Economics behind outsourcing

As explained in the exhibit below, in the face of perennially pressurized margins resulting from various factors such as growing competition, saturation in the existing markets etc. businesses, primarily in developed economies, have identified cost reduction opportunities in outsourcing a section of their non-core work to developing economies with the required resources – mainly skilled work force. The trend is strongly based on the fundamentals of economics. It started with lower end of a business value chain under the term ‘Business Process Outsourcing’ (BPO) covering services such as back-end customer support centers and slowly has spread further under the term ‘Knowledge Process Outsourcing’ (KPO) offering high end services such as design, software development, research etc.

India and various other South East Asian Countries, due to their English speaking, educated, intellectual and highly disciplined work force, have been able to offer a good business propositions to various clients based in the developed countries in terms of lower service costs. With time and due to rising competition, additional advantages such as time zone difference to provide 24 by 7 uptime (as observed in the case of Evalueserve prefer operating from Chile in order to support its global customers on 24 by 7 basis[1]), ability to offer support in languages other than English etc. (as observed in case of various BPOs supporting the Middle Eastern clients by operating from a cost competitive locations such as Egypt offering Arabic language support[2]) have been seen making difference to the outsourcing preferences.

Cost benefits being the principal premise behind acceptance of outsourcing of work, including that of Research industry, during the financial downturn period this practice even makes all the more sense.

As displayed in exhibit 1 here, India with its ability to maintain a high growth rate of more than 6% even during the ‘troubled’ past year and half, where the GDP growth of developed economies such as the US and leading European countries nosedived, is definitely not vulnerable to the global credit crisis to the extent the other export driven global economies are.

Supporting to the fact is unwavering global investors’ confidence in the Indian opportunity. This is captured in the same exhibit, in the form of continuously growing foreign direct investment to the country between 2005/06 and 2010/11 (CAGR of 41%).

Population: a blessing in disguise for India Inc.

One of the underlying factors acting in favour of India is its healthily growing huge population base of close to 1.2 billion[1]; this results into a huge internal market with high untapped potential at present, for various products and services. This has led to a comparatively lesser dependence on exports. Exports are roughly 15% of the GDP[2].

India’s lower dependence on exports is acting in favour of India

Though in the face of credit crunch India’s IT services exports may have suffered strongly during this crisis period, the extent of this blow appears to be low overall. It is equally important to note that though IT and ITES are perceived to be the leading contributors to Indian exports, exhibit 2 here clearly suggests that lower or declined growth registered by Indian IT exports should not impact India’s over all economic growth due to its marginal contributions.

In light of the above factors, Indian economic growth appears to be relatively unaffected by the global financial turmoil.

In the recent time, a number of commercials on television space caught my attention with one similarity in them – a known brand was extending it self in hitherto unchartered product space. While writing this, I recall the effort to imbibe the concept of ‘Brand Extension’ as introduced by Dr Ratnaja Gogula in one of her marketing lectures during the management graduation days. Back then, it remained merely a theoretical concept and now, with a few years of professional experience, even while at leisurely activity of watching television the concept gets registered and analyzed without any special effort. And this makes me agree with those saying ‘best learning is the practical one’. I hope readers especially those currently attending marketing lectures are listening and may find this useful piece of advice.

Let me return to the focal point here – brand extension. Though in the recent time there are quite a few incidents of brand extensions around us, the one that I recollect to have noticed first, through TV commercials, was Paras Pharmaceuticals’ entry into personal-care product space with ‘Set Wet’ and ‘Zatak’ brands. This move seemed to have opened floodgates for others to follow the suit. Mankind Pharmaceuticals’, with a number of established OTC products including Prega News (an easy-to-use pregnancy detection kit), Don’t Worry (a sanitary napkin brand) etc., have already introduced a male deodorant/perfume brand – Addiction. Company roped in a young bollywood actor and a heartthrob Nil Nitin Mukesh to feature in their advertisements. Spurred by the early success, the company has launched a deodorant brand for female – Kustody – endorsed by Bipasha Basu as seen in the already-on-air commercial for the past few days. The latest to join the band wagon of Pharma-to-personal care firms is Elder Pharmaceuticals with its male deodorant brands ‘Fuel’ and ‘Octane’. Company also has a range of other consumer products but deo brands remain the most widely advertised ones. Within pharmaceutical sector, brand extension is not only limited to the personal care space. Zydus probably is the fist to create a niche food supplement Nutritional Health drink ‘Acti Life’ targeted at grown-ups.

Not only pharmaceutical manufacturers are unshackling their limits to explore the benefits of brand extension, even the health drink market has many recent examples worth noticing. An easy-to-make glucose-based beverages’ space, a space ruled almost for several decades by the Glucon-D brand by Heinz, is now witnessing entry of consumer product giant brands such as Dabur, Boost (GSK) and Rasna etc. Dabur has been fighting to enter into this space since as early as 2002 and even stopped by law in as recently as 2007 now introduced several variants – Glucose-D, GlucoPlus-C in orange and lemon flavours. GlaxoSmithKline Consumer Healthcare has also extended its already established boost brand to introduce a glucose based beverage – Boost Glucose. Similarly Soft-drink concentrate maker Rasna has also recently launched a variant – Rasna Glucose-D.

A sleeping giant and a known brand in almost every Indian household, Parle, woke up after a long to spread its presence to snack segment with its unique ‘Smart Chips’. This time Parle showed its seriousness by getting its product endorsed by a serious Amir Khan and has challenged the reigning emperor Pepsi foods’ Lays brand and various others. Similarly, in the coconut hair oil segment the long standing sovereignty of Marico’s Parachute brand is recently challenged by Emami’s Navratna brand as it has now introduced a Navratna’s coconut hair oil.

In an another incident of brand extension, after making their presence felt by drafting a batting maestro Sachin Tendulkar as their brand ambassador for their inverters, Luminous has now introduced mobile batteries.

As brand extension is neither a new concept nor it is explored for the first time, only time will tell how far these moves will succeed!

In the recent times, there are several brands representing a range of industry sectors – News paper, mobile services, confectionery, Tea etc. to name a few – have adopted this tool of social message based advertisements, especially on the TV media. Two key underling reasons are behind this trend; companies are trying to differentiate their communication in the heap of several thousands of run-of-a-mill advertisements to create an impact on viewers’ mind; beyond this they also intend to form a connect with its consumers, especially with those belonging to a niche of well studied, intelligent and a bit more aware of various social causes around.

Tata tea, to my mind, initiated this trend with its ‘Jago re’ ads started a couple of years back; these ads cover several of long-standing social issues such as avoidance of voting power by many youth under various reasons, vote-hungry and undeserving politician, bribing government official, illegal admission buying system etc. and remains my personal favourite. Though ultimately Tata-tea is also trying to sell, the advertisement appears to be highly pleasing and they are trying to retain the freshness by coming up with a new story to tell in every few months. Beside this, the company has created a separate portal with the same name where interested consumers can engage themselves in various social causes/initiatives etc. Over all, the ad campaign reflects the honesty of the purpose of the company. Idea’s ‘what an idea’ driven advertisements are also appreciable, especially the one where a principal of a school uses mobile as a solution to reach out to country-side children; the company also promotes social causes such as ‘save tree’ through a smart ads.

Hindustan Times, a leading news paper, also tried briefly to follow the suit with its ‘it’s time’ campaign on TV media covering several topics – Aids awareness, traffic sense especially at railway crossing etc.  Following this a fellow newspaper – The Economist – also has an ad on air talking of a global issue – African kids falling prey to chaotic situation around them and loosing their childhood as they are forced to take up weapons at early age. Wrigley’s Doublemint chewing gum’s advertisement tries to address a general lack of traffic sense in India, but in a bit funny way. Otherwise a known promoter of cricket in a cricket-crazy India, Hero Honda also tried a differentiation formula with its special ad campaign featuring Virendra Sehwag and Priyanka Chopra mouthing a slogan “fir dil do hockey ko, hero Honda dhak dhak go” promoting the last hockey world cup.

Though advertisements are one of communication tools that companies deploy with an ultimate aim to raise sales of product or services, most fail miserably; there are advertisements which even end up annoying viewers. So it is Interesting to notice that at least several advertisements also talk to us using ‘social cause’ route.

A normal understanding says businesses tend to prefer to be in locations different from  the ones where their direct competition is present; but when the competition is too intense you find close competitors choosing to be as close to each other as possible. With the intense rivalry scenario in the Indian telecom space, where an unhappy customer can change its service provider at a drop of a hat, it is always fruitful to be present in the vicinity of your close competitor so as to be able to attract each other’s existing customers.

Nagarjuna circle is a junction connecting access points to several key parts of the city – Secunderabad, Banjara Hills, Madhapur (Hitech city), Ameerpet and SR Nagar etc. Though Ameerpet, a busy commercial location close by, have the potential to be the location which can serve as an access point to these telecom players, there are several factors going against Ameerpet. One, Ameerpet is always a highly crowded place and hence many avoid going there unless specific need forces them to; second, Ameerpet is kind of D-tour, especially for someone travelling from Secunderabad side to Banjara Hills or Madhapur and vice versa.

A road from Secundrabad to Banjara Hills and Madhapur remains one of the busiest roads in the city, especially during office hours with thousands of IT and ITES workers commuting to and fro. Nagarjuna circle is directly located on this route; IT and ITES employees again is one of the key sections of customer for all the telecom players. And hence Nagarjuna circle becomes one of the –hard-to-ignore locations for these service providers. By being their, they are able to offer an all-important ‘convenience factor’ to their customer – customer can conveniently drop in to their showrooms on their way to work, home. Nagarjuna circle and the near by areas of Banjara Hills also boasts of many high-end retail brands including Wills Lifestyle, Loft, Benetton, Provouge, Shades, Addidas, Café Coffee Day etc.; even several banks such as HSBC and Andhra Bank are conveniently located there. A petrol station, a Music World store, Himalaya book store, a Nokia store, Jalgam Vengalrao Park, Sai Baba Temple etc. and eating joints such as Shanbagh on Panjagutta side and many others on Banjara Hills side also attract shoppers/diners to travel through Nagarjuna circle.

Conclusively, Nagarjuna circle is one of the key business locations for businesses especially the ones which customer driven.

Because of my profession – market/business research – I am aware that CCD brand actually belongs to Amalgamated Bean Coffee Trading Company Limited (ABCTCL); the company have started from Karnataka and following a franchisee model has successfully spread across India now; corporate website tells that the total number of stores under CCD chain is at 923 at the moment and within India the brand’s presence is not only limited to Metro cities but it has also reached to other cities such as Jaipur, Jodhpur, Ahmedabad, Surat, Bhopal, Indore, Lucknow, Vizag and many more. So definitely it feels good that the brand is doing GREAT in terms of business growth.

But my recent encounters with CCD, especially in Hyderabad, have made me doubt on my perception of CCD as a good brand and rather on CCD’s promise to its customers: “come to me not only for coffee but for an experience around it”. In last few days I happened to visit three different CCD stores – at Ashoka Bhoopal Chambers, Lifestyle building and Nagarjuna Circle. Several things which I observed are behind an emergence of negative image of CCD brand.

• Varied experience across various stores – I think even when this is a franchisee-model operation, customer perceives it to be a same brand and hence expects a same experience. Stores at Ashoka Bhoopal and Lifestyle offer normal drinking water without charging where as Nagarjuna Circle store forces you to drink CCD branded bottled water that too at a premium charges as compared to prices out side.
• Poor interiors – especially at Ashoka Bhoopal Chambers based store the rest rooms were in highly unhygienic conditions; the temperature within the store is not maintained properly even in the peak summer time. During my visit to some of the offices in side the building I notice several offices have recently opted to move out and may be because of this attrition of regular customers might have affected the business of CCD store there; but this does not justify bad service standards to me. Even at the store at Nagarjuna Circle, I found at least two of the tables’, right near the entrance, upper surface to be in damaged conditions and upon asking the staff’s answer was far from being satisfactory.
• Unethical practices – Nagarjuna Circle store literally tried cheating me; against my payment, they handed me the rest of the amount with a bigger pack of Orbit chewing gum in stead of five rupees. Initially the staff told me casually that they were short of change but looking at my mood they somehow were able to find the change which a just while ago was in shortage. This is just unacceptable to me; I may choose to tip but can not be forced.
• Stark absence of activities/initiatives – During my early visits I noticed that a store at Somajiguda Circle had a customer comment board decorated with loads of colourful comments. None were found at the rest of three stores I visited recently which again is an indication of lack of interest on owner’s part. This ultimately transforms into demeaning a CCD brand as a whole.

So I am now really doubtful about this brand and its ability to deliver on its promises, at least to me. Hope some body at the core of CCD brand is listening and has the heart to act on these. This is all the more necessary with the global coffee retailers are hot their heels – Costa Coffee (UK), The Coffee Bean & Tea Leaf (USA), Starbucks (USA), Gloria Jean’s (Australia) etc.

A while ago I was returning home after completing an errand; I witnessed a very shocking human behaviour which I honestly and completely fail to understand as well as justify.

On a bumper-to-bumper traffic where one can hardly drive at a speed of 20 to 30 km/hr, two teenage middle class kids on a bike, a few meters ahead, bumped slightly into a rear mud guard of a red Ford car as the bike driver could not abruptly halt. What I saw immediately was almost a maniacal and beastly behaviour of two middle aged gentlemen in the Ford. They stopped there vehicle in the middle of a road and both jumped out of their vehicle within a second and started beating the bike driver kid then and there in a savagely manner with punches and slaps all over kid’s body parts while constantly abusing him. I felt pity as I saw that the bike-driving kid was constantly pleading with his palms against each other – a typical Indian expression for forgiveness and was almost on the verge of crying. I could sense that he was equally guilty and now with this behaviour by those car guys he was feeling threatened for his life at least for that moment. The pillion rider kid was even younger to his driver and was so scarred that he jumped off the bike scarcely managing the polythene carry beg with some heavy household stuff and started running away from the scene so as to somehow save him self.

Even in the case of a rash-driving involving fatal injury, I personally do not subscribe to this savage behaviour; to me the damage, no matter in what amount, can not be undone by this revenge-hungry behaviour. Everyone of us probably would agree that accidents are never a pleasure but at the same time we all humans do know in our mind that then accidents are unintentional and that is precisely why they are termed as an accidents.

These two car guys are representatives of a growing sect of our society – the upper middle class with a car and they start thinking they are better-off than lower middle class person. They also carry license to do as they please at any place; their behaviour was highlighting several shocking aspects. Seriously poor traffic sense – they were completely engulfed in their own; other several vehicles behind were not allowed to move and the traffic was building on the road at the peak-hours. Complete absence of civilised behaviour – beating someone especially teen age kid in a savagely fashion tells a lot about the attacker’s mental status. Even under the influence of various pressures that life nowadays exerts on each of us city-dwellers including jobs, hectic lives etc. one cant not justify this kind of behaviour.

Opposite to this, I was involved in almost a same intensity accident on a rainy night in Dubai, a city famous for its heavy traffic globally; all vehicles were in a hurry to get back home after a long and tiring office hours and due to slippery road surface my friend failed to halt his car in time which slightly bumped into the posh Honda SUV ahead of us. The driver instantly came out but just to notice the slight dent on back of his vehicle; my driving friend offered a genuinely guilt-ridden ‘sorry’ and the SUV guy maturely accepted the same without much fuss. Within few seconds we all were on our way without jamming traffic behind us. This was a pleasant human behaviour especially on SUV guy’s part as under Dubai traffic rules if the vehicle owner involved in a road accident wants to claim insurance he has to park his vehicle on a side, inform police which then would arrive at a scene and will issue a written memo to the vehicle owner after thoroughly understanding both – how-it-happened and the damage to vehicles. Without this memo any insurance company will not repay any amount to the vehicle owner for the damage. Though this incident does not prove a complete absence of road-rage especially in Dubai or any other part of the world with more proven traffic sense, it definitely proves that we – the humans – have ability to understand situations and solve them in more pleasant and civilised way.

I pray that somehow we all, especially those on driving seats, think on this and try and accept accidents as an accidents and not delve into inhumanly revenge-seeking behaviour.

Before I completely move off the track, let me come to the point. Nokia, Sony Erickson, Samsung, LG have been strongly present in Indian mobile phone market for close to ten years. Finnish global giant Nokia, probably riding on the fact of being the first mover, remained a clear leader even in Indian market for considerable period with its easy-to-use mobile phones and track record of regularly launched models offering improved features etc. Slowly other global brands such as Sony Erickson with its proven mastery especially in music related features and Korean firms Samsung and LG with lower price band took a part of Nokia’s pie for the past several years. Even several Chinese brands including BenQ also keep getting attracted to take a bite of lower end of a market sporadically.

Come 2008-09, and the scene is changed surprisingly. I am talking of a trend which saw horde of homegrown mobile brands sprung to life; even before the global counterparts acknowledge and understand a bunch of names such as Karbonn, Micromax, Maxx, Lava, Lemon, Spice and Pagaria etc. started crowding the market space. Latest to join the band wagon is more known Indian brand in the electronic goods’ space – Videocon. Being a proud Indian, it definitely is heartening to see many indigenous mobile manufacturers ruling the scene in just a short span of time. Even without scrutinizing their sales figures one can safely assume these companies to be doing good by looking at their enviable aggression on brand promotion front. In a cricket crazy nation like India, these companies must have paid dearly to be a lead sponsor of many high-profile cricket events in the recent past; this trend indirectly proves their aggressive intention. In line with this, Akshyay Kumar, M S Dhoni, Sonam Kapoor and group of leading cricketers including Virendra Sehwag, Gautam Gambhir and Virat Kohli respectively to be their brand ambassador.

The reasons behind these companies’ success are several; one prime positive is India being a large market in itself with primary part being a cost conscious middle and lower class. Consumers representing this huge chunk are knowledgeable enough to expect latest features at lower price. Indigenous companies are benefited by the fact that they entered the market late – latest features and technologies which were developed at higher R & D costs by the leading global brands were now available for these Indian companies to replicate rather easily. Another positive for these Indian companies is rooted in the fact that many Indians in general, like the author, are not lured blindly by brand names; as a representative of this particular sect, I personally base my buying decisions mainly on product’s utility; outward appearance and attached brand name comes last in my decision.

Indian market’s huge size provides enough incentive to indigenous companies to plunge into mass production for many products; this makes a perfect sense behind what I noticed during my stay in the Gulf market. All the global vehicle manufacturers including two-wheelers from India are present there. And even with amazingly deep pockets none of the Gulf countries have produced any indigenous manufacturer of automobiles or electronic goods etc.

Kudos to Indian markets to inspire indigenous manufacturing.

What they say is true – old habits die hard. Being observer by nature, I keep noticing and analyzing ‘business angle’ behind things in my surrounding, which many others around me may miss completely; the interesting part is, this remains true even when I am holidaying. In fact today I want to talk about one such commercial trend which I noticed in the middle of nature’s most amazing creations – ice laden mountains and free flowing rivers. Last June, while traveling through Himachal’s renowned tourism spots – Shimla, Kullu & Manali – I could not help but notice a strong presence of Maruti’s Alto amongst other tourist vehicles.

Before my visit, I had a perception that on this rugged and hilly terrain I would only find sturdy vehicles – the likes of Jeep, Tata-Sumo, Toyota-Innova, Mahindra-Scorpio & Bollero etc. But as soon as I ended my amazing journey on a famous Kalka – Shimla Toy train, I saw a small Maruti Alto roaming around in Shimla’s narrow and winding roads. I immediately thought how enthusiastic a tourist could be to drive one’s own small car to such tough heights! While checking in into a hotel, the manager at desk inquired for our itinerary. I asked for a rented vehicle with a driver and to my surprise the option list included Maruti Alto among others. Apart from being convenient for two persons, it was the cheapest option and hence I chose it, although with bit doubt in my mind regarding the vehicle’s ability to support our plans in this uneven terrain with rough road conditions.

The next morning, we roamed around in our little princess on narrow, winding hilly roads in an around Shimla and I was really happy with its performance. That is when an analyst inside me came to the fore and made me think further on this topic. Once back, I even tried looking at this using my most reliable partner – Google, but found nothing on the topic. This is when I tried thinking logically and arrived at several conclusive reasons.

There appears to be several underlying aspects behind successful acceptance of this small-wonder from Maruti’s stable in the local tourist-vehicle market. Himachal boasts several of the favourite Honeymoon spots across India; Alto, though considered smaller, provides sufficient space for the newly weds. On hills, the roads are narrow which again favours Alto’s small body; while overtaking or finding an always-scarce parking space, especially inside Shimla, many pride owners of big and sturdy vehicles would look with envy at this small beauty’s ability to accommodate easily and effortlessly in small space. Maruti is long known for its comparative higher mileage which again adds another feather in Alto’s cap. Being at the lower end of a price belt, it is an affordable option for a lower-middle class taxi-driver who can think of owning an Alto to be able to earn on his own. Maruti invariably boasts the widest and deepest reach of service stations and parts stores which again makes it easy to go with Alto.

Thinking on these aspects I concluded my Himachal journey inside the cozy comfortable interiors of Alto. Amazing was the fact that we used at least three different Altos during the whole journey and none of them had given us even a slightest of trouble in any form. So my vote is for Alto hereon!

I was bit surprised when a day before yesterday I noticed an advertizing on one of the popular Television channel announcing they will be airing a world TV premier of Veer – a much hyped epic movie, starring a big star such as Salaman Khan. The surprising bit here was the fact that this movie was released barely a month ago. But then I realized that this trend is not a recent one; rather it has started may be several years back – a movie, hit or flop, gradually comes on a television. It is interesting to observe that the time between a movie’s release date for theaters and its subsequent television premier is shrinking pretty fast; though there are variations in this period for various movies depending upon its status tag – a hit or a flop.

If we analyze this trend a bit closely, movie business normally has two well known revenues models – through initial theatrical release and later through selling rights to a TV channel. With recent high proliferation of internet and easy availability of pirated VCD/DVD across the breadth and the length of our country has been one of the major forces behind this shrinking timeline between a movie’s original theatrical release and its gradual appearance on TV channel. We find pirated VCD/DVD easily available in the market, though it is considered to be illegal. Similarly, there are numerous websites streaming movies online with many of them having a dubious status. In other words, laws have been and will be there but then it is always impossible to enforce them for many a reasons. We probably have to accept that as the movie business is getting bigger the movie piracy business is also getting stronger with the passing time. Although we see lot of anti-piracy ads and campaign promoted even by well known movie star with the slogan “piracy is a crime”, the strongly established pirated movie network shows very little or rather no respect for such efforts.

With all these in the background, it is a wise business move from movie producers to utilize the second channel of revenue by selling rights of a movie to a TV channel before it is too late; it is also a win-win situation for a TV channel, as TV still is a medium with larger reach as compared to internet. There remains a mass, still dependent on TV channels to watch movie and this ensures a TV channel to attract sufficient advertisement revenues.

I think with the passing time, the time difference discussed above may shrink drastically depending upon business-maths of the forces involved. This also proves that a famous phrase – “survival of the fittest – is universally applicable; even to businesses.