The mission of Going Global is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.
CHICAGO – Adarsh Arora is CEO and co-founder of Lisle Technology Partners, an early stage and middle-market technology consulting firm based in Lisle, Ill. The firm has worked with the portfolio companies of numerous Chicago and Silicon Valley venture capital firms.
In part two of a three-part Q&A, international expert Michael Muth sat down with Arora to discuss the issues of turnover and pricing with regards to outsourcing in India and other countries.
Michael Muth: How big are the issues of turnover and training in working with outsourcers?
 Adarsh Arora: There is no effective way to do it. In 1996 when I went to India (I was born there but I came here when I was 19), I didn’t really know how India worked. It drove me nuts trying to understand the nuances. Rather than starting our own center, we found a competent partner. Once we knew what really works and what does not, we started our own center.
Turnover is a huge problem and one has to find clever techniques to retain good people. Aside from money, the key retention technique really involves the type of work. Since we are always working on creative projects, we have been able to hire and retain some of the best talent.
MM commentary: It’s impossible to underestimate the scope of this problem as well as the range and scope of the solutions to it. None are quick and easy.
MM: How does a local firm maintain control over its products and processes with an outsourcer?
AA: If a customer insists that its process of development must be followed in all its glory, you might have trouble finding the right partners because the outsourcer can’t change its culture to satisfy one customer. The goal should be to find a compromise with which both parties can live.
MM commentary: Like many other management issues, you need to manage toward results and not necessarily the means to achieve those results.
MM: How are outsourcing arrangements typically priced so there are no large cost overruns?
AA: A lot of the work is still priced by time and materials. Still, fixed-price contracts are on the rise. It all depends upon how specific the requirements are, how rapidly they are expected to change and whether some routine work is being done or some creative system is being built. The customer should also expect the cost of change to be very high in a fixed-price contract.
The best advice I can offer here is that the customers should be fully engaged and should not take the “big bang” approach to development. To keep the visibility very high, we insist upon periodic deliveries so the customer at every step is fully aware of the progress being made.
MM commentary: Though some contracts are being negotiated based on performance, that’s not yet happening on any great scale.
MM: What are the soft costs of outsourcing?
AA: If it’s not done right and for the right reasons, some key people can become hostile. This will have its own negative effect on the whole undertaking. It’s important that the senior management buy into the outsourcing strategy.
MM commentary: Depending on what is outsourced, this can be an organization-transforming process.
MM: How difficult is it to sever an outsourcing relationship?
AA: It’s pretty tough. After a while, your partner has built up some real experience in your systems and you might have let some people go to save money. Pulling the project back into your organization can be expensive. This is another reason why the choice of the vendor should be done very carefully.
MM commentary: In other words, if you are going to jump into it, it’s important to be committed because getting back out can be very expensive and time consuming.
MM: How does India compare with other offshore outsourcing destinations?
AA: In software, Russian price and performance might be quite attractive to me. There are very smart people there. Still, there are two issues. First, the number of people available there is relatively small compared to India. Second, the political situation isn’t stable.
Some of the other countries that are competitive in terms of rates are Poland and Malaysia. Scotland and Australia aren’t price competitive any more. While China will be the biggest competitor to India over time, it’s not there yet because of the language and the lack of experience in building complex software systems.
One of the key reasons India has done so well is that the Indian government has pretty much stayed away and let the business community drive the software industry.
MM commentary: You can find outsourcing partners in most countries throughout the world today. I’ve heard of resources in Portugal and South America lately.
MM: How did India overcome obstacles in power generation, telecommunications, illiteracy and bureaucracy?
AA: We have our own generator. Every software company has its own. Lights go off for a few seconds and the generators kicks in. We also have UPS power backup devices so there’s no loss of work. The Indian government built its basic telecom infrastructure and then left the industry alone.
By the way, the physical infrastructure is a different story. Bangalore is growing so very rapidly that its traffic is now a nightmare. To keep this in context, it still doesn’t take more than one hour to go anywhere, but given that the population there was used to a 15-minute commute, they now constantly grumble.
MM commentary: Despite being cast as a panacea in outsourcing, India still has problems of a developing country. Even though literacy is only 52 percent there, the country has such a large population that they are still cranking out a large number of software developers. Though bureaucracy has historically been a problem, the government has kept its hands off.
MM: What incentives do provincial governments offer foreign companies to set up IT-enabled services?
AA: Any company that primarily does export business gets a major tax relief. If I’m not mistaken, there are pretty much no taxes for any five of the first seven or eight years.
MM commentary: Our government officials might be wise to consider providing more incentives like these to keep more knowledge-based work here rather than supporting manual positions.
MM: What are intellectual property protections in India?
AA: As is the case anywhere, the first level of protection is to work with high-quality vendors. I know that India continues to strengthen penalties associated with IP theft. There was a case a couple years ago where one employee of a company stole some IP and tried to sell it to a company in the U.S. The FBI and the CBI (India’s equivalent of FBI) worked together to go after that person. It was quite a story in India.
MM commentary: Intellectual property protection isn’t anywhere near as extensive as it is here in the U.S. Though the quality of the relationship with your partner can assure some protection, you still have little recourse through the Indian legal system.
MM: How does China fit in the software development outsourcing equation?
AA: Over next few years, I predict that there will be a three-tier system: the U.S. customer, project management and some design work in India and significant development in China. As China slowly starts moving up the value chain, some spirited competition will occur between India and China. It’s interesting to note that large Indian vendors are now starting their operations in China to get access to additional manpower.
MM commentary: Technically the Chinese are better educated and the Communist party eliminates bureaucracy there. However, this is a case where the cultural difficulties (such as language and domain expertise) hold the Chinese back.
MM: Does Lisle Technology Partners have a branch, project office or joint venture in India?
AA: Our subsidiary has been a fully owned subsidiary of Lisle Technology Partners from very early on. My recommendation to a customer thinking about starting their own center would be to first work with some partner to learn the landscape and then perhaps do their own center or a joint venture.
MM commentary: Again, so long as there is some export-based orientation, there are significant tax advantages.
MM: Why Bangalore?
AA: Because the best software talent is there.
MM: Delhi and Mumbai have populations two or three times larger than Bangalore. How does Bangalore compare with other Indian locations like these for outsourcing?
AA: Delhi and Mumbai are not for software. It got started in Bangalore and a lot of the defense labs are there. The culture got built up.
MM: What percentage of your firm’s revenues come from outsourcing?
AA: That’s not the way we look at it. About 80 percent of the work is done in India and about 20 percent of the work is done here.
MM: Does Lisle Technology Partners do more than outsourcing readiness assessments?
AA: That’s a small part of what we do. We make our money by developing software for our customers who require creativity and certainty that it’s going to get done right. Our sales and marketing channel is U.S. VCs. Many of them hire us to do technical due diligence before they invest. A significant percentage of those leads turn into development opportunities.
With companies we like, we cover our costs and take our profits in common stock. For the companies that we think we don’t understand enough, we take everything in cash.
MM commentary: Some of this does not come across clearly from the Lisle Technology Partners Web site.
Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muth’s full biography.
Previous Columns:
Q&A: Lisle Technology Partners CEO Adarsh Arora on Offshore Outsourcing (3/15/2005)
Q&A: CEC’s David Weinstein, Kapil Chaudhary on International Experience (3/1/2005)
Q&A: CEC’s David Weinstein, Kapil Chaudhary on Internationalization (2/22/2005)
Q&A: Brian Briggs of Acclaro on Whether to Outsource Localization (2/8/2005)
Q&A: Brian Briggs of Acclaro on the Complexities of Localization (2/1/2005)
Q&A: Brian Briggs of Acclaro on International Localization Services (1/25/2005)
Q&A: RPX’s Robert Okabe, IEC’s John Janowiak on Global Events (1/11/2005)
Q&As: FastRoot’s Terry Howerton, Doug Cogswell of ADVIZOR Solutions (1/4/2005)
Q&A: Opportunity International’s John Kamperschroer on Partnerships (12/21/2004)
Q&A: Opportunity International’s John Kamperschroer on Technology (12/14/2004)
Q&A: Opportunity International’s John Kamperschroer on Innovative Financing (12/7/2004)
Q&A: IEC Senior Director John Janowiak on Trade Show Realities (11/16/2004)
Q&A: International Engineering Consortium Senior Director John Janowiak (11/9/2004)
Q&A: Founder John Lee of Chicago’s Hostway on Web Site Localization (11/2/2004)
Q&A: Founder John Lee of Chicago’s Hostway on Growing Globally (10/26/2004)
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