Monday, March 13, 2006

Labour arbitrage and Indian IT

Indias IT services companies are at the forefront of offshoring. A lot has been written about them - the TCS, Infosys, Wipros and Satyams. These companies have evolved from the bodyshoppers they once were to real system integrators that compete with the likes of EDS, IBM and the biggies.

But, like it or not (and this blogger is one who is a fan of Indias IT companies), there is a strong element of labour arbitrage in the model. Again, this is not a secret as far as IT services are concerned - neither is the salary low to be considered to be a sweatshop. In India it is far more prosperous to be working in an IT company than working in any place at a similar level (and this has been so for the past few years. (For employees, the big companies are good paymasters and also provide good benefits. Most companies offer insurance schemes, profit sharing schemes, ESOPs, subsidised food, subsidised transport, excellent working hours, flexi times, work from home facility, evening cab drop facility and so on.)

But, as I said earlier, labour arbitrage is a big part of the equation for these companies. A look at their recruitment pattern will show how. Many years back when some of these companies began operations, they looked for IIT engineers - from the choicest of streams. Work in these companies was never really the grade of these geniuses, and it was reflected in attrition among other things.

Then the companies began to look lower, any IIT degree and some selected degrees from the NITs and locally renowned colleges. These employees also did not come cheap with the year on year rise in salaries - and since these guys (all credit to them) were quite sharp themselves, found the jobs not to their satisfaction leading to attrition.

Salaries in this industry have been rising straight ever since the industry began save for the years of the dot com bubble. Therefore things came to such a pass that the salaries offered by these companies found no takers at the IITs, even many of the A lister colleges. Companies responded by going further down the value chain.

The economics of this is simple. Engineers especially the A-listers have to be paid well, need job satisfaction and even project management experience a couple of years down the line. Indias IT services model is highly people intensive. The career path here is module within 2 years, project lead within 2 more years and project manager within 6 years. So, what does a company do? Hiring has to happen, it has to get cheaper each year and profitability cannot be hit.

TCS has been hiring graduates (I mean non engineers) for donkeys years. Hence they are able to offer, usually, the lowest quote for all engagements. Wipro has been grooming graduates at WASE and hires graduates for certain positions. The big daddy of profitability, Infosys, has maintained an elitist air about itself and never really hired graduates on a large scale - anywhere near its hiring numbers of engineers. And that may change, shortly. Infosys legendary profitability can be maintained only by going lower down the chain of education and finding employees who will work for cheaper. The training and hands on work experience model (euphemism for throw in the sea and they will learn to swim with the sharks) of the Indian IT firm works well in bring employees upto speed rapidly. When the industry began, it was more throw in the sea and very little training, now the model is reversed for the most part. In any case, the gap between engineers and graduates is low (if any - and mostly perception driven) as far as the quality of work goes and with appropriate training, most employees deliver on a project (because of various reasons).

Note: Companies can, of course counter this by displaying attrition figures, but that is not the complete truth about the nature of jobs in this industry. True, there is money to be made via labour arbitrage even at the employee level and for the most part, this overrides job satisfaction. Scratch the surface and you will know about it. Many of those in the industry are not here out of passion, but out of the fact that this job pays well, so what the heck. Companies have their own cultural clubs, photography clubs, trekking clubs so employees get a good work life balance.

Coming back to the point, these companies have to do two things. One, go up the value chain of profitability by taking in high end work. Two, go down the command chain of education and get people who can get work done cheaper. It also means that certain classes of employees will be far highly paid than certain other classes, so profitability will continue to be intact. The only question is, how long? This is not a pessimistic post - on the contrary, it places its bets on the way these companies will counter high salaries and cost effectiveness and come out shining through.


Prasanth "PC" Chandrahasan said...

great post. unfortunately this poor blog reader is not a fan of software companies and hates computer engineers as much as he hate coriander leaves. One of my achievements in life was skipping a privilaged Wipro interview for a visit to the nearby soap making factory. My friends who ridiculed me at that time unfortunately could not join Wipro because two hijacked airplanes crashed somewhere in US and screwed their lifes too. It did not take them enough to realize that the salaries they get was not given by Wipro (or TCS or Infosys) but by some client somewhere in the other side of the world and that the difference in the billed amount is what makes the profit for them. May be the reason why Wipros and Infosys's are still body shoppers and has neither the innovation nor the guts to make a decent software product. And since we are a billion strong and produces a million unemployed (and unemployable) engineers every year who are more than ready to work in call-centers, India is again the next superpower. What if the Brits had not come here and we had a habit of using condoms while having sex. Ain't that called the "butterfly effect".

Anonymous said...

Could'nt be more true ,as people who have faced the disaster digit first hand, we stand to be living verdicts to this article and the posted comment too. The differnce in the billablity amount is not the only thing that the company mooches off you. Its also via the policy dicisions and I wish now that I had to visit a nearby soap factory too when the ineterviews were being held.

Anonymous said...

hey...quite an interesting post. i am doing research on infosys nowdays...trying to understand how their plan to hire 25k employees this year will affect their profitability. wts ur view on the same? do u think the co. will be able to maintain its margins by tapping into lower grade colleges? isn't the training cost going to be significantly high for these?