Engineering process outsourcing in context of India Timo Ingalsuo University of Tampere, Finland Abstract Business process outsourcing has

been a growing phenomenon during the last decade. The current trend continuing, and there is a shift also towards more complex and high end processes to be outsourced. One of the emerging market areas is India, which is attracting offshoring decisions. One of the increasing areas of offshoring is engineering services; however the engineering process offshoring sector is still relatively small. Objectives of this research-in progress is to draw a picture of EPO in India, clarify concepts and provide check-list for European SMEs in engineering field, which are looking for opportunities to integrate into Indian markets. Keywords: Offshoring, engineering process outsourcing, EPO, knowledge process outsourcing KPO, BPO, India. Introduction The research at hand focuses on engineering process outsourcing (EPO) as a segment of business process outsourcing (BPO) in context of India as a destination country. The main reason for selecting India as a research target is the rapid growth of BPO segment in South East Asia during the last years, and especially the evolvement in BPO sector and rapid growth of Indian share of outsourcing decisions. There is a growing interest in Finnish enterprises and governmental institutions to follow the market development in South East Asia region. Thought the outsourcing inside independent economies is not a new trend, and BPO in information technology sector has also formed the ways the companies worked for two decades, the speed of offshoring to South East Asian countries seems to be ever increasing. The focus of this study is to clarify the concepts of EPO and knowledge process outsourcing (KPO), see those in the context of BPO development, and to set the basis for the theoretical framework for future case study focusing on EPO market in India. The case studies of selected companies will result an itinerary checklist for the engineering companies looking the possible business opportunities to integrate into Indian engineering markets. Theoretical background for the research is drawn from the business process outsourcing theories published in latest articles. The used resources focus on Indian sources like NASSCOM strategic reviews -08 and -07, and in global context rely on statistics like EUROSTAT.

Information Science, Technology & Management: Sustaining Knowledge Proceedings of the 7th Annual Conference on Information Science, Technology & Management Sustaining a Knowledge Economy New Delhi (Gurgaon), India July 13-15, 2009

Editor Gurpreet Dhillon Virginia Commonwealth University, USA

ISBN: 978-1-935160-06-9

www.cistm.org

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Business process outsourcing has been a growing phenomenon in economy. One of the starting events was when the Kodak outsourced its IS function to IBM late 1980s (Sridhar & Bharadwaj 2005, Saxena & Bharadwaj 2008). Sourcing and contracting in e.g. manufacturing has naturally existed longer. Datta (2005) points out the theoretical ground for outsourcing from theory of firm by Coase in 1940s, also the phenomenon of job migration from US to Japan in 1950s and -60s, and to Mexico in -90s, and recent development to China and India. The evolvement has changed outsourcing towards more complex structure of networked companies and value-chain thinking. What is new is the companies willingness to outsource also those kinds of processes, which previously have been considered as a core or strategic knowledge of the company. BPO has become a concept which involves lots of expectations of strategic competitive advantage and cost efficiency. At the same time it has become a concept which concretes globalization process and global division of the work. (like described in NASSCOM 2007, p7). The continuous globalization process pushes companies in adopting international sourcing as a significant business model (Alajsk 2008). BPO Framework Business process outsourcing has been researched a lot during the last 10 years. Business process outsourcing involves the actions of the organizations, where operations and responsibilities of specific functions are contracted to a third party service provider. There is other ways to define BPO as well, like Saxena and Bharadwaj (2008), who differentiates BPO from outsourcing of simply IT-services. BPO is then defined as the movement of business processes from inside the organization to external service provider. Sen & Shiel (2006) are referring, - when talking about outsourcing - to the practice of transferring activities traditionally done within a firm to third party providers within the country or off-shore. Ghandrasekhar & Ghosh (2006) however points out the lack of clear taxonomy in BPO conceptualization. In statistic and estimates there is no clear distinguish between outsourcing, offshoring and outlocation. Therefore it can lead to false handling of economical data and create over optimism about the economical possibilities in developing areas, or vice versa over pessimism about job losses in those economies from which the jobs are transferred. Same kind of criticism is found in some other studies as well (e.g. Niranjan, Saxena & Bharadawaj 2006), while the most of the referred articles are emphasizing the possibilities and gains of offshoring to developing markets like India.

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From BPO to KPO and EPO

To better understanding business process outsourcing it is profitable to look at it in historical context in economical framework. Within twenty years, BPO has developed into major part of business thinking. The main motivators are quite self-evident: companies seek for cost-savings through synergy in utilizing resources, knowledge and skills of their outsourcing partners to the full extend. The development of the best practices, shortening of the cultural distance and improvements in the global infrastructure have also increased border-crossing outsourcing (offshoring or international outsourcing) in terms of volume of contracts and value. BPO as a part of sourcing field started some twenty years ago, as mentioned earlier in Kodak case. The drivers behind letting whole processes out were mainly organizations ongoing need to continuously cut the costs, but also the change in strategic thinking. Supportive roles of some business processes like IT/IS and the need to free resources led companies to concentrate only on strategic core processes. From the sub manufacturing in 1980s, ITO and BPO practices started to develop in 1990s, creating a boom of BPO in the beginning of the third millennium. For companies in US and Europe the biggest BPO partners have been domestic actors, who are still controlling the most of outsourcing contracts. While the BPO contracting has become almost an everyday action (with a certain reservations naturally), also the more sophisticated and high end processes are being outsourced with more frequent basis. This is a case in especially R&D, engineering and healthcare sectors. Total worldwide market of technology products and related services was estimated being worth of $1,7 trillion globally in 2007. Strictly BPO contracting was worth of $462 billion in 2007. R&D and engineering was worth of $802 billion, being separate from technology products and related services field. (NASSCOM 2008, p29) Biggest share of this BPO contracting is naturally domestic sourcing (in- and outsourcing). The Americas and Western Europe account almost 90% of the worldwide BPO market (NASSCOM 2008 p39). Of all BPO the offshoring of international outsourcing was at 2005 according to NeoIT (2005)report not more than approx $40 billion. NASSCOM (2008) evaluates that the value of international outsourcing was approx $60 billion in year 2007. With the movement towards more complex processes there have been two new concepts of Knowledge Process Outourcing (KPO) and Engineering Process Outsourcing (EPO) created. They are relatively new terms, as KPO was first introduced in approx. 2003 and EPO two years later. Both of the new terminology falls partly under the BPO concept, but also in wider speaking to ITES (information technology enabled services). They represent the
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movement in BPO practices towards more complex processes, where outsourcing company is leveraging its outsourcing practices to strategic partnership with service provider. It also diminishes he edge between the core and non-core processes, as e.g. the engineering has earlier been seen as core and not something to be outsourced. EPO and KPO as a concepts are somewhat overlapping. As mentioned earlier, the total value of R&D and engineering outsourcing sector is approx $800 billion globally (NASSCOM 2008). Of that amount also only a small portion is international border crossing sourcing (offshoring). Engineering process outsourcing has however a potential to grow, and it has already been one of the fast growing forms of offshoring. India as EPO target The main focus of this study is to look at India as a target of engineering process offshoring. India is one of the countries which without a doubt have been gaining a lot in the recent BPO boom, and also in the same wave it is attracting lots of engineering contracts as well. While the whole offshoring sector is relatively small (keeping in mind that Americas and Europe domestic sourcing is dominating form of sourcing (NASSCOM 2008)), and also in Indian scale the whole BPO, R&D and engineering sector forms only few percentage of GDP, it is still one of the major factors behind the growth of Indian economy, which still year 2009 is evaluated to be approx 7%. GDP growth has been close to 10% yearly almost the whole last decade. The total share of all BPO, R&D and engineering offshoring in India is approx $48 billion in 2008 (NASSCOM 2008). The value of EPO in India is expected to rise with 17,6 % CAGR, and to be approx $20 billion in the year 2010 (in FinPro 2008 cited EvalueServe). On the other hand NASSCOM (2008) estimated that the R&D and engineering was at 2008 approx $4,5 billion. All together R&D and engineering services, offshore product development and software product license exports were worth of &6,3 billion in 2008. Of this statistics of EPO there is drawn a picture of relatively small but possible emerging market. The markets have wide variety of actors, from local engineering services (ES) providers operating either with local or global strategy, big international players with their own R&D centers and SMEs utilizing captive centers, joint ventures or contracted services. While transferring the engineering work to India the benefit of cost advantage is hardly anymore the only motivator, as it is the case with KPO also (Sen & Shiel 2006). In fact the wage inflation has diminished the cost advantage of India when compared to at least some areas of US or Europe. While the cost advantage can be a benefit to some level, companies integrating to Indian EPO markets are looking other aspects of advantage as well. These advantages of offshoring could be e.g. following the global delivery model,

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access to skillful labor, forming strategic partnership, being close to clients and accessing new market areas in emerging markets in Asia. The strategic and core competence nature of R&D and Engineering work challenges companies to also form more sophisticated business models and integrate more deeply into the market that they are going to operate within. Objectives for the research-in-progress The main objectives of following study are to map the EPO markets in India, the past development, present status and future outlook, to provide insight for the methods for benefitting the business possibilities and look more closely to the value proposition of Indian markets. The special focus is set to SMEs, which is showing in the way how the business cases are selected. The study will include four case studies of engineering companies, all in different stage on integrating Indian markets. Of this two folded approach there will be a check-list drafted for small and medium size enterprises needs. References Alajsk, P. (2009). International sourcing in Europe. Statistics in Focus 4/2009 EUROSTATT Chandrasekhar C.P. & Ghosh J. (2006). IT-driven offshoring: The exaggerated Development Opportunity. Human systems management, 25(2), 91-101 Datta, S. (2005). Offshore Outsourcing- Building a Conceptual Framework. The 32nd Annual Conference, Academy of International Business, UK Chapter: Innovation, Change and Competition in International Business, eds. E.J. Morgan & F. Fai, Academy of International Business, UK Chapter, Bath. FinPro (2008). ICT and Electronics sectors in India. Industrial report by FinPro Association, Finnish Ministry of Labour, Trade and Industry NASSCOM (2008). NASSCOM Strategic Review 2008; the IT-BPO Sector in India. NASSCOM 2008 New Delhi NASSCOM (2007). NASSCOM Strategic Review 2007; the IT industry in India. NASSCOM 2007 New Delhi NeoIT (2005). Mapping offshore markets update 2005. Offshore insight market report series volume 3 issue 8. NeoIT 2005 Niranjan, T.T, Saxena, K.B.C. & Bharadawaj, S. (2006). Process-oriented taxonomy of BPOs: an exploratory study. Business Process Management Journal Vol. 13 No. 4, 2007 Saxena, K. B. C & Bharadwaj, S. (2007). Business process outsourcing; for strategic advantage. Excel books 2007 New Delhi Sen, F. & Shiel, M. (2006). From business process outsourcing (BPO) to knowledge process outsourcing (KPO): Some issues. Human Systems Management 25 (2006) 145 155 Sridhar, V. & Bharadwaj, S. (2005). Modelling the growth of IT enabled services in India. In Dillon, G. & Jaiswal, M. (2005). Exploiting systems for organizational effectiveness. Proceedings of the CISTM 2005, MDI, Gurgaon, India.

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