Vineet Nayar Interview: Offshore Outsourcing and the New Global Economy

Vineet Nayar will be remembered as an executive who helped turn business practices upside down. As CEO of India-based HCL Technologies, Nayar is among those who spearheaded the offshore outsourcing movement that took root in the 2000s. He also pioneered the concept of “Employee First, Customer Second”—a management philosophy of employee-centric organizations. Nayar recently corresponded via email with Workforce Management senior editor Ed Frauenheim.

Workforce Management: How has offshore outsourcing changed the ways companies conduct workforce planning? Do they have to take into account skills and wage levels throughout the globe much more than they used to when forecasting the future?

Vineet Nayar: Yes, definitely. Workforce planning has become more global, and it now applies to all organizations, not just those based in the U.S. The confluence of three megatrends—a drifting global economy, a completely new kind of customer, and a decline in employees’ trust in both their organizations and leaders—has created unprecedented challenges for business. This will involve the reinvention of traditional relationships with employees in a way that enables a company to gain competitive advantage in the current economy. So the change is not just in workforce planning, but in all aspects of workforce management.

WM: Can you compare U.S. outsourcing to India now vs. its infancy? What were the obstacles then and what are they now? And what role has technology played in boosting outsourcing?

Nayar: The disciplined use of technology to improve business is something Indian firms have excelled at. Outsourcing to India was once considered to be merely a tactical strategy for wage arbitrage, resourcing and low-end operational work. It is now a much more mature strategic partnership option. And, of course, this is because today’s customer needs are much different than the past—they are demanding more business value and measurable impact.

Over the past four years, the outsourcing industry has seen close to a 90 percent increase, with information technology export revenue from the U.S. to India moving up from $19.5 billion in fiscal year 2007 to $59 billion in fiscal year 2011.

As companies’ outsourcing practices mature, the focus will shift from one-dimensional cost arbitrage requirement to three-dimensional cost, revenue and profitability expectations from outsourcing deals. This in turn requires innovation as a service (in terms of technology, business construct or operating model) from IT vendors. For example, most of the large deals signed by HCL in the engineering space last year were centered around aligning the customer’s business needs and full product life cycle development—both of which were codified into the contract and service-level agreements. We are a company positioned in the high-end quadrant of outsourcing with new business practices such as risk-reward sharing, engineering outsourcing, full service co-sourcing and investments in ‘glocal’ centers of excellence across the globe. We have seen the positive results of focusing on our people, which has been at the core of all these initiatives, as they ultimately deliver the value in each of our business and customer partnerships.

WM: Where do U.S. companies fail when it comes to outsourcing to India? Why?

Nayar: U.S. companies have been the early experimenters of some of the most mature and successful outsourcing models. But let me answer your question irrespective of the geography: Outsourcing may fail like any other partnership may. Unclear expectations, partner selection that is inconsistent with the company’s long term vision or objectives in mind, cultural misalignment, poor governance and lack of collaboration in making things happen. There is no “signing a deal and it’s a success.” Companies who are open to discussion and keep a mindful eye on the both sides of the partnership have been, and will continue to be, the ones to succeed with outsourcing.

WM: What has the effect been on U.S. employees overall? Many say it has worsened things for average workers, who face additional job insecurity and global competition. Others say it has benefited U.S. workplaces by allowing companies and employees to raise their sights to conceive of higher-level products and services.

Nayar: In most cases, increased access to foreign markets is usually well-received as it can drive pricing down. We understand that there is some sensitivity around a global talent pool. However, we have worked regularly with our U.S. customers to minimize turnover and hire locally whenever possible.

WM: Some argue that India-based companies like HCL Technologies embody more-enlightened management practices, such as organizational democracy. Have India-based firms like yours started changing the culture of people management in America—either directly through your operations in the U.S. or indirectly in the way you work with clients?

Nayar: The new entrants into the workforce are detached from the organizations they work for. They don’t respond to traditional command-and-control environments that are built around the idea that everyone is working in the same office. As a result, companies are finding it difficult to motivate their workforce to come up with the innovative ideas they need to compete in a rapidly changing economic environment.

The answer to all these ills is to invest in an ‘architecture of innovation’ that encourages employees to contribute new ideas that push the business forward. It’s only by constantly innovating in people management practices that companies are going to be able to compete in a challenging global economic environment.

Our management practice has brought us significant results. Our clients are very happy to partner with us, to work with our employees on high-end value creating projects and to culturally align for positive business outcomes. In fact, they are asking us to conduct customized workshops for them on how to apply this unique ‘Employees First’ management model in their organizations.

WM: What is the future of offshore outsourcing? Is a single global labor market emerging? What will that mean for people management in the United States?

Nayar: We are indeed seeing this trend towards a global labor market. In many ways, U.S. companies have taken the lead and are driving this market. U.S. companies have been ahead of the curve in diversity and adapting to ensure growth.

WM: What is the best result of offshore outsourcing over the past decade or so?

Nayar: If we look at [the] Indian IT Industry, it has done well for the country, for the clients and for all stakeholders in general. But if we look at it from a global perspective, what stands out in my eyes is that today it has become a powerful engine that fuels economic growth in a very significant way. For example, job creation is a direct outcome of this self-fulfilling engine. While on one side, better value delivered to customers will lead to better business for them and more investment in technology as well as people, the other side shows that outsourcing partners are also required to invest in infrastructure as well as people locally in other countries closer to customers. For example, HCL has announced its intent to create 10,000 new jobs in the U.S. and Europe in next five years. This will be made possible through our ‘glocal’ program—or, rather, new global offices in each country that will leverage local talent to focus on innovation.

WM: What is the biggest drawback of offshore outsourcing during that same period?

Nayar: To me, the biggest drawback is the public perception attached to the outsourcing business model. To be able to realize the true value out of an outsourcing engagement, we must first stop reviewing it as a low-cost business proposition. One needs to explore beyond the perception. We partner with companies that have experienced lower-than-expected sales and provide them with a much larger distribution chain. In most cases, companies who partner with us see a near immediate increase in sales, jobs and innovation.

WM: What has surprised you most about the way offshore outsourcing has developed in the past decade?

Nayar: I am most surprised by the passion and creativity that young employees of the IT industry have demonstrated when tackling and solving a business problem. It is a sight to be seen. This mindset has become so core to HCL that we adopted the EFCS [Employee First, Customer Second] philosophy and made sure that the management is only in the business of enabling employees rather than administering them. In the industry where people are your assets, unfortunately they were or are treated as resources by most, however unfortunate that is. This situation has really helped us attract top talent because it is well-known that we truly put our employees first.

Ed Frauenheim is Workforce Management’s senior editor. Comment below or email editors@workforce.com.