Death of Indian Outsourcing
“Are you kidding? No way!”
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.
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 “arrived”. 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.
I came to the same conclusion (though only aout IT) last year after looking at the lack of products that Infosys and the elk produced. The lack of tools, The lack of any competitively distinguishing strengths (other than hr management - which also has not scaled well) apalled me.
However facts remains facts. Hiring people for IT jobs is HARD. The SaaS companies do not negate the need for customization. In fact Salesforce et al have been developing platforms for it. How do you think a corporation whose core competency is not IT develop a customized solution that meets their needs, with or without SaaS.
The problem is .. the demand for IT is high. The supply of IT workers is low (atleast in the US). Hiring and firing workers is not a great option. Outsourcing IT to a specialized corporation is a great idea. Beyond a point, Quality is hard to measure in software and hence the need for commodity outsourcing will remain HIGH.
Sure you can shift this to China, Botswana or Venezuela if it can provide the same competencies. The need for communication overshadows the problems of shifting these IT jobs to China for example. Other countries are not providing a competent workforce. Hence that time has not yet arrived.
BTW Eastern Europe and Russia have always been a target of “high quality” outsourcing as opposed to the lower quality outsourcing provided in India. For example a huge amount of the mac virtualization platform - Parallels is developed in Russia.
The increase in salaries and attrition at the indian shops is scary. Scarier is the weak US dollar. However this has not yet given a competitive advantage to alternate outsourcing destinations. The euro and the pound and the rupee are all strong against the USD.
There is another positive side to this story .It’s true that Indian companies has been sole suppier of services and neglected product development.India being and IT power proved less enterprising and innovative when it comes to new product development.
But ..
Indian economy is growing at scorching pace, without including IT and ITES exports.
Indian financial services, banks , healthcare ,telecom and goverment all will need IT service of global standard . Fortunately we have companies like infy and wipro , tcs who has developed those skills while servicing American clients.
It is quite possible that 1$ will buy only 18 Rs and these IT companies will derive more of their revenues from Indian and Asia then from USA.
It all started with cost advantage but now it is gyrating towards skill advantage. Even if US companies dont have any cost advantage they will top dollars to indian outsourcer to get the required skill . which means and Indian company might charge 120$/hr for project management professional (1$=18Rs) although you can get the same service for 80$/hr in USA. ( if you can get )
Not all economies all built same way and I dont think there is anything negative about Indian companies not putting too much money into innovation. If Japanes and American can do that job better let them do it . Let the Apple be american .. we can still create another Accenture or IBM ..
[...] admin wrote an interesting post today onHere’s a quick excerptAccording 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. … [...]
Interesting article. Here is my observation as a current body shopper as well as an individual contractor. Large US Corporation are run by risk managment professionals . They are not interested in assuming IT risks ,even when it is very basis of their operations. ie insurance,banks,Supply chain ( retailers,dealers etc.) Due to the ease of transfering risk to a vendor , the outsourcing industry at micro level has a dynamic very different than macro arbitrage argument. This kind of risk aversion has destroyed companies in consumer electronics earlier (RCA,Fisher etc.) If commitment to core competencies are sacrificed for Rs. 35 or Rs. 18 per $. then I think the corporations both the buyer and seller are playing a losing game.
[...] seems to somewhat validate an article that was tweeted yesterday by Puneet Thapliyal. It was a posting that discussed the challenges that [...]
Ajay,
Good points. Now consider the scenario where these professionals, because of lack of cost-advantages, are moved to a low-cost location in the US or Canada.
For the professionals, this may be a great deal … that takes us back to body-shopping as we knew it in the eighties and nineties.
On India’s domestic producer - domestic consumer economy, your points are well-taken. In fact, at the end of the day, that part of the economy is far more sustainable than the labor-arbitrage business of IT / ITES.
[...] Death of Indian Outsourcing all that far [...]
I don’t think this article has any merit. Simply becuase it “ass u me” that the likes of Premji, Nandan Nilenkani, Ramadorai etc. are not congizant of the well known fact that salaries are rising, dollar is falling, margins are tight. This all is old news! they are lot smarter than you think. They are expanding their delivery centers to lower cost countries. You think a call center in Phillipines comes up by itself! Look into ownership structures and you’ll find most of them are owned by Indians. The software development companies in China today are also owned by Indians…
Secondly the outsourcing is spreading to consumer markets today. I guess the writer is not aware of services like Getfriday.com, a private concierge desk for individuals or tutorvista, the private tution outsourcing that is spreading like wildfire.
Another aspect ignored here is the net value rise in salaries. If an Indian call center employee earning $3/hr gets a raise of 15%, that amounts to 45 cents, where as an American call center person making $15/hr gets 3% raise, that amounts to 45 cents! So I am not sure how the ratios presented in this article are valid.
There seems to be a simple reason for VC money not finding core IT/ITES ventures. Most of the new ventures are funded by parent corporations! A company making $1Billion in revenue trying to set-up a shop in India for backoffice work is not exactly looking for capital, they are hungry to find right executives who can manage the scale and have the right skills and experience to build a large team. The second reason is that capital today is being multiplied in red hot realestate and stock market lot faster than going through the 4-5 year cycle of funding/IPO.
One of the other aspect missed by the author is that for the past 2-3 years India’s focus has been manufacturing! Has anyone made the attempt to find out how many advanced automotive plants have come up in India in the past 2-3 years. Just make a trip to chennai, Pune, west bengal etc. and you’ll find that the next phase of Indian economy is highly focused on “outsourced” manufacturing. The Japanese have a 10-15 year vision of manufacturing a very large chunk of their cars in India. The automotive engineers who designed nano are being offered amounts that are unheard in the industry. Nissan, Toyota, Honda, GM etc. are setting up core engineering centers in India because there is no other place on the planet where sub-compact can be designed as effectively as India (talking about brains and not “execution”)
Even on the software product side I think the author fails to look at the likes of iFlex solutions and their BFSI focused products. some of Europes top banks work on TCS created BFSI products. So before we call all this innovative companies mindless, backoffice robots, lets dig deeper into what’s actually going on.
As an Indian living in North America for the past 15 years, I am a bit offended by the article and advise the author to understand at a deeper level as to what is going on today in India. I think the author has not done the neccessary research to arrive to this bold conclusion of death of Indian outsourcing. The facts suggests exactly the opposite. It is growing, spreading and the pace is accelerating.
Surinder,
How does Infosys/Wipro hiring people in China or the Philippines help the Indian IT worker, unless they move to those geographies?
This article primarily addresses the plight of the Indian IT worker, and that the number of IT jobs will substantially diminish in India in the next 8 years. Also, you may want to read this piece:
http://sramanamitra.com/2008/02/21/indian-it-industry-the-next-8-years/
By the way, this author is not known for writing without doing adequate research.
Thanks, Sramana
Sramana,
Indian companies opening shops in China and Philippines helps them move up the value chain. Call Center - In my travels to India, there is hardly anyone I met who wants outbound call center work. They are trying to move this types of work further east (or working with African nations) and accepting the work so the larger organizations in the West gives them additional work related to BPO and now KPO, in other words keep the cost of outbound call center low by moving it around but at the same time get more work for BPO and KPO, hence creating more jobs for the Indian nationals. I met several employees who started as call center agents and are now looking forward to not just being supervisors in the same call center but helping company expand the experitse east, managing international ITES operations. All signs of going up the value chain.
IBM’s Indian workforce is second only in terms of total numbers of employees in the US. It is growing by leaps and bounds. The day outsourcing in India dies, that day IBM will die as well! Last time I checked wall street is rewarding them for their Indian based strategy. Three years ago the annual kick off for IBM which historically was done always in the US, was done in Bangalore. It was Sam’s way of telling the world that things have changed for good. If US still remains the brain for IBM, India most certainly has achieved the status of its heart.
Same is true for Accenture, HP and many other large IT outsourcers. A wise man once said that customers go to India looking for cost advantage but they stay there for Quality! Did you know that India today has more IT firms that are CMM level 3 or more certified than any other country in the world. Quality is another fact that your bold prediction about death of Indian Outsourcing is unlikely to come true.
Lastly you mention “Outsourcing” in your headline. India is destination for IT outsourcing, ITES outsourcing, Manufacturing Outsourcing, Consumer Services outsourcing, Legal Services outsourcing, Accounting Services outsourcing and in the coming years hundreds of other forms of outsourcing, driven by the innovative minds of young and the restless in Tier1, TierII and TierIII cities. India is shining on the back of its innovative creation of outsourcing and the new attitude of its citizens who are proud to live in small towns and call themselves Indians.
I suspect there will be lot more IT jobs in 8 years than there is today. These jobs are not only going to depend upon IT outsourcing from West, but domestic market itself is going to create a lot more positions.
History tells us that the dominance of US economy started after the infrastructure boom in the 50s. That’s what is going on in India today. $360 Billion in today’s dollar to be spent on infrastructure like roads, bridges, highways etc. in the next 5 years. Following that will come a wave of domestic economic development which will translate to more IT jobs…
Regards
Surinder Puri
As I said, you need to read some of the prior discussions we’ve already had here. I don’t want to repeat the same thing again.
I think there is a realization across companies about the increasing salary levels in India. Lot of companies are now using an incentive scheme where the high performers in teams (just 1-2 per team) get the highest hike and the rest have do with a not-so-great hike. To some extent this mitigates the effects of attrition as the best workers are still motivated and still with the company. At the same time the total increase in salary components need not raise much. Another move by companies to circumvent the salary increase is to create a lot of new designations like technical manager, solution manager (whatever they mean). Just compare a typical organization chart of an Indian software company with that from previous years - there is bounty of new positions.
One thing though, there are a lot of product companies (HP, Microsoft, Google, Yahoo, Amazon, Adobe…) who are setting up shop in India or increasing their base. For them the main attraction is the talent (and also the shortage of H1 visas) available in India. Salary does not seem to be a constraint. On the other hand, being product companies, these do not really employ lot of programmers (as compared to services).
[...] laid off 150 people who were doing the same thing manually. I wrote a piece recently called the “Death of Indian Outsourcing†that featured InsideView and I talked about that example. My thesis is the Indian BPO industry [...]
i gtenerally donot read this kind of non sense thing but was direct this crape by one @ linkedin.com this my answer her and well as to the guy who wrote this?
Hi Melissa ,
good story ,finally ur must b happy u hav something against the Indian outsourcing elephants…
sad part is this holy crape
hey there will only 1 india in it and ites ,it doesnot happen every day…
few points tht will let u understand the whole thing and moreover abt the indian writer who wrote article is typical indian for u(we like bashing ourselves) or shall i call him a Indian crabs who pull legs jst bcoz some of us r getting out of jar.
moreover on the points:
1.what replacements u hav ?eastern Europe ,can please let me know tht total population of tht place…? ,china (how will u teach them English in 1year),Philippines(same question very small amount of skilled labour available for this job)
2.u do think only us companies a smart and rest of world is stupid hey for ur info all big and small indian it and ites companies from india hav centers in eastern europe and south america and far east,infact we r leading the way for these nations?
3.quality hey for god shake donot even complain for tht.if we were not best in the game thn y will all fortune 500 companies outsource to india,or do u think ur the only concerned abt the quality?
love us or hate us ,In it and ites wehav the 1st place and are the world leaders and we r going remain so b bcoz all the disadvantages tht u might count ,u can never beat the first mover avdantage tht we hav…
:note:please note the above comment r not meant as personal attack its jst to xplain the subject…
with regards
[...] end of tremendous hate mail due to my widely syndicated and (looks like) read and discussed Death of Indian Outsourcing [...]
I think your article definitely has a point. It will be interesting to see how it plays out.
The problem is there… solutions need to be found. See Anand Mahindra speech at NASSCOM published in Economic Times
http://economictimes.indiatimes.com/Infotech/ITeS/IT_industry_has_its_own_Hiranyakashyap_to_battle/rssarticleshow/2782893.cms
It is only a matter of time that this transformation might happen - hopefully sooner than later.
Phani,
This is a great speech. He nails it. Thanks for sharing.
Sramana
In Quatrain 3.27( if memory serves me right) Nostradamus said “that a man will rise from the East.”
In 1986, my Spiritual Master(in Patiala, Punjab, India) told me ” come the turn of the century, USA, Canada, England, Europe will go downhill.”
In response to my question as to which country will rise, the Master replied ” India”.
Again, in response to my question- Why? The Master replied, ” The land on which deep meditation has been done will not see hard times. Other countries will have to go through difficult times.
In the 21st century, India will lead the World.”
My request to all the Intelluctuals - please meditate on the above. If you feel there is some merit in The Master’s words, please factor his views in your analysis/opinions.
After all a time must come when the Almighty asserts His will.
Once you are in Software Services, you think software services, your business model is built on high margin business and it is very difficult to transition to anythingelse.
Unless, one of the first IT majors does something drastic. Like Tata buys Corus Steel or Jaguar.
They need to bring in new blood, not parochial fellow brahmin management or fellow telegus management or fellow Punjabis management. Surround yourself with people like you. Different thinking cannot emerge. They all think just like you!
Like buy some large Global Software product company!
They do have the money to do it also!
Check out this article on Infosys sitting on a large pile of cash in the bank.
http://economictimes.indiatimes.com/articleshow/2814187.cms
They should be actively investing in many other business models in and around the globe.
Anand Mahindra’s words in the article cited in one of the comments here is very worthy of listening to!
The Indian IT industry needs to do something fast.
Past glories or listening to astrologers about the greatness of India will not do. They build an international airport in bangalore but don’t have a road leading up to it. That’s not greatness. If you cannot pull that one off, I don’t think you can pull any greatness!
Low Cost Labor will keep moving around all the time. From US to Singapore to Malaysia to Thailand to China. IT is not different. Just a matter of time. Local demand will not pay as much as foreign outsourcing. If you get $18 a hour from an US company, expect $2 from a local company.
Time for drastic action and some hardwork. Otherwise we will all be wistfully thinking of the good old days when we stupidly thought that only Indians are capable of programming and all others are fat,lazy and stupid.
Yha you are right if just follow the figure, however if some have ability to understand the change management they would surly narrate a different story.
innovation comes at top of the trajectory and we are about to reach there….. depending on outsource was just one of the ways to reach there….. “It is not the end its a beginning”
Innovation Has three attributes- compelling factor, Cost Factor and Time
Compelling Factor: - We have proved our competence… i hope no discussions on that… it just a matter of time that we realize that baby has grown and can sustain on its own… the term “compiling Factor ” will capitalize
and i hope people reading the blog will be knowledgeble enough to understand the future implications of Cost and Time and the ways it is going to bring in the paradigm shift
The whole idea that salaries are increasing at 15% per year is misunderstood. Salaries do rise at that level for experienced people. Not for freshers. The salary of freshers have risen just a little above local inflation that, when you take the average salary of the whole company it does not rise at the rate of 15% per year.
I hope that Ms. Mitra reads the last few years of the Infosys analyst discussion transcripts before writing like this. This wage inflation issue has been addressed so many times, that I have read about this few times in those transcripts. What matters is the average salary per employee, which they contain to some extent by having a pyramid structure. With appropriate slope in the pyramid and with adequate scale efficiencies, the things are sustainable to some extent, at least for few more years. Definitely not to the extent of death as suggested by Ms. Mitra. I hope the author reads the transcripts available on the infosys’ investors webpage, and understands the issue.
[...] another front, I seem to have hit a beehive with my slingshot by writing the Death of Indian Outsourcing piece. Well, now that I have, I am trying to follow-up with additional coverage of the issues on [...]
[...] written a fair bit lately about the Indian outsourcing industry’s challenges. In my article Death of Indian Outsourcing, I had talked about how outsourcing companies need to come up with solutions to fight the growing [...]
[...] had written about the Death of Indian Outsourcing a few months back. I got in touch with her, and since this was a subject I was passionate about, I [...]
With the move towards high-end values with a relatively low cost, malaysia is the best choice for SSO compared to India, China and others.
You will find high capabilities that Malaysia can offer. Contact Outsourcing Malaysia website for further information.
[...] encourage Indian entrepreneurs experienced in the IT outsourcing industry, and alarmed by my Death of Indian Outsourcing piece to read Sudhakar Ram’s Wave 3 of Indian Outsourcing. Other related pieces on the topic [...]
[...] down to comments or read the others. By Sudhakar Ram, Guest Author Sramana had written about the Death of Indian Outsourcing a few months back. I got in touch with her, and since this was a subject I was passionate about, I [...]
[...] end of tremendous hate mail due to my widely syndicated and (looks like) read and discussed Death of Indian Outsourcing article. The article has met and exceeded my expectation in terms of a tool for catalyzing thought [...]
India might have good IT personnels but Philippines is definitely the best for me. this is just based on my experience. Thanks..
I think it could not be happened because India is the best outsourcing country who show really their talent in this field. Many Indian people needs to have new strategies in order to cope up with the changes in the technical world
[...] Mani Karthik on 31-05-2008 There are some great articles around that I found interesting… Sramana writes about the death of Indian outsourcing, which I think is a very honest article on the “outsourcing bubble”..The interesting [...]
[...] India is riding high on outsourcing. [...]
http://economictimes.indiatimes.com/Infotech/ITeS/Infy_bags_patents_for_mobile_tech_holography/rssarticleshow/3094523.cms
Things are moving in terms of R&D.
[...] outsourcing industry back in January this year with a blog published on Forbes.com titled “Death of Indian Outsourcing“. Â She pointed out - which I completely agree with - that companies like Infosys and Wipro [...]
[...] the ratios are better. But even there the situation is grim. Read Sramana Mitra’s “The Death of Outsourcing“, for example. If you liked this post, subscribe for updates by email or via RSS Tags: [...]
[...] they understand the real difference, many people jump to the wrong conclusion. IT outsourcing is dead in India. It’s not cheaper to develop in India [...]
Hi,
I work for one of the companies which is frequently mentioned in this article and broadly I do agree with the trend of rising costs, lowering the labour arbitrage. However the management is aware of this and I believe that it is a matter of time before a course correction is done. Secondly, I believe that the future wave of outsourcing will be around domain expertise. Companies will choose to focus on certain domains while allowing certain areas to die away or hive them of. This domain expertise will help business stickiness and drive future growth. In the interim margins will decline. This domain expertise will be picked up even in the US. The day a development centre is up in the US is not far ahead. Lastly, the 15% salary hike is an indicative figure. The average is probably more around 10-11%.
[...] because the value proposition of these ‘resources’ is not increasing proportionately (read this for a more articulated post on the [...]
Can anyone tell me, in percentage, roughly, the share of outsourcing in the businesses worldwide?