I began to re-read the article querying if "the Party Over
for Indian Outsourcers?"
from others in the Industry using the article as a launch
Trent: I recently addressed concerns that Cognizants
(CTSH) growth - as well as that of other Indian outsourcing
firms - may be peaking. Now it seems that those in thee
industry may be wondering the same thing. . . It is
healthy that industry insiders are beginning to worry
about the issue. Nothing is more dangerous than cocky
management teams. For investors, though, there still
needs to be an adjustment to the risks that growth will
not be what it used to be.
I mentioned this a few weeks ago. Heres more on
the topic from Business Week. Basically, the arent
as many people available to fill the outsourcing demand,
the rupee is rising against the dollar, wages are rising,
and theres more competition for existing talent.
Visas to the US are running short too
Mountain blogs: I usually ignore the hyperbole when it
comes to Indian outsourcing. Articles about outsourcing generally
fall into one of two categories: 1) business articles that
exaggerate the benefits of outsourcing to with little factual
data, or 2) visceral anti-outsourcing propaganda. However,
Business Week has produced an interesting snapshot of the
challenges faced by Indian Outsourcers: a falling US dollar,
increased competition, lack of innovation, limits on the H1B
Visas, and a severe shortage of technical labor. Perhaps most
shocking is the admission that Tata is taking general science/math
grads and putting them through a "7 month" program
and then making them coders. Paradoxically, someone with seven
months of training is billed at the same cost as a senior
on a discussion forum wonder: Its a very Long Article
but well worth reading....what are the affects of this IT
scene in Pak and what good is it going to do for People/Companies
in US. is Outsourcing is really going down among US companies
and now instead of some company run by indians, its the IBM's
and others are gettign that Outsourced work done
began to jot down a few major flaws in the argument that Kripalani
seems to be making in the article. My comments embedded. - Mohan
[Opinions here are mine personally, and not that of my employer]
Is the Party Over for Indian
TCS, and Wipro still rake in profits, but they face challenges
ranging from a stronger rupee to the likes of IBM and Accenture
romping on their home turf
July, rumors swirled that Infosys Technologies (INFY) might
be readying a takeover offer for Cap Gemini (CGEMY) or another
major tech-services player in the U.S. or Europe. So on July
25, when the company alerted the press and the markets that
it had a major announcement, there was a great deal of anticipation.
Infosys unveiled a $250 million outsourcing contract with Royal
Philips Electronics (PHG) of the Netherlands. It was an acquisition
of sorts, the company said, at least of the outsourcing centers
that belonged to Philips. "We're taking the model to a
newer level," said Chief Executive Kris Gopalakrishnan.
a new contract certainly isn't bad news, but the development
was somewhat deflating for those who believe that Infosys needs
to redefine and reposition itself in the multibillion-dollar
arena for global outsourcing services. In fact, Infosys and
other Indian outsourcers are facing a raft of competitive challenges
that will require some dramatic new strategies.
biggest outsourcing firms continue to rake in the profits, at
least judging by the latest earnings season. The top five playersTata
Consultancy Services (TACSF), Infosys, Wipro (WIT), Cognizant
(CTSH), and Satyam (SAY)reported robust profits in the
quarter ended June, 2007. And executives generally forecast
strong growth ahead.
very happy with having beaten the forecast," said CEO and
Managing Director S. Ramadorai of the $3.1 billion Tata Consultancy
Services in Bombay. "TCS, as the leader, is doing well."
Ramadorai predicts $60 billion in tech-services exports for
the industry by 2010, nearly twice the current $35 billion,
plus $20 billion in revenue from domestic business.
behind this show of supreme confidence lurks deep unease. A
confluence of adversities is at play. They include an appreciating
rupee that is cutting into earnings, a severe shortage
of qualified talent at home, and a cap on H-1B worker visas
to the U.S., along with pre-2008 election protectionism threats.
IBM, Accenture and EDS too are crippled by the same archaic
visa regulations and bottlenecks. Case-in-point is Microsoft's
decision to move R&D to Vancouver in Canada, across
the border to Redmond for the same reason.
All IT players in the offshoring business are hit by this
bottleneck, why do the writers claim that the problem
is unique to Indians alone?
of that, there is the end of preferential industry tax benefits
at home and the growing success of multinational competitors
such as Accenture (ACN) and IBM (IBM) on Indian turf. Perhaps
most challenging for the Indian players is the pressing need
to move up the ladder into business consulting, a domain that
companies such as IBM have dominated for decades. Indian outsourcing
firms need to invest heavily to secure a position in this arena,
and that will erode their fat profits, at least in the short
the first time, industry insiders are asking: Is the outsourcing
game over for Bangalore? "The Indian IT companies
have had an unusually long run in profits and growth,"
says Siddharth Pai, partner and managing director of global
tech advisory TPI Advisory Services India. But that's "an
anomaly," he adds. "As they mature, they can't expect
the same kinds of returns."
Diminishing returns typically translates to either innovation
or consolidation. The railroad boom in England a few centuries
ago lead to an industry wide consolidation. The automotive
boom in the early twentieth century in America lead to
the demarcation of the turf by 'big three' automakers.
Indian IT scene has long been dominated by Big-three -
Infosys, TCS and Wipro. The tier-2 and tier-3 are almost
non-existent. It is not sure if the author is suggesting
a consolidation among the tier-1 players?
they must. For the past decade, Indian software-services firms,
which pioneered the business of delivering tech services to
the developed world from India efficiently and at 40% of the
cost of companies such as IBM, have grown exponentially. Revenues
exploded from a mere $1 billion in 1997 to $35 billion in 2007.
their multinational competitors such as IBM Global Services,
Accenture, and Electronic Data Systems (EDS) were taken by surprise.
But then they joined in the new game, setting up shop in India
and leapfrogging by making local acquisitions, hiring aggressively,
and offering similar services to their clients. As of
June, the three multinationals alone have 100,000 professionals
on their rolls in India. That's about a third of the top three
Indian players, and the multinationals only began hiring three
certainly have an edge: an edge in poaching trained employees
from tier-1 Indian sourcing giants. Not many realize that
a majority of the 100,000 that the multinationals claim
to employ are employees poached from Indian companies;
employees who probably joined as 'freshers,' got trained
and productive at a considerable expense. Now, who is
the competition is evening out at the bottom of the business,
the battleground will start to move up to the higher end—business
consulting and the integration of the offshore and on-site services.
Here, the multinationals clearly have an edge. Not only have
they been providing consulting services for decades, but they
have been doing it across geographic borders, using experienced
talent and cultivating long-term and deep relationships with
customers. More important, companies have been investing in
research and product development for decades—in 2006,
IBM spent $6.2 billion on research and development, and its
largest R&D center outside the U.S. is in Bangalore.
much argument here. R&D, investment in products and
solutions that can be replicated is the forte of the IBMs.
This said, tier-1 Indian giants are certainly catching
on here too.
This said, the author conveniently omits Indian software product innovations including Infosys’ Finacle, iflex’ flexcube that have lead the domestic banking modernization
in contrast, have almost no research and development and spend
very little on it. They began building their high-end consulting
services only two years ago, and all of them have done so organically.
Infosys began Infosys Consulting in Fremont, Calif. Wipro has
been making small but strategic acquisitions in the U.S. and
Europe. And TCS, which has the widest reach with 150 offices
and 79 development centers worldwide, says that 3% of its revenue
now comes from consulting. That's peanuts compared with foreign
the Indians attempted to leapfrog into the big league through
a major acquisition. "They have to, they should, to get
a global footprint," says Avinash Vashistha of New York
outsourcing consultancy Neo-IT. Do they lack confidence? Certainly,
"the levers and supportive environment they have in India
are not available to them overseas," says Kris Wadia, executive
partner, global sourcing, at Accenture.
supportive environment is Wadia alluding to, one wonders?
He is probably aware of the bureaucracy and redtape that
permeates Indian business. Fact remains corporate India,
Indian software services firms included, have to jump
through the hoops; the same hoops that the Accentures
have to jump through.
the tech industry in India is so pampered by New Delhi, and
so admired by ordinary Indians, that they have been lagging
behind the competition. Industry trade group Nasscom recently
released a report on the necessity of Indian companies to begin
to innovate to survive, and suggested the establishment of an
ecosystem for innovation, helped by policy initiatives.
India lacks a formal innovation culture, one would never know
from the assumed superiority over foreign rivals. Indian
firms are simply unable, culturally, to absorb a Western company.
Industry analysts say Indian companies such as Infosys are hierarchical,
and have an elitist view of their business and suffer from "conceptual
Brahmanism," referring to the group at the upper
echelon of the Indian caste system.
this may be true in large part, and the growth in the
Indian software services sector has primarily been organic,
one should not generalize. It is a matter of time before
IT executives take a page out of Tata-Chorus
or Mittal's M&A handbook. And speaking of conceptual
Brahmanism, is the author referring to the Boston
Brahmins or the (in)famous hold of the Skull
andBones on Corporate America?
a ring of truth in that. While the companies all employ Indians
and some foreigners from across economic and social lines, the
top rungs of both Infosys and Tata Consultancy are dominated
by upper-caste South Indians. Satyam has a big contingent of
employees from the company's native state of Andhra Pradesh.
Integrating a Western firm into that closed culture could be
problematic. Infosys Chief Operating Officer S.D. Shibulal dismisses
the inability to acquire, saying only: "We are perfectly
capable of building things organically."
such as IBM have taken a more democratic approach to building
their business. The company began competing with the Indians
in the outsourced tech-services business just three years ago,
when it acquired Daksh, a call center. Since then, IBM has made
plenty of acquisitions in India, absorbed them, and also organically
expanded its business. Today, IBM has 3,000 workers dedicated
to research and development at its offices in Bangalore. It
is the largest R&D operation outside of the U.S. center
in Armonk, N.Y., but one that is integrated with all of IBM's
nine research centers around the world. Last year, IBM saw a
385% increase in patent filings from its India office.
IBM is already
the dominant player at the top end of the tech-services market,
with its large and established consulting business, and now
it has also mastered the bottom end of the market, which offers
low-cost servicing. More important, IBM is the leader in the
Indian market for technology services, a market that the Indians
have always overlooked. According to tech research firm Interactive
Data (IDC), IBM has the largest market share in India, at 10%
of the total $3.7 billion market, and customers across the board
from the state tax department to the private players.
IBM is the top choice of India globally. Ambitious Indian corporations
such as Bharti Airtel, since 2004, have outsourced roughly $1
billion worth of tech services to firms such as IBM with global
expertise. In March, IBM bagged an $800 million, 10-year contract
with Idea Cellular (IDEAF), formerly co-owned by Tata, Aditya
Birla, and AT&T but now by the Birla group. In the first
six months of this year alone, $1.4 billion in domestic telecom
deals were grabbed by the multinationals.
to researcher Gartner (IT), over the next two years, Indian
companies in the private and state sector, from banks to the
railways, are expected to spend an estimated $5 billion on new
technology, all of which will need to be serviced. Save for
Tata Consultancy, 9% of whose business is domestic, the Indian
players have largely focused on exports and missed the big opportunity
in their own backyard. Nasscom estimates that just a quarter
of the revenues of Indian outsourcers are domestic, though it's
growing at 22% a year. This year, for the first time though,
Infosys said that it would bid for domestic business, admitting
that the "home market has reached a level of maturity."
companies such as IBM in India share some of the same constraints
as their local competitors. India is in the throes of a severe
talent shortage in sectors from tech to retail to research.
Part of the problem is the emergence of new businesses such
as retail and telecom in which India has no prior expertise.
But a significant part is the country's creaking education infrastructure,
which isn't producing enough qualified engineering candidates
who can be productive employees immediately.
for example, is now mining deep for potential candidates, hiring
not engineers, but math and science grads from colleges and
putting them through a seven-month training course. "About
20% of our new employees are non-engineers, and that number
will increase," admits TCS' Ramadorai. IBM solves the problem
by paying higher salaries, but only recruiting engineers.
strictly an Indian headache is the visa situation in the U.S.
Just 65,000 H-1B legal worker visas are issued by the U.S.,
a strain on Indian firms that need to send their engineers to
work in their U.S. clients' offices. The demand is so huge that
for the last two years, on Apr. 1, the day that U.S. immigration
officials release the quota for H-1B visas, nearly all are snapped
up by Indian tech companies (see BusinessWeek.com, 2/8/07, "Work
Visas May Work Against the U.S.").
With a Presidential
election coming up in 2008, visas promise to be a hot-button
issue. Already, companies such as Infosys and Patni Computers
(PATIF) have been penalized by states such as California for
not paying their H-1B employees market wages. The Indians are
hiring locally, but it will surely affect their low-cost advantage.
The Indians are doing "awesomely well," says IBM's
software research chief in India, Harish Grama, "but what
are they doing to stay in the game?"
Visa restrictions hurt offshoring. Period. Even multinational/global software giants like Microsoft are lobbying for reform
in the sector. So it is not just an Indian challenge; right?
a Fixation on Margins
defend their position stoutly. "Now, we are in the same
position as IBM or Accenture, where people treat you like a
partner and consultant, not a vendor," says Ramadorai of
TCS. Indian companies, he adds, are spending increasingly on
innovation. TCS says it has developed a full range of services,
global network delivery, intellectual property, deep knowledge
of different industries, and is starting to invest heavily in
innovation, working together with clients. Ditto with Infosys,
which has increased its R&D spending to $12 million this
year, for instance. Wipro has made R&D a business to be
outsourced from people, but that too is not sophisticated, cutting-edge
say industry analysts, lies in doing things the multinational
way: embracing innovation, consulting, and geographical expansion.
To get there, Indian companies must get over their "25%
margin fixation," says Ashish Thadani of Gilford Securities,
who covers Indian tech companies listed in New York. "Those
continuing high margins mean you are probably underinvesting
for the future."
A nice theory to preach to graduate students in management schools. But is it a lesson to preach to Indian software giants who helped create the market?
is BusinessWeek's Mumbai bureau chief.
With Nandini Lakshman in Mumba
here are mine personally, and not that of my employer]