It’s been an “interesting” time in Cambridge, Massachusetts (where I live) in the past week.  Every day the front story above the fold of the Boston Globe has been about one aspect or another of the controversy around the arrest of a black man, Harvard Professor Louis Gates, by a white man, Cambridge Police Officer Tim Crowley.  And every time I open my iGoogle news page, one of the top 5 news stories is related to it.

Out of all the commentary I’ve read, this comment by Donna Brazile stands out for me:

“No one wants to talk about race,” said Donna Brazile, a Democratic strategist and ABC News consultant. “He [Obama] does not inject race into the conversation regularly because it clears the room. There are designated times, like Martin Luther King Jr. Day or when we have a large gathering of black folks, like at the NAACP recently, but that’s about it.”

When I read this remark, it struck me that in the seven or eight years that I’ve worked with or in the Indian outsourcing industry, I can’t think of more than a handful of times when race has been mentioned.  We have conversations about cultural differences, regional differences, multiple religions, and different communication styles, but no one wants to talk about race, and when it is brought up occasionally, it often clears the room.

I don’t think that’s because race is an insignificant issue.  Race – however we define it – is a major element in the history of both the U.S. and India and, as the recent news coverage shows, continues to be a controversial and emotional topic in U.S. politics.

I think this is a blind spot in our conversations, and one that we can ill afford.  The root cause of outsourcing engagement failures almost always lies in the relationships between the organizations and team members, and rarely in the contract or business process definition.   Developing a shared understanding of the business, culture and environment, across both the outsourcing client and the outsourcing vendor (or distributed locations in a shared services model), is key to a successful business relationship and engagement.  And recognizing the differences in those cultures and environments — from the business model, corporate culture, language, communication practices, to holiday schedules, phone service and weather — is part of developing that shared understanding.

When outsourcing projects go bad, there is almost always finger-pointing about the other side, and it usually includes remarks about “Indians do this…” and “Americans think that…”  While the issue is often not racism per se, I think it’s impossible for us not to be intertwined in our racial histories in one way or the other.  If we don’t recognize and acknowledge this, it’s difficult to have open, productive conversations about what’s going on, and if we can’t discuss it, it’s almost impossible to fix it. Given how much we invest in making outsourcing engagements work, can we afford not to talk about race?

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.

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.

The past few weeks have brought a couple of notes about outsourcing IT services to China, with rather different perspectives.

McKinsey’s recent research note notes some key challenges: lack of employees with strong English skills and international project management capabilities, and poor intellectual property protection. But the note also highlights strengths, such as the large number of Japanese- and Korean-speaking employees, and expertise in high tech realms that could support outsourced R&D. They boldly state that:

…McKinsey research—including interviews with officials at many Chinese government agencies, executives at Chinese leading services providers, and managers at Chinese services-outsourcing parks—suggests that by implementing an aggressive strategy to develop the sector and cultivate talent, the country could capture opportunities worth $56 billion a year by 2015.

On the other hand, the Go East blog offers a few quotes from this year’s Black Book of Outsourcing report that are quite critical. The 2008 State of the Industry report notes that none of the China outsourcing firms made it to their top 50 global outsourcing firms list, and while some have received positive marks, “the level of client satisfaction has not been maintained over long periods as have other offshore suppliers.” They continue:

Customer-provided grades in work quality and staff dedication are extremely high but clients complain of several crucial issues keeping China outsourcing vendors from receiving top satisfaction scores. On top of a fragmented market, China still lacks outsourcing management talent, along with problems with intellectual property protection, differences in culture, poor English language skills, and sparsely found project management expertise especially in outsourcing. Having to tread carefully with these concerns is causing clients to reconsider these suppliers until more intrepid competitors substantiate successes in China.

Upon closer comparison, it seems to me that while their overall assessments have a very different tone, both groups see similar pros and cons. I’m guessing that part of this is about whether you are looking at China outsourcing as an industry, and can see the overall growth opportunity; or whether you are looking at it from a single company’s perspective, and are concerned about an individual client’s business risks.

What’s also interesting is that only a small part of either assessment is related to the specific content of the outsourced work (whether IT or BPO services). This affirms my view, that managing global projects requires a broad set of individual skills and organizational capabilities, beyond the specific project content-related skills.

I’ve been a fan of Sandeep Sood’s wickedly funny comic “Doubtsourcing” for some years now. (He seems to be taking a breather right now, writing about big B’s campaign, but that’s another story…)

Yesterday his newsletter pointed me to an excellent short – and humorous – article in Forbes about outsourcing to India. If you work with people in other parts of the world, especially India, and you haven’t seen it yet, I urge you to check it out. Working from an anecdote about an all-too-common miscommunication with his virtual assistant, he draws some broad lessons on what it takes to make outsourcing to another country work.

Perhaps most significantly, Sandeep Sood refers several times to “global collaboration,” and not once to “offshoring.” I think it’s that mindset, the recognition that what you’re really doing is working with people in another country and culture, not sending work out, that underlies almost all successful global projects. Add to that basic understanding some detailed planning, a lot of structure, good virtual communication tools, and a large dollop of patience, humor and respect, and you can get some great results…and maybe even have fun in the process.

In addition to his commentary, there is a slide show on ten tips for outsourcing. These do not include the usual advice on contract negotiations and performance metrics! Last I checked, the link to one of them is not functioning, but you can get to the rest of the slides by manually tweaking the URL. They’re worth it.