“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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Why are we worried??? question is simple…..why are we worried about it?….it is way capitalism works. when capitalism is at our side we enjoy it….when it is against us….we cry out.
Most focused thing which is not discussed in this article…..how many people learned programming, how many people learned process, which were outsourced to us…..we all learned many things during this wave of outsourcing…when we become expensive…..we will start thinking solution for new things….to find more revenve for more profit….it is invisible hands which will control everything…..rather then crying for this situation…we should think about change…what we can do with knowledge of computer.
forget infosys and wipro.they were leader of yesterday world…where license raj was dominated…..we have to search for new leaders of new india….where product combined with effienct services combined with human face is delivered to customers.
Virat
Sramana, very interesting thoughts – exaggeration is a valid tool to get people to sit up and notice an early trend – the actual wage differential is perhaps still in the 1:5 zone, and if it gets to 1:1.5, I think India would have made significant advance (imagine BPO workers making 8 lacs of starting salary in India!)
In any case, the point regarding investing in and employing technology is very valid indeed. I have spoken to some of the larger IT services/ BPO companies and they are very cognizant of this need. They are themselves developing tools that allow them to deliver services more efficiently – of course, those tools are not marketing separately, and hence general public doesnt know about them. I would also expect that companies like Insideview will become valuable for some of the services companies. I think that vulnerability of smaller BPO firms is far higher.
Another area where technology is key in any outsourced service is purely the workflow, and that adoption is fairly high. Large enterprise software companies are now looking to sell through the outsourced service providers to the end clients. In companies which are targeting SMB customers, or even individuals (such as iYogi, a company we have invested in), this is even more important. I see salesforce as the delivery platform for sales process outsourcing services to thousands of SMB customers. Same with monster on recruiting front. And many other areas!
Long live Indian Outsourcing.
Yup I agree…Saas is indeed the way to go…SOA n SaaS wud bring about a complete revolution…As far as India’s edge in the outsourcing is concerned…despite issues related to rising wages n attrition….India would continue to b the indisputable leader at least for the next decade or so…n the reason is very simple..the fundamentals of the Indian outsourcing industry r very very strong..
It’s not really the “death”, but the commoditisation of Indian Outsourcing that is on the horizon, IMHO.
The outsourcers will scrape the bottom of the barrel to get a price differential that makes business sense. That could mean a) going to smaller cities, b) buying out or setting up shops in Eastern Europe, China, Philippines etc.) or something else. This business by itself will grow, but competition and wage sensitivity will keep margins fairly low. And that is a low P/E business.
The “discretionary” spends of customers has been traditionally a huge source of income, and in good times no one questioned such spending at the customer end, as long as it wasn’t “material”. In harder times such as those the US and Europe are about to experience, anything that can go will go, and random discretionary spend is near the top of hte list. (CEO compensation is the bottom)
Productisation is useless; these companies aren’t fit to do the product business. ISO 9001 doesn’t quite fly here and neither does moving tech leads to different projects based on random acts of management. Efficiency is key in the product business, but the companies don’t have it in them – their incentives are more aligned to lower efficiency (higher headcount on a project = higher money)
SaaS is probably not their forte again, since it involves creation of a product and holding on to people and all that.
My take is that they should Participate in their customers’ profits rather than get paid for outsourcing. So tell companies: “I’ll save you 30% from your current cost and I’ll buy your IT department”. ANd then go and cost-improve things 60% and get a bigger margin. You can deploy software or automate to save cost, or look at lower wage countries, whatever.
This is what the outsourcers are GOOD at, except they only did it for their customers while getting paid [what is effectively] a salary. Moving to a business model that hinges on results rather than work is a huge leap of faith, especially for their CFOs, but it’s the only thing that, in my opinion, will work.
Having said that, it’s still time to say goodbye to massive hiring in the outsourcing industry. Any which way, the outsourcers will have to make better use of lesser people, and we will finally see the day when, on quarterly results, people will applaud the lower headcount of such companies. For the few of us who work here, it’s time to look for SUPW – socially useful productive work. (or even “locally useful…”)
Sramana – I have lot of respect for your writings but I am afraid this particular piece didnt say anything new. The concern of increasing wages, high attrition and over dependence on services is just too obvious to be stated today. Just because Infy and the likes are hiring by the thousands doesn’t mean they are not thinking of SaaS or other product based models. I mean, if you and I can see these obvious problems with our current outsourcing model, its hard to think that these large IT companies are not worried about it. I have observed that there is lot of quality activity happening around the domestic IT market and both consumer and enterprise focussed product innovations are starting to happen.
So while I agree outsourcing per se might not thrive in the future, I dont agree that our IT industry has “outsourced” its thinking and has become complacent.