In the mid-1980s the Indian government launched an ambitious “Software Technology Parks of India” program that envisioned tax-free use of land for construction of high-tech parks and freeing all IT companies from income tax and VAT. That is how one of the world's poorest countries managed to build a powerful high-tech industry - now the key driver of the whole Indian economy.
Ukraine has started realizing its own IT potential only recently and is yet to fully realize it in the years to come. Last year's hot topic on the Ukrainian IT arena was construction of the first Live-Work-Learn-Play Technology Park in the outskirts of Kyiv, the capital city and biggest IT hub of the country. Bionic Hill – that is how the project was called – had been initiated back in 2011 by UDP, one of Ukraine's leading investment companies and supported by the Kyiv municipal administration. In August 2012 the state-funded “Technopolis” project that aims to foster innovative IT infrastructure development within the country included Bionic Hill in its agenda. In November – December 2012 the project went on road show and was presented at Stanford University (California), Washington, Chicago and Toronto. The Bionic Hill project team spent some time in the Silicon Valley to borrow best practices of the tech parks' construction, functioning and management.
The Bionic Hill will be similar to any other innovation park and will include a huge business center to host both domestic and foreign IT companies, business incubators and tech labs, venture funds, banks and other service providers, and own “University”. The latter is said to be a joint effort of Bionic Hill, Kyiv Mohila Academy (one of the oldest and most respected higher education institutions in Ukraine) and leading IT companies. I wouldn't really call it so pretentiously as it's only going to be an IT training center for JAVA specialists, testers, cloud, iOS and other technologies as well as client service management and foreign languages. That said, the “University” will supposedly fill in the gaps that currently exist between technical education and real-life business needs.
The project promises significant benefits for the national economy such as 35,000 new workplaces, $900 million in annual revenue from the resident companies, over $600 million in value-added software products export, more direct investments, access to cutting edge technologies, stimulation of innovation clusters in industries other than IT (e.g., energy, biotechnology, etc.) and regular cash inflows into the state and local budgets. Sounds like a true dream town, doesn't it? If we believe the promises, of course...
Some Ukrainian IT leaders and C-level execs are very optimistic about the project outcomes and view Bionic Hill as a panacea for today's issues facing IT industry actors in Ukraine. Roman Khmil, COO of Ciklum, a Danish based company with operations in Ukraine, believes that even though Bionic Hill won't be able to fully solve the brain drain problem, it will provide a next-gen level of comfort for Ukrainian IT geeks. “IT industry has grown immensely in the last 10 years,” says Khmil. “When I returned to Ukraine [from US] in 2002, the average salary was $500, now it's $2,500. IT specialists' wellbeing is a way better than the average national rate. However, there're very few good business centers downtown with a good price – quality ratio. Freelance model works well for small projects only. Big project teams of 30 people and more should be stationed together and managed properly. Now only big and experienced outsourcing companies can afford to host such teams. Therefore, outsourcing to freelancers accounts for no more than 5% of the market. ” In his opinion, Bionic Hill will be able to provide excellent conditions for work, leisure and learning.
Igor Fedulov, CEO of Intersog, a global provider of mobile apps and games development services with 3 development centers in Ukraine, is less optimistic about the project. “My opinion is that techno-parks are a myth and they don't work. Most other attempts to start a high-tech park in Russia, Belarus or Kazakhstan didn't produce any marginal success. If you're modeling against Silicon Valley or MIT or Cambridge you need to have one major recipe for success. One. It's called government spending on actual innovation that happens in those parks. I'm talking about major government spending, close to 80% of entire park revenue. Without this any attempt to realize synergies from the fact that the commercial firms will have direct access to the talent which is taught at the same location is a pipe dream.”
Construction of Bionic Hill is set to start in Q2 2013. Phase 1 including a business center, residential real estate and social infrastructure objects is planned to be commissioned in Q1 2015, while the ultimate completion of Bionic Hill is expected in 2020.
I personally think Ukraine has already lost its chance to benefit from high-tech parks. We'll never reach the level of Silicon Valley or India. We don't have any conditions for creating high quality techno-parks due to several obvious reasons. Firstly, we can't physically build them around the tech universities (parks like Silicon Valley have grown organically around the biggest universities) or as modern oases amidst ubiquitous poverty (like in India's case). Secondly, in Ukraine IT business isn't consolidated at all, IT companies are disseminated across the major IT locations such as Kyiv, Lviv, Odessa and Kharkiv and it makes no sense to bring them under the same roof. Instead of investing in such mythical parks and creating new ways of money laundry, we'd rather improve our foreign investment climate and IT education...IMHO.
(Roman Khmil's quote in Russian is available here.)
Viktor Bogdanov, PR Manager, INTERSOG (global provider of mobile apps and games development solutions), twitter @Intersog, link to profile - http://ua.linkedin.com/in/viktorbogdanov/
Thursday, April 25, 2013
Sunday, April 14, 2013
Global Sourcing Sprawl: Monitoring and Managing Global Sourcing & Services Risks
Author: Atul Vashistha, Chairman & Alan Hanson, SVP, Neo Group Inc.
The globalization of services has become a mainstay of corporations. This dynamic has a huge impact on the competitiveness of global corporations. Yet, global sourcing is not what it was even a few years ago. Its complexity has risen manifold. It embraces multiple locations and multiple processes as companies seek, presumably, to optimize the gains from outsourcing and offshoring. But it also has raised risks and brought on newer, and varied, risks, many of which are not fully assessed by management.
Over the past year, in particular, many of these risks have been brought to light by global events. In April 2011, it was a geo-political situation in Egypt that led to an unprecedented nine-day Internet shutdown. In July 2012, we saw a massive blackout affecting 670 million people in India, the single largest market for services outsourcing. In between, there were economic meltdowns in Southern Europe, Japan’s Tsunami and another deadly season of hurricanes, floods and tornadoes across the US (reminders that even developed and onshore locations carry risk).
Far from seeing the glass as half empty, there is no reason for companies to turn the clock back on globalization or give up on further gains. The need of the hour, instead, is a proactive, and effective, opportunity and risk-monitoring mechanism and strategy to manage the new levels of risk and complexity.
To imagine this complexity, think of a corporation’s global operations as a giant jigsaw puzzle whose pieces are being ordered from different parts of the world, to be finally assembled, perhaps, at its headquarters. Each piece of the puzzle is important, and has to be ordered to precise specifications; and all the pieces then need to come back in good time, and to exact standards, for managers to put the puzzle together. In this situation, what would happen if one piece is lost because of a typhoon in Manila? Or another is delayed by a flood in Mumbai? Or another is caught up by expiring tax incentives in Brazil? Or suddenly one piece costs far more to produce than budgeted as a result of wage inflation in Bogota or a policy U-turn in Russia? And, worse, what happens when multiple things go wrong at the same time? Would one be able to address these better if they had a fair warning?
The unity and diversity of risks
Even given the complexity of modern corporations, and their sourcing processes, it must seem puzzling to comprehend why globalization risks have grown dramatically. The simple answer is: geography and scale. It is the unity that binds globalization risks, while the diversity of the risks comes from the unique vulnerabilities of each location and the scale at which it is being performed. When companies first started outsourcing, most of the work was discrete and project based. Now, a significant majority of the work is management of ongoing projects and processes.
A decade ago, there were far fewer countries to which corporations farmed out any work. Giant nations such as China and India were the choice, themselves leaning heavily on outsourcing to create jobs and to drive domestic growth.
Today, Latin America, for example, is a large emerging outsourcing hub whose proximity to developed North American markets has proved a recent boon. Similarly, Eastern European countries, especially after the financial re-alignment following the 2008 financial crisis, have the twin advantage of lower costs and affinity to developed European markets.
These ‘me-too’ regions, coupled with global corporations’ insatiable appetite to support their needs in lower cost locations have succeeded beyond the most optimistic estimates. As a consequence, sourcing has a global footprint that is far and wide, with over 50 countries providing some kind of services. This geographic sprawl along with scale is responsible for the higher risks.
Geographic risks, of course, don’t mean only natural disasters. They mean much more – geopolitics, regional politics, regional financial policy, local (city- or region-specific) culture and politics and several others. It might be useful to categorize the risks, along with the most relevant examples, as follows:
Seasonal (and predictable) natural disasters
Monsoon floods in Mumbai, typhoon season in Manila
Unpredictable but several countries could be vulnerable, with India and Pakistan near the top
Wage inflation in India, Brazil and Czech Republic
City- or region-specific risks
Hyderabad because of agitation for separate statehood for Telengana
China for its currency risks; Greece for its bankrupt economy; Europe overall because of the euro’s vulnerability.
Almost all emerging markets and some developed ones, too, on account of opposition to immigration and outsourcing
India’s fraud-hit Satyam Computers is the most egregious example. But almost every vendor has a level of risk that needs to be assessed
Likely, none of these specific events could have been predicted with any accuracy. However, many of these could have been anticipated. Consider an example.
Egypt has been a dictatorship for decades, and the Egyptian Movement for Change, the fountainhead of protest against the Hosni Mubarak regime, was started in 2003. Besides, Egypt’s geographical location –situated in a region of harsh, Islamic dictatorships with Israel as neighbor – brought more than average risks. It is conceivable, therefore, that companies that sourcing to such region should have been not only aware of the risks but also pro-actively monitored those closely to pick up early warning signals, and even set up appropriate redundancies.
The fact is: the worst of risks can be fully assessed well ahead of time, avoiding service disruptions, financial losses and potentially brand dilution.
To start with, we propose that risks be broadly, categorized as
· Country Risks
· City Risks
· Supplier Risks
And at each level there are certain risk categories. For any particular city, by example, it is possible to create a risk model, using parameters that uniquely contribute to the strengths and weaknesses of the cities. Some criteria are:
§ - City budget deficit
§ - Rental rates
§ - Space availability
§ - Local taxes
§ - Lodging costs
§ - Industry size
§ - Attrition
§ - Pool of graduates
§ - Existing and planned SEZs
§ - Educational institutes
§ - Attrition rates
§ - Wage inflation
In our own model for example, data is continuously collected across the various parameters at the Country, City and Supplier levels and analyzed using an analytical engine to help inform critical decision-making.
We don’t advocate our model exclusively, but over the past two years clients have used it in the real world with encouraging results. In one case, this model helped pick up early warning signals on a policy decision in India - termination of the Software Technology Parks of India (STPI) scheme, which offered tax breaks. Based on the recommendations one of our clients, a leading semiconductor company proactively renegotiated, a deal with a partner to locate in a SEZ, ahead of the policy announcement. Call it “operational arbitrage” if you like, but it helped the client realize annual savings of approximately eleven percent
In another case, the model picked up signs of likely escalating attrition levels in the subsequent two quarters in Shanghai, which helped clients begin “proactive” employee retention strategies with its suppliers, mitigating potential quality of service issues common to higher attrition. .
For global minded companies, the point is that the world has changed, becoming abundantly more complex, and the tools we use to manage it should therefore change too.
Some people are startled to learn that the first electric vehicles, EV’s as they were known, graced the road more than 100 years ago (they retailed between $1000- $2000 - without any government tax incentives, thank you.) But these EVs would be incompatible with the driving conditions presented by the modern highway, and, frankly, blown-away by the basic model Honda Prius too. They had a top speed of around 15 miles per hour, and could only go about 18 miles on a charge. Talk about range-anxiety.
Firms leveraging global services can help avoid a different kind of anxiety by adapting a risk management approach and system to ensure the stability of operations and avoid significant disruptions.
Managing the global services sprawl all but requires it.
Atul Vashistha is the Chairman and Alan Hanson is SVP, of Neo Group Inc., a leading Global Advisory and Supply Analytics firm, which provides Global Supply Risk Monitoring as a service for dynamically monitoring, managing and predicting country, city and supplier risks.
Atul is a recognized leader in the global services industry with numerous industry recognitions, such as ‘Top 25 Most Influential Consultants’, ‘Nearshore Power 50’, ‘HRO Superstar’, ‘FAO Superstar and Global Sourcing Leader’. You can get in touch with him on – firstname.lastname@example.org. Please visit www.GlobalSupplyRiskMonitor.com for more details on GSRMSM.
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