Offshoring is for SMEs too, Says Study
By Vivek Seal

A study involving four Small and Medium Enterprises (SME) in Europe by the Value Leadership Group shows that they have gained significant competitive advantage by offshoring.

Offshoring is not just for the Fortune 500 or FTSE 100. SMEs should also try to reap the benefit of globalizing their services delivery. European technology SMEs, in particular, stand to gain significant advantages by developing and implementing an offshore strategy, concludes a study by Value Leadership Group, a Europe-based management-consultancy firm. 

The study by Value Leadership Group involved four European companies — Valtech (France), Telelogic (Sweden), Case Consult (Germany) and DeDuCo & XSYSYS (Belgium) — and concluded that these IT SMEs had improved their competitiveness by shifting parts of their value chain offshore (in this case India). Some of these companies moved to India before 2000 when there was an acute shortage of IT workers in the U.K. and U.S.A. due to the explosion of IT-related services.

Despite the fact that many SMEs are afraid of fully utilizing the cost savings because of their limited economies of scale, the study concludes that they have fewer reasons to be worried. Unlike big companies, the SMEs do not have to worry about the social cost of ending jobs in the markets they serve. “At none of these companies did the offshore strategy lead to job losses. In fact, the opposite is true. By shifting some of their value chain offshore, these companies were able to secure jobs in Europe that would otherwise have been lost. One of the companies, DeDuCo in Belgium , would have gone out of business had they not developed a globally distributed development model,” says Peter Schumacher, President and CEO, Value Leadership Group.

Europe has almost exhausted its quota of IT engineers, and is badly in need of workforce which is large in number and loaded with the current IT skills — both easily available in India. “It is like, if an employee leaves the company in Belgium , then you are stuck a big time to find a replacement. But in India you can get a replacement in a few days,” said the report, quoting Carl Dujardin, CEO and MD, XSYSYS.

These companies were fascinated by the growth achieved by the Indian home grown companies, Wipro and Infosys, who have become global powerhouses with more than $10 billion of market capitalization individually. These European IT SMEs are trying to ape some of the success of these companies by leveraging the same advantages — superior IT workforce, lower wages and ready availability of workforce.

DeDuCo came to India when 60% of its staff left for better paying jobs in the banking and other sectors, and was on the brink of a major debacle. It came in the late 90s after attending an event sponsored by the Nasscom, India ’s software and services association. Since then the company has rebuilt itself from the scratch, and is now even planning to sell in the U.S.A. , which would have been impossible had it stayed back in Belgium.

Valtech, which is based in Paris , camped in India in 2003 to move away from catering to the niche consumers of Java Integration Architecture. It wanted to compete with the biggest IT companies from all over, and realized that moving to Bangalore was the only option for it to achieve that. The scalability advantage of India let it take orders, which was beyond the reach of its current workforce as it was able to hire experienced employees with ease. “Valtech has the highest offshore staff ratio of all continental European IT-services firms. This is an interesting fact because most people assume that French companies are not adopting offshore strategies. So in Europe , a French IT-services company is leading the industry in transforming itself to an offshore-centric model. This confirms that the ability to develop smart business strategies is not a function of geographic location,” says Schumacher.

Offshoring has helped these European SMEs to not only survive but also to directly compete with the best and biggest.

For those planning a similar passage to India, Value Leadership Group offers some lessons from the experience of the four companies.

The Group notes that the reason why these four companies succeeded is “not because they avoided making mistakes, rather because they made mistakes early,” at a stage they were still affordable and learnt from those mistakes.

Another successful practice that the firm finds common to all the four companies is that they started by working with local partners before doing things on their own.

VLG also notes that these pioneers — like their bigger counterparts who have tasted success in offshoring — had more strategic reasons to look at India than cost alone. Interestingly, most of them started with one strong reason, but once in India , leveraged their strengths to do other things as well. For example, Valtech, which develops software out of Bangalore , also operates its global shared services out of the South Indian city. And like all effective business strategies, the offshoring strategies of all the four companies were driven from the top.

Copyright © 2005 CMP-CyberMedia LLC |  GLOBAL SERVICES ALL rights reserved.