Outsourcing: LN Balaji, President of ITC Infotech (Part 6)

Sramana Motra: If you want to build an operation in Mississippi, you can do that. You can build something – you’re already doing something – in Arkansas. You can do it in Vermont. You can do it in all sorts of low-cost United States regions. We’re seeing that. We’re also seeing Latin America, big time.

LN Balaji: Yes, because of the time zone. We have two issues over there. One, we’re investing heavily in Spanish-language capability because that is needed if you have to work in most parts of Latin America, barring Brazil, but especially in Mexico. But talent is still an issue. That’s been our experience. What is your view of the economics of a low-cost U.S. location vis-à-vis an Indian or an Eastern European one? We don’t have any operations in Eastern Europe.

SM: Europe is hot. There is a lot of work going on in Eastern Europe, Ukraine, Poland. Those are hot destinations. I’ve even talked to people who are setting up in Africa. I think the cost structure in India continues to rise, and that is an issue. And as you said, very eloquently, the employable talent in India is scarce, and demand is immensely high.

LNB: That’s true, but still the costs don’t compare too favorably. Even if you took an average developer, not very high end, if you look at what you would pay somewhere in the United States vis-à-vis somewhere in India, the cost differentials are still very large.

SM: Give me your numbers. I have some ideas about what the numbers are, based on other conversations, but I’m curious, what numbers do you use to make that assessment?

LNB: It all depends.

SM: A ratio, perhaps.

LNB: If you look at something in the region of say, $75 to $80 an hour in the United States, the same talent would be maybe $32 an hour in India. That’s a pretty wide cost differential. And that kind of differential, that range of differential, you’ll find across all skill sets.

SM: It’s an interesting trend. When we started this India outsourcing business, it used to be 10% of the cost of the United States.

LNB: That would be for lower end manual testing and all that, which now has gone to China.

SM: Right. It’s gone up and up. India became one-sixth; then it became one-third. Now we are quoting numbers that are half.

LNB: Not half. It’s less than half.

SM: One-third, let’s say.

LNB: I don’t know what our actual rates are, but one-third would be a fair [estimate], somewhere between one-third and 40%.

SM: So, the cost structure has gone up significantly.

LNB: But it’s still a large differential.

SM: Absolutely.

LNB: You could get two people to do work for the price of one, even if it were 50%.

SM: Some of the more remote areas of the United States where governments are willing to offer subsidies …

LNB: Too little, very little. It’s not like it’ll cover the standard differential. In my experience, ITC Infotech – actually this year – we are embarking on a small experiment to pick up [graduates] from American universities, send them Bangalore, train them, and bring them back here. We believe that for some of the junior levels, they would be comparable to talent that you could bring from anywhere in the world. But once it gets a bit senior, maybe four or five years of experience and above, then the cost … that’s why I said we don’t go behind the rationale of our clients. We work with them, and once we’re given their strategy … for example, we have a mid-sized bank. Now, the bank, when it engaged with us, started by saying, “Listen, a lot of our members are from small communities. We will render services to these communities only from the United States.” That is their philosophy. That is the way they do business. Who are we to question that? What we need to figure out is how to do it cost effectively.

SM: On that topic, one of the definite trends I’m hearing about from Indian outsourcers is the move toward second-tier and third-tier cities.

LNB: In India?

SM: Yes.

LNB: Yes, that’s true.

SM: That’s a comprehensive trend. Everybody is looking at their fourth, fifth, sixth, seventh development centers in places that are not as developed. To your earlier point in our conversation about Calcutta, there the talent pool is not as trained, but they are going to invest in training the talent pool with the assumption that attrition rates are going to be significantly lower.

LNB: Quite right. That is the advantage. If we get it right, then attrition is much lower than Bangalore or Gurgaon, for that matter. These two are pretty well developed. Chennai, of course, that’s also getting hot. The attrition rates tend to be a little lower, but that place is also getting hot.

[There are ] two second-tier towns that have very good universities. Though we don’t have a setup in Guntur, which is in Andhra Pradesh, we get some good talent over there that we train and deploy in Bangalore. Maybe if you set up in Guntur or some such thing, it will do well. Nagpur, for example, it’s a seat of learning. Everybody knows that. This is a terrific trend. It all goes very well, not only for the industry but also for the economy.

SM: For development in general, yes. I think the mega cities are bursting at the seams. The quality of life is awful. You would probably find a lot of people living in those cities who may be willing to go back to where they’re originally from and help lead those development centers and train more people and so forth.

LNB: Right. I can definitely see that as a trend. As I mentioned, we are looking at Trivandrum. Going forward, who knows, maybe one of the smaller cities as well.

SM: Yes. Kerala, actually, I’m seeing a lot of pings from Kerala across the spectrum. We work  a lot with startups, and we see startups in Kerala, smaller companies, quite a bit. Of course, we see the regular cities, you know, Bangalore, Pune, Delhi, Chennai, Bombay, all of those are very active from a startup point of view. But we are seeing startup activity in Kerala. We see a little bit of activity in Calcutta. Pune is doing very well on that front.

LNB: True, true.

SM: OK. It sounds like we’ve covered a lot ground. Thank you for talking with me.

LNB: Lovely. Thank you.

This segment is part 6 in the series : Outsourcing: LN Balaji, President of ITC Infotech
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