Strategic CIO // Executive Insights & Innovation
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2/18/2008
11:40 AM
Chris Murphy
Chris Murphy
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Report From India: Infrastructure's The Latest Offshore Outsourcing Prime Target

The offshore outsourcing industry's looking at running data centers remotely as one of its hottest growth segments. One reason, a recent report concludes, is that as hardware prices fall, labor takes an ever-larger share of the costs. So to cut costs, CIOs will cut staff, the consulting firm McKinsey predicts. "Moore's Law's latest victim has become labor," Vivek Pandit, a McKinsey consultant, told attendees at the recent Nasscom conference here in India.

The offshore outsourcing industry's looking at running data centers remotely as one of its hottest growth segments. One reason, a recent report concludes, is that as hardware prices fall, labor takes an ever-larger share of the costs. So to cut costs, CIOs will cut staff, the consulting firm McKinsey predicts. "Moore's Law's latest victim has become labor," Vivek Pandit, a McKinsey consultant, told attendees at the recent Nasscom conference here in India.I visited Infosys' campus in Bangalore today, and CEO S. Gopalakrishnan shared this optimism that Indian firms can do to data center infrastructure what they have in applications-that is, use lower cost labor in India to monitor, support, and add functions to it. Today, that's just 5% of Infosys' business, but Gopalakrishnan clearly expects growth. "The value proposition we bring is similar to what we brought to application management," he says.

That's how U.S. engine manufacturer Cummins came to outsourced its infrastructure management beginning in 2003. "We had very good success with application outsourcing, and there was a push in the company to consider more outsourcing," says CIO Gail Farnsley. Cummins contracts with HCL to manage its two U.S. data centers, plus two opened last year in Singapore and the U.K. Recently Cummins has been consolidating data center functions, away from having a clutch of servers at every factory to having centralized data processing and "lights out data closest at the facilities," says Farnsley. Cummins, like most companies doing RIM, keeps ownership of its data centers, and just contracts out their management.

Offshoring infrastructure management is a harder sell to companies than application development or support. The infrastructure's the information factory that makes a lot of companies run, and outsourcing that management isn't something companies can do half-way. Offshore an app dev project that craters, and it's one project ruined. Have an outsourcer foul up the infrastructure, the company could grind to a halt. That's why RIM's a long sales cycle, often with many more execs along with the CIO involved.

But more CIOs seem to be getting comfortable with the idea fast. In McKinsey's 2006 survey, CIOs said 10% of their infrastructure roles could be offshored. In 2007, that share leapt to 27%. The report-- sponsored by the India IT industry association Nasscom-- concludes 70% to 75% of infrastructure roles ultimately can be outsourced. "The comfort factor has gone way up," says Anant Gupta, president of HCL's infrastructure business. Later this week, I'll be visiting Microland in Bangalore, one of the earliest suppliers of infrastructure services, for more on this trend.

But does India really have a competitive advantage in infrastructure management? It's possible other emerging markets, with lower costs than India's surging salaries, could seize this moment in much the same way India did with the offshore application development boom. Gopalakrishnan dismisses that as unlikely. "In BPO I will agree the advantage is limited in India, and other countries have an opportunity," he says. "But when it comes to infrastructure management, it's highly technical. India still has an advantage. … It also has an advantage in scalability - where else can you scale to 100,000 people, 500,000 people?"

McKinsey actually puts the number a bit lower-325,000 to 375,000 jobs in India by 2013, if it can capture around half of RIM's growth. It's tough to imagine India's talent-strapped IT industry finding another 300-some thousand infrastructure experts. But the growth's already begun. Today, India's top 12 RIM outsourcers employ about 40,000 people in the field, up from 6,900 in 2004, McKinsey estimates. With smaller firms and company-owned "captive" remote management in India, the number's 70,000 to 80,000, says Pandit.

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