“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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There are ways to reinvent the outsourcing wheel. I know of a company based in Chennai, which over last twleve months has delivered cutting edge consumer internet products, which hires school drop outs from government run schools and trains them for a period of six months – who go on to become excellent engineers.
On the other end of spectrum, if you look at the number of tech startups created by students or recent graduates of IITs (specifically IIT Bombay) – it points to a trend where the younger generation is no longer looking for a fat pay check at the end of the month but for some excitement.
There is also a case for IT companies to relocate for Tier II & Tier III cities. Not many from the old guard have done that, but new startups in services business are doing just that. For example, Tutorvista which employs about 600 teachers have most of them located in Tier II towns who use a broad band connection to get online to teach American kids their maths.
One of the large IT services firm is getting really good at taking a large complex problem and breaking it down to small simple components which can then be given to one of their hundreds of teams located across the world – where it is most advantageous to do it. And then these small tasks get completed independently and assembled at one place seamlessly. That is where outsourcing game would move to. Coupled with smaller centers in Tier III towns, I think we would see some decentralization.
I think the product phenomenon is waiting to happen in India. You see Peter Thiel at Paypal created some magic building the Paypal team. The Paypal alumni after ebay acquisition went on to create enterprises worth USD 30 bn according to Thiel. Trilogy in India has spawned multiple startups – 1000 ex-employees at Talisma went on to found about 10 new startups. I am sure there are other examples like this, but it lacks the scale of paypal or Oracle in valley.
I have had these thoughts a million times. But when ever I speak to some young chaps in this industry, he seems to be happy and proud of the following facts
— Their first month’s pay is more than his father’s last pay before retirement.
— A comparatively easier option to support the family. Especially for the ones in need.
— Regular onsite visits. Which means more money and an opportunity to see places.
— Sophisticated work life.
— Being able to realize their dreams – car, tv, homes, social status etc ….
— Working for a reputed Indian firm.
In the process they become very risk averse and continue to do the same thing and find newer ways of being happy – promoted to a manager, managing a team or customer account etc…
Pros:
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From a short term perspective i think it makes sense as it supports 4 million families. Nation is happy with the Forex. Firms are happy as they are earning in dollars and paying in Rupees.
Cons:
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Long term point of view i think it is like shooting one’s own foot.
If this industry would not have been there, people would have been forced to do study higher and looks for ways to innovate and compete. But now even those who can afford higher studies are getting lazy and trapped into the services industry.
What’s more, most of those who finally break out of the trap tend to start a services firm of their own – the path to least resistance.
My 2 cents!
A very interesting posting. The message I get from the posting and the comments is that though out outsourcing story is on a solid footing, we should start moving towards the ROI model (read high-end consulting) before it is too late.
Having worked both in India & the US for IT services firms, I find that our folks (read TCS, Wipro …) are still focused on the number game more than the value. Though they have been very active in buying up companies which would give them an edge on specific domains and in turn get more consulting revenue, their core DNA has still not changed.
In one of the companies which TCS bought recently, they got a very good bunch of people who were very good at building solutions in the BFSI domain. After TCS acquisition, most of them (including a friend of mine) ended up leaving TCS.
So, unless our TCSes & Wipros make an concerted effort to change their approach, they would end up behind IBMs and HPs who have an edge because they also sell hardware and hence can offer complete solutions.
Now that lot of our folks are turning entrepreneurs, in my view this can possibly change the DNA of the talent pool which could lead to lot of solutions for the Indian market which would in turn expand the domestic IT pie itself.
In the next 10-15 years I expect a lot of action in the domestic IT scene which could potentially offset some of the difficulties that are affecting the Indian IT companies. I also expect a lot of consolidation in the services side and proliferation of new solutions for the India market.
Are insights only a privilege for bloggers? How about those that are bang in the middle? Let me first do the credits. The managements of IT vendors have seen it coming, if only ahead of us. After all they figured out GDM ahead of the giants [IBM, Accenture and EDS] to follow suit – didn’t they? I could use a cliche – Imitation is the greatest form of flattery.
That said, SaaS screams economies of scale but is not free from limitations. In a typical enterprise with 500+ users, the operations are far too diverse to be wrapped around by a general, all-purpose SaaS application. Could a one-size-fits-all SaaS app delivered over the web, on demand, for standard CRM functions like HR,Sales,Payroll be as effective in multi-layered on-premise ERP environment with complex processes? And then you have cross-vertical demands. How can a workflow driven SaaS app be used in common between a billion $$ multi-product business like a GE as much as the one that makes only automobiles? Very few of today’s SaaS vendors would stand the security and SLA scrutiny of large company due diligence. Do you argue that there could be any number of SaaS variations designed to cater to diverse verticals? That’s asking for trouble. In that case, product differentiation and fragmentation would fling economies of scale out of the SaaS vendors’ window. They would soon come full circle with escalated TCO cascaded with separate loadings for maintenance, upgrades, consultancy hires, system integration costs as are necessary for customization initiatives. Now hold the mirror to it. It will look more on-premise enterprise than on-demand SaaS.
Besides economics, the one sure shot I see is this. SaaS has opened up a new thought window in that the CIOs are rapidly abandoning the assumption that they should own and control their entire IT architecture. It also guarantees vendor accountability since mediocre vendors can’t blame it on a bad legacy/enterprise software that they’ve been asked to use by the clients. They have nowhere to hide since they own the infrastructure.
This altered belief will open new doors of innovation that could fix those early SaaS bugs. Being the not so bad co-authors of early off-shoring processes and with their vast exposure, India’s IT outsourcing vendors are aptly placed to usher in the SaaS translation of what has essentially been labeled as an enterprise offering.
I don’t dare be arrogated with the thought that they are not already at work in that direction.
I tend to agree with Alok, if there was an award for exaggeration, this post would be a top contender.
I disagree that cost arbitrage is reducing. It is a blanket statement. I would say cost arbitrage is reducing but only for certain types of companies – Infy,Satyam,Wipro etc.
Although exchange rate is making employees expensive, there is a huge pool of candidates which has not been tapped by these companies. This includes engineers from third/fourth rung colleges and non-graduates. If you don’t know what I am talking about, check out a walkin of second/third grade software companies in bangalore. There are stampedes when freshers are also allowed.
It is just that best guys from IITs/NITs etc were willing to work for these companies earlier and now they are not. So, TCS is forced to look beyond even engineers and start hiring science grads. Frankly speaking, IT services is not rocket science. I am fairly sure that proper training can solve all the hyped up “skills” problems (check the Infosys 6 month course for incoming freshers).
For a reality check, do see the median income of Indian households from the Mckinsey report. By 2025 , only about 2% of Indians will earn more than 10 lakh INR per year. And all of them will not be in IT :). For the same reason , albeit strongly, BPO will continue to succeed.