Wednesday, August 08, 2007

Doomsday prediction # 239

Is the party over for Indian outsourcers, asks Businessweek. (Reproduced by rediff too.)
I should have blogged about this earlier; the rupee rose by a few percent against the dollar - for no fault of it and the imminent demise of the IT industry was all over the press. Some said that people will now have to work weekends - what if it goes up a little more - do they work 7 days a week - absurd don't you think?

The party has not even begun yet, people, but like I have said earlier, the easiest way to get something printed is to have a doomsday stamp all over it, like a marauding elephant. So, if you were looking for a business case on how to write doomsday prediction for the IT industry, it is here.

First up, is the caste system. Even though private business cast it away a long time back, journalists haven't or perhaps they don't want to.

But while India lacks a formal innovation culture, one would never know from the assumed superiority over foreign rivals. Indian firms are simply unable, culturally, to absorb a Western company. Industry analysts say Indian companies such as Infosys are hierarchical, and have an elitist view of their business and suffer from "conceptual Brahmanism," referring to the group at the upper echelon of the Indian caste system.

I have not met a conceptual Brahmin yet - will let you know when I meet one.

While the companies all employ Indians and some foreigners from across economic and social lines, the top rungs of both Infosys and Tata Consultancy are dominated by upper-caste South Indians. Satyam has a big contingent of employees from the company's native state of Andhra Pradesh. Integrating a Western firm into that closed culture could be problematic.

There is only some truth in that the top rungs of the IT companies are dominated by South Indians. The domination happens not because they are South Indians or upper caste but because they have proved themselves at their jobs. Also, these companies were founded and HQed in the South. Please, please check out the companies founded in Gurgaon (Hero Honda et al) /Mumbai (Patni, Kanbay, LTIT) and then let us talk. Ask those 1.2 million odd employed in the industry, if they were ever asked their caste? So, why bring the mention of the caste system in this except to score points?

Next up, is the talent shortage.

India is in the throes of a severe talent shortage in sectors from tech to retail to research. Part of the problem is the emergence of new businesses such as retail and telecom in which India has no prior expertise. But a significant part is the country's creaking education infrastructure, which isn't producing enough qualified engineering candidates who can be productive employees immediately.

Sure there exists a talent shortage, but I don't hear Infosys and Wipro and TCS and Satyam complain when they recruit by the hordes - why is that so? Neither do Google and Yahoo and Microsoft when they recruit selectively? Because the former have invested in training which others dont want to do and the latter hire the cream, which in any case is not going to be in millions.

Two other points mentioned - the visa cap; well its a problem, but with so many employees already abroad, with hiring abroad, its a problem that has answers. Protectionism - having just read the history of the textile industry in the US via "The travels of a T-shirt in the global economy", it is unlikely that doors will be shut on this industry.

The one point that I agree with -

To get there, Indian companies must get over their "25% margin fixation," says Ashish Thadani of Gilford Securities, who covers Indian tech companies listed in New York. "Those continuing high margins mean you are probably underinvesting for the future."

And that means, competing in the home market as well...

So, for those who believe in this industry. How much will a rising rupee hurt these companies? Sure, it will in the short term and if it continues to go up much longer, companies will lose their 25% margin - but this business has long since ceased to be one of pure labour arbitrage.

Ah, will employees have to work weekends? Well, heres my answer. Most projects in this industry are fixed price projects - so getting someone to work longer will barely be the answer - the price is awarded for a particular work to be executed regardless of the time taken - unless your company tries to make you work on 4 projects at a time - which as you would know is almost pointless. As for T&M, they are billed to time anyway, so no prizes for working weekends. So, expect companies to be ruthless on managing bench, managing slack capacity down to an hour etc.

But in the long run, I expect companies to get over it. How? Some of it involves moving up the value chain which these companies are doing actively, some of it means getting billed in the foreign currency and keeping it there, some of it involves moving to a basket of currencies and so on. By becoming more productive (and that doesnt mean only working longer hours - who said working longer hours meant you are more productive?), by automating processes, reducing operating costs, finding lower cost locations and innovating their way out of troubles like this.


Anonymous said...

"but this business has long since ceased to be one of pure labour arbitrage."

Or has it? What else is it about then? Many Indian techies seem to believe some variation of what you state above. The problem is, pretty much everybody else seems to believe otherwise.

Jagannath Moorthy said...

Most Indian IT firms have learnt lessons from the dot-com bust and made soft pay cuts (read variable pay) a feature across most levels. This insulates them to a certain extent. If things get worse, there is a lot of scope for an actual cut in pay across the industry. The average IT professional is so much overpaid that even a 50% paycut will still be a very good salary in absolute terms.

Neelakantan said...

Anon, See the captives all around you or see the kind of business IT firms pick up and you will realize that not all work is drudge work - which is a pure play labour arbitrage. Sure, there is an element of labour arbitrage here and that will continue as long as there is a wage/currency differential. Talk around, ask a few who work in these industries - dont believe journos only :)

Jagannath, great point. I forgot about that one. If margins fall, there are cushions, true.

Abhishek said...

I fully agree with your views in the post. Somehow, our analysts(may be everywhere) move from one extreme to the other extreme. This is what is happening for the IT industry. On the rupee appreciation aspect, the fact of the matter is that appreciation in rupee will affact the bottom line temporarily but will enable the IT companies to learn more about Financial management/engineering (Hedging etc). Indian Managers are smart managers and they have found ways (or will find soon) to overcome this temp problem and move ahead.


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