company reduces its political risk in the U.S., since it no longer has any Indian employees, just a contract with a vendor.  (The company may also reduce political risk in India, since it is sending revenue to a large India-owned company.) One could also argue that they have reduced their management workload, since they are no longer managing the Indian employees and services directly, but I suspect that on a day-to-day basis, there is not a lot of difference for project managers, and at the senior management level, they have  probably just traded some of their operation management to vendor management.

Another kind of situation is the example of a small biotech firm quitting most of its Indian presence and selling its facilities to a mid-sized outsourcing firm, along with signing a 10-person services contract for 18 months (probably for transition purposes only).  Small captive IT services operations are notoriously difficult to manage, and are often started with the idea that while they require an upfront investment, they will make sense financially over the long run.  If the business doesn’t grow as expected (common in this recession), or if the people managing the center quit, the company can be left with a money-losing headache.  It can make a lot of sense then to turn it over to an India-based services company that can integrate the facilities and staff into their operations.  Reducing the U.S. political risk can also be a factor, particularly if the company is looking for U.S. government contracts or funding.

In contradiction to the main story line, the article also points out that Everest, a leading outsourcing advisory firm, knows of four companies who opened new captive centers in the first quarter of 2009.  This suggests that there continue to be some benefits to the captive model, such as greater control, security & IP protection; establishing a geographic presence in another region, and potential cost savings.

The bottom line message, for me, is not that there has been a wholesale change in outsourcing strategies, but that the strategy about how to engage and manage services in India is always complex, and usually evolves over time.  These examples are great object lessons about the importance  of evaluating a number of factors, and considering a wide range of possible scenarios for both the environment and business model, in developing smart outsourcing strategies.

The Wall Street Journal (sorry, subscription required) noted earlier this week that February car sales in India increased 22% over last year.  China’s car sales increased by 2.7% in January and February.   This contrasts starkly with car sales in the U.S., which declined by 41%, and Europe, which declined 18% (only rising in Germany).

To be sure, there are some quirks behind these numbers: India’s sales last February were especially low because of anticipated changes in excise taxes, and this February have been spurred by increased credit availability.  China’s sales were similarly influenced by a cut in the purchase tax (Germany’s sales increase was also driven by a policy change,  an incentive to scrap old cars) .  Still, the WSJ article forecasts an 8% increase in China car sales for all of 2009, and notes that it is now the largest car market in the world, having surpassed light vehicle sales in the U.S. in January.

The woes of the big three American car companies are splashed across the newspapers almost every day,  and they are only alive because of massive loans from the U.S. government.  European car manufacturers are doing layoffs,  production and salary freezes , and seeking loans from their governments.   Meanwhile, Tata Motors announces it is opening a new plant in Gujarat, to start manufacturing the Nano.

Could this pattern be any clearer?  While all economies have stumbled and fallen in this global recession, it certainly looks like India and China are going to be picking themselves up and brushing off the dirt sooner than the U.S. and Europe.

As noted in an earlier post, Jalal Alamgir’s new book, India’s Open-Economy Policy: Globalism, Rivalry, Continuity, was recently published by Routledge.

Dr. Alamgir’s book was just selected by Asia Policy as one of two dozen recommended books for its 2008 Policymakers Library, and one of only two books focused on India.  You can download the PDF with the reviews of the recommended books at the journal’s website here.  Asia Policy is the journal of the well-respected National Bureau of Asian Research, and needless to say, we are proud to see our partner’s work recognized in this way.

Among the policy implications cited by the review is this nugget: “To reduce domestic political risks associated with controversial economic policies, policymakers can… [r]efocus domestic political opposition to issues of international position, status, or competition.”  This seems particularly relevant to U.S. policy at this time, when there is often semi-fanatical concern about “jobs going overseas,” with little consideration for the repercussions of protectionist policies.  Could the political debate be reframed to focus instead on the value of international trade for the U.S., and building our position as an economic partner of choice?

I spent the weekend glued to my laptop screen, repeatedly checking for updates on Lehman’s situation, as well as Merrill and AIG.  Like a rubbernecker watching a highway accident, I couldn’t stay away, emotions surging through me as disaster unfolded in front of my eyes.

While most of the news is about the FSI companies themselves, my thoughts veer towards the collateral damage in the IT consulting and outsourcing business, where I’ve worked for the past dozen years.  I left Capgemini’s Financial Services BU (which had been Kanbay) almost a year ago.  At the time, the bulge bracket firms were among the crown jewels of the legacy Kanbay accounts (after HSBC, of course).  We touted our projects in four of the five leaders, because of what they said about our ability to execute complex projects and to develop domain expertise, and as a measure of general credibility.  If we worked for these big players, it was clear evidence that we were doing something right.  What do those accounts look like today?  What do those accounts look like at Infosys, TCS, Wipro, Accenture?  What is the larger impact on the way these businesses operate, and on the economic ecosystem around them?

The Indian IT outsourcing business was just starting out the last time we saw a meltdown like this – in the internet and tech industry in 2000-2001.  Many of the Indian employees in this industry have never seen business slow down, never mind shrink.  I think back to my time in iXL, an internet consulting firm, that went from wild optimism to repeated layoffs and restructuring during the dot.com bust – the gloom and doom, the desperate scrambling for lifeboat jobs, and wonder how this will play out in the IT industry in India, and all the domestic Indian businesses that depend on it.  Wall Street has been looking grim for many months, but the fallout from this weekend will accelerate and intensify many changes.  A few guesses:

• Some of the business “rules” are going to be rewritten.  Big players have concentrated on big engagements, clients with over $5M in annual contracts, which has mostly meant financial services companies.  Now they will look more carefully at smaller accounts in other industries, particularly those with the potential to grow even as financial services contract.
• There will be a new emphasis of diversification, both in industries and geographies.  The big players have already increased their focus on Europe, and now we can expect to see more interest in India-based business and other emerging markets that were considered too low margin in the past.
• There will be more interest in service lines that will grow as the bread-and-butter AMO work from the financial services players is consolidated and tightened.  We’ll see more attention on growing consulting, BPO (especially non-FSI lines), ERP, embedded systems, etc.
• There will be widespread layoffs in the Indian outsourcing businesses, for the first time ever.  Some of the prestige associated with IT careers will wane, and they will no longer be seen as a sure ticket to a good marriage and wealth.  Some employees will leave the industry and pursue careers that are more aligned with their personal interests, some aspiring recruits will look to other areas.  Hiring standards will go up, compensation will go down; overall employee quality in the IT industry may actually go up, although morale will surely go down.  India’s young managers (usually under 40 years old) will be faced with leadership and management challenges they have rarely encountered, and some will leave; those who stay will grow and mature.  While the shake-out will be painful for both the IT industry employees, the long term effects may be beneficial to an overheated industry.
• All of the related players, big and small, are going to hurt.  The IT industry in India has propelled an economic miracle, with opportunities in real estate, employee services providers (insurance, banking, food service providers), hotels, car services, and all the small businesses (think tea stalls) that support its employees.  The meltdown is centered in a few big businesses in New York city; it will be felt by individuals throughout the world.