“Are you kidding? No way!â€
In 2008, the IT and IT enabled services (ITES / BPO) industries are supposed to be the major drivers of India’s economic growth. According to Nasscom, the two industries combined will employ 4 Million people, account for 7% of GDP, and 33% of foreign exchange inflow.
Death of this industry is far from anyone’s mind.
Let me tell you a story. <!–more–>
There is a tiny company in Silicon Valley called InsideView. It helps customers in sales lead generation, qualification and opportunity identification research using technology and a software-as-a-service (SaaS) business model.
In November 2007, InsideView acquired a company called TrueAdvantage which did the exact same thing manually, with a team of 150 people in India. TrueAdvantage had 2500 customers, all of which are being transitioned over to InsideView’s software-driven solution. All 150 people at TrueAdvantage have been laid off for no fault of their own.
The human tragedy may sound familiar to the Michigan auto-workers who have been losing their jobs to China, or the IT/Call-center workers in the US whose jobs have been off-shored to India. They have all been laid off for no fault of their own.
The reality is that wages are rising in India. The cost advantage for off-shoring to Indian used to be at least 1:6. Today, it is at best 1:3. Attrition is scary.
Jobs that are low-value-add and easily automatable should and will disappear over the next decade. People talk a lot about India moving up the value chain. Yes, some of that has indeed happened. An industry that started gaining momentum with the Y2K porting projects has blossomed beautifully into one that offers a much more comprehensive spectrum of services.
Yet, India, for all its glory, is still the world’s back-office. The IT / ITES industry is a “services†industry. In simple terms, the Indians don’t do the thinking. The customers do. India executes.
As a result, India has not learn’t to come up with technology products of its own. Barring a few exceptions, the huge amount of venture capital chasing India finds it difficult to be deployed. There is way too much money, way too few deals. Instead, tech-sector VCs are now diverting capital to retail, real estate, hotels, etc.
The $30 Billion IT / ITES services industry, meanwhile, is slowly and surely, losing its competitive advantage.
You see, most of the 4 Million people that the industry employs have already “arrivedâ€. They have breezed through the milestones that their fathers had to toil all their lives to reach. A phone. A watch. A TV. A car. A house.
They are complacent. They will not take risks. They have “outsourced†thinking to their customers.
As the 1:3 cost structure becomes 1:1.5, it will soon become inefficient to use Indian labor. Why not Oklahoma or British Columbia? For many Europeans, Eastern Europe has already become more compelling than India. The pure labor arbitrage equation will no longer balance.
In a decade, what would happen to the newly minted affluent class created by the Indian IT boom?
Companies like Infosys and Wipro, assuming that they want to preserve their business momentum, will need to diversify their portfolios away from pure body-shopping and process competencies to technology driven advantages. The obvious place for them to go is Software-As-A-Service (SaaS). Their current market caps and cash reserves are high, so an easy way for this transition would be via acquisitions. Wherever SaaS and manual BPO services overlap, they should cut the manual and replace with SaaS to the extent possible.
To give you an accurate picture, none of this is happening quite yet. In fact, Infosys is hiring tens of thousands of new employees in India still. The mood is upbeat. The golden goose is still laying large, warm eggs, enough to feed the 4 Million and their families.
Meanwhile, the workforce is getting comfortable in their cubicle chairs, just as the turkey gets comfortable before Thanksgiving.
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Brilliant Sramana (and welcome to VentureWoods) – this needed to be said.
One small quibble about the affluent IT class – most of their savings have already been invested, and most of their future earnings are already promised to a real estate bubble teetering on the edge of collapse.
Very insightful article Sramana.
While Infosys, TCS, Wipro & Sathyam are big players and HUGE in the Indian market, they needn’t necessarily be the barometer of what the future holds.
There are a whole lot of startups which are rising from the early “pioneering” work of those big guns. Especially in the mobile space.
Sir,
I appreciate the insights you have provided. But i think thats the one side of the story. What abt the other side?
Here is what i mean – YOu mention Infosys / Wipro (let me add TCS, Satyam and any Indian MNC), They are hiring in thousands, but do you know how many are going out of these -ALMOST equal thousands. Fact of the matter is that this is acting as a balancing force. Apart from that the gory picture you are painting, might be true to some extent BUT for only the small companies you mentioned – e.g Insideview where they are yet to achieve the Breakeven and they try every gimmick possible – even acquisition etc. These biggies have more hidden inside than thats visible to the outside world as a Public company. I mean both positive and negative. But i think in today’s world of “Business@speed” its foolish to bring on any pessimistic thoughts that to a decade from now.
Lets talk abt the Manufacturing industry to said. I agree Anything you touch in US is “CHINA” but do you think the very labour force has been sitting idle for all these years. There have been zillions of SME’s emerged because of these very Made in China stuff. So all in all i would say, Lets accept – All surveys / researches made are still done by humans and I FEEL 99% of them have the vested intrests just like Media. They show what they want to and not what you want to.
…aah i forgot abt the affluent class – Well yes it might seem they are complacent, BUT its not. No matter how much we see ourselves splurge crazily Our very Indianness overpowers us to some extent to save for the rainy day – Cany you deny – I donot think so..
Have a blast of the time ahead in the mayhem you feel is on its way in coming decade 🙂
Sramana,
Very well written and I agree with most of your thoughts.In fact I’ve seen sometime last year in one of presentations from Infy’s senior management about hedging strategies for dollar depreciation and increase in wages that they will be starting a SaaS business unit,create non-linear pricing models etc.
But the process is rather evolutionary for companies(or any country) and there is only so much possible in one generation. Given the socio-economic state of India, services is what most companies can think of and not products of global scale. Paul Graham was right when he said silicon valley cannot be created elsewhere (atleast for sometime).
For that matter, even Microsoft is not able to innovate(to diversify) any further being a product company.
This reminds me the book “Who says Elephants can’t Dance?” by Lou Gerstner. Indeed all Elephants can’t Dance. 😉
If not inspired from paranoia, your post is definitely thought provoking.
While cost advantage is definitely a factor considered by companies for starting outsourcing work, there are other factors too that a company will think of moving the businesses from one vendor to another.
There is no denying the fact that companies have to climb the value chain to survive the threat from say a start up which gives a compelling cost advantage. But this is true for any company in any economy across the geography.
The only difference that this Internet age offers is that a company can now choose a vendor from the farthest corner of the globe instead of a company in the same city. The reason behind is the fact that all the companies operating in this Internet era now have what I call as robust “Global development models”.
A company operating as a vendor to a US company is capable enough to easily identify a vendor in cheaper destinations. And not only that these companies are better equipped to predict the ROI from these newly found vendors having gone through the same experience, which probably was lacking in companies which started outsourcing -10 years back.
I would beg to differ that Indian companies are sitting ducks…Almost all Indian players, NIIT, Infosys, HCL, Wipro, to name a few, had already diversified to European markets a long time back to insulate themselves from dollar fluctuations. And some of these companies have strong presence in Asian markets too, that have shown some stability against the US market fluctuations.
One thing is inevitable; dollar is on decline and will not remain the premium currency of the globe. The only thing remains to be seen is by when.