March 03, 2008
India is riding high on outsourcing.
Information technology and IT-enabled services will employ 4 million
people
in 2008 and account for 7% of gross domestic product and 33% of India's
foreign-exchange inflows, according to Nasscom, an Indian IT industry
organization.
The death of this industry is far from anyone's mind.
However, the reality is that wages are rising in India. The cost advantage
for offshoring to India used to be at least 1:6. Today, it is at best 1:3.
Attrition is scary.
Jobs that are low value-added and easily automatable should and will
disappear over the next decade.
People talk a lot about India moving up the value chain. Some of that has
indeed happened. An industry that started gaining momentum when Indian
software developers were tapped to help fix the 'Y2K' problems in old
software code 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. India's
tech industry is a "services" industry. The Indians don't do the thinking.
The customers do. India executes.
As a result, India has not learned to invent 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 and other non-tech sectors.
India's $30 billion IT/ITES services industry, meanwhile, is slowly and
surely losing its competitive advantage.
* Slideshow: Outsourcing atlas
* Slideshow: A brief history of tech CEO apologies
Most of the 4 million people that the industry employs have now "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.
ADP, the largest U.S. payroll services provider, has 45,000 employees
worldwide, of which only 2,500 are in India. It has around 1,000 workers
in
El Paso, Texas, it's expanding a location in Augusta, Ga., and it's
opening
a facility in Jackson, Miss. It's also growing a location in Halifax,
Canada. ADP isn't moving its workforce to India--it's hedging its bets
geographically. On a recent earnings call, ADP's chief executive used
terms
such as "smartshoring," and "nearshoring" to describe the strategy.
The software as a service (SaaS) megatrend in technology also plays
against
India.
Here's an example: There's a tiny Silicon Valley start-up called
InsideView.
It helps customers to generate sales leads, qualify those leads and use
technology tools to help find big sales op****tunities for customers.
In November 2007, InsideView acquired a company called TrueAdvantage,
which
did the exact same thing manually with a team of 150 people in India.
After
the acquisition, InsideView moved all 2,500 of TrueAdvantage's customers
over to its SaaS solution. All 150 TruAdvantage employees in India were
laid
off.
That's been a familiar tale in Detroit--but no so far in India. But that's
changing.
Indian powerhouses like Infosys [Get Quote] and Wipro [Get Quote] must
diversify their ****tfolios away from pure body-shopping and process
competencies to technology-driven advantages. They, too, could build--or
acquire--SaaS businesses.
So far that's not happening. Infosys is still hiring thousands of new
employees in India every year. The mood is upbeat. Nasscom is forecasting
25% annual growth in the Indian IT services industry for the next few
years.
The golden goose is still laying large, warm eggs, enough to feed the 4
million and their families, servants, chauffeurs and cooks.
Meanwhile, the workforce is getting comfortable in their cubicle chairs,
just as the turkey gets comfortable before Thanksgiving.
Forbes recently published some scary statistics on wage inflation in
India.
Salaries rose 15.1% in 2007, up from 14.4% the previous year. The 2008
forecast: 15.2%. This would be the fifth consecutive year of salary growth
above 10%.
Add to that the appreciation of the rupee against the weakening dollar,
and
its impact on the labor arbitrage market.
Is the death of Indian outsourcing all that far off?
Assuming a 15% year-to-year salary hike rate, and a 2007 cost advantage of
1:3 in favor of India, if US wages remain constant, India's cost advantage
disappears by 2015. Then what?
http://inhome.rediff.com/money/2008/mar/03forbes.htm
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