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Aug 7th, 2007 #1----
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Its a very Long Article but well worth reading....what are the affects of this IT scene in Pak and what good is it going to do for People/Companies in US.
is Outsourcing is really going down among US companies and now instead of some company run by indians, its the IBM's and others are gettign that Outsourced work done.
n late July, rumors swirled that Infosys Technologies (INFY) might be readying a takeover offer for Cap Gemini (CGEMY) or another major tech-services player in the U.S. or Europe. So on July 25, when the company alerted the press and the markets that it had a major announcement, there was a great deal of anticipation.
Instead, Infosys unveiled a $250 million outsourcing contract with Royal Philips Electronics (PHG) of the Netherlands. It was an acquisition of sorts, the company said, at least of the outsourcing centers that belonged to Philips. "We're taking the model to a newer level," said Chief Executive Kris Gopalakrishnan.
Landing a new contract certainly isn't bad news, but the development was somewhat deflating for those who believe that Infosys needs to redefine and reposition itself in the multibillion-dollar arena for global outsourcing services. In fact, Infosys and other Indian outsourcers are facing a raft of competitive challenges that will require some dramatic new strategies.
Adversities Add Up
True, India's biggest outsourcing firms continue to rake in the profits, at least judging by the latest earnings season. The top five players—Tata Consultancy Services (TACSF), Infosys, Wipro (WIT), Cognizant (CTSH), and Satyam (SAY)—reported robust profits in the quarter ended June, 2007. And executives generally forecast strong growth ahead.
"We're very happy with having beaten the forecast," said CEO and Managing Director S. Ramadorai of the $3.1 billion Tata Consultancy Services in Bombay. "TCS, as the leader, is doing well." Ramadorai predicts $60 billion in tech-services exports for the industry by 2010, nearly twice the current $35 billion, plus $20 billion in revenue from domestic business.
Yet behind this show of supreme confidence lurks deep unease. A confluence of adversities is at play. They include an appreciating rupee that is cutting into earnings, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats.
On top of that, there is the end of preferential industry tax benefits at home and the growing success of multinational competitors such as Accenture (ACN) and IBM (IBM) on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term.
For the first time, industry insiders are asking: Is the outsourcing game over for Bangalore? "The Indian IT companies have had an unusually long run in profits and growth," says Siddharth Pai, partner and managing director of global tech advisory TPI Advisory Services India. But that's "an anomaly," he adds. "As they mature, they can't expect the same kinds of returns."
(page 2 of 3)
And mature they must. For the past decade, Indian software-services firms, which pioneered the business of delivering tech services to the developed world from India efficiently and at 40% of the cost of companies such as IBM, have grown exponentially. Revenues exploded from a mere $1 billion in 1997 to $35 billion in 2007.
At first, their multinational competitors such as IBM Global Services, Accenture, and Electronic Data Systems (EDS) were taken by surprise. But then they joined in the new game, setting up shop in India and leapfrogging by making local acquisitions, hiring aggressively, and offering similar services to their clients. As of June, the three multinationals alone have 100,000 professionals on their rolls in India. That's about a third of the top three Indian players, and the multinationals only began hiring three years ago.
Now that the competition is evening out at the bottom of the business, the battleground will start to move up to the higher end—business consulting and the integration of the offshore and on-site services. Here, the multinationals clearly have an edge. Not only have they been providing consulting services for decades, but they have been doing it across geographic borders, using experienced talent and cultivating long-term and deep relationships with customers. More important, companies have been investing in research and product development for decades—in 2006, IBM spent $6.2 billion on research and development, and its largest R&D center outside the U.S. is in Bangalore.
Indian companies, in contrast, have almost no research and development and spend very little on it. They began building their high-end consulting services only two years ago, and all of them have done so organically. Infosys began Infosys Consulting in Fremont, Calif. Wipro has been making small but strategic acquisitions in the U.S. and Europe. And TCS, which has the widest reach with 150 offices and 79 development centers worldwide, says that 3% of its revenue now comes from consulting. That's peanuts compared with foreign rivals.
Lagging the Competition
Nor have the Indians attempted to leapfrog into the big league through a major acquisition. "They have to, they should, to get a global footprint," says Avinash Vashistha of New York outsourcing consultancy Neo-IT. Do they lack confidence? Certainly, "the levers and supportive environment they have in India are not available to them overseas," says Kris Wadia, executive partner, global sourcing, at Accenture.
Indeed, the tech industry in India is so pampered by New Delhi, and so admired by ordinary Indians, that they have been lagging behind the competition. Industry trade group Nasscom recently released a report on the necessity of Indian companies to begin to innovate to survive, and suggested the establishment of an ecosystem for innovation, helped by policy initiatives.
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.
IBM's India Buildup
There's a ring of truth in that. 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. Infosys Chief Operating Officer S.D. Shibulal dismisses the inability to acquire, saying only: "We are perfectly capable of building things organically."
page 3 of 3)
Companies such as IBM have taken a more democratic approach to building their business. The company began competing with the Indians in the outsourced tech-services business just three years ago, when it acquired Daksh, a call center. Since then, IBM has made plenty of acquisitions in India, absorbed them, and also organically expanded its business. Today, IBM has 3,000 workers dedicated to research and development at its offices in Bangalore. It is the largest R&D operation outside of the U.S. center in Armonk, N.Y., but one that is integrated with all of IBM's nine research centers around the world. Last year, IBM saw a 385% increase in patent filings from its India office.
IBM is already the dominant player at the top end of the tech-services market, with its large and established consulting business, and now it has also mastered the bottom end of the market, which offers low-cost servicing. More important, IBM is the leader in the Indian market for technology services, a market that the Indians have always overlooked. According to tech research firm Interactive Data (IDC), IBM has the largest market share in India, at 10% of the total $3.7 billion market, and customers across the board from the state tax department to the private players.
Missing Homegrown Opportunities
In fact, IBM is the top choice of India globally. Ambitious Indian corporations such as Bharti Airtel, since 2004, have outsourced roughly $1 billion worth of tech services to firms such as IBM with global expertise. In March, IBM bagged an $800 million, 10-year contract with Idea Cellular (IDEAF), formerly co-owned by Tata, Aditya Birla, and AT&T but now by the Birla group. In the first six months of this year alone, $1.4 billion in domestic telecom deals were grabbed by the multinationals.
According to researcher Gartner (IT), over the next two years, Indian companies in the private and state sector, from banks to the railways, are expected to spend an estimated $5 billion on new technology, all of which will need to be serviced. Save for Tata Consultancy, 9% of whose business is domestic, the Indian players have largely focused on exports and missed the big opportunity in their own backyard. Nasscom estimates that just a quarter of the revenues of Indian outsourcers are domestic, though it's growing at 22% a year. This year, for the first time though, Infosys said that it would bid for domestic business, admitting that the "home market has reached a level of maturity."
Of course, companies such as IBM in India share some of the same constraints as their local competitors. 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.
Visa Restraints Hurt
Tata Consultancy, for example, is now mining deep for potential candidates, hiring not engineers, but math and science grads from colleges and putting them through a seven-month training course. "About 20% of our new employees are non-engineers, and that number will increase," admits TCS' Ramadorai. IBM solves the problem by paying higher salaries, but only recruiting engineers.
But what's strictly an Indian headache is the visa situation in the U.S. Just 65,000 H-1B legal worker visas are issued by the U.S., a strain on Indian firms that need to send their engineers to work in their U.S. clients' offices. The demand is so huge that for the last two years, on Apr. 1, the day that U.S. immigration officials release the quota for H-1B visas, nearly all are snapped up by Indian tech companies (see BusinessWeek.com, 2/8/07, "Work Visas May Work Against the U.S.").
With a Presidential election coming up in 2008, visas promise to be a hot-button issue. Already, companies such as Infosys and Patni Computers (PATIF) have been penalized by states such as California for not paying their H-1B employees market wages. The Indians are hiring locally, but it will surely affect their low-cost advantage. The Indians are doing "awesomely well," says IBM's software research chief in India, Harish Grama, "but what are they doing to stay in the game?"
Overcoming a Fixation on Margins
The Indians defend their position stoutly. "Now, we are in the same position as IBM or Accenture, where people treat you like a partner and consultant, not a vendor," says Ramadorai of TCS. Indian companies, he adds, are spending increasingly on innovation. TCS says it has developed a full range of services, global network delivery, intellectual property, deep knowledge of different industries, and is starting to invest heavily in innovation, working together with clients. Ditto with Infosys, which has increased its R&D spending to $12 million this year, for instance. Wipro has made R&D a business to be outsourced from people, but that too is not sophisticated, cutting-edge work.
The future, say industry analysts, lies in doing things the multinational way: embracing innovation, consulting, and geographical expansion. 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."
Mar 3rd, 2008 #2
The Coming Death Of Indian Outsourcing
BURLINGAME, CALIF. - 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.
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 opportunities 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 (nasdaq: INFY - news - people ) and Wipro (nyse: WIT - news - people ) must diversify their portfolios 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. (See "Indian Employees Enjoying Swift Pay Hikes.") 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 U.S. wages remain constant, India’s cost advantage disappears by 2015. Then what?
Mar 3rd, 2008 #3
In a piece published Friday in Forbes, Sramana Mitra documented the numerical reasons why India’s outsourcing industry - commanded by corporations like Infosys and Wipro - is bound to decline. And maybe even die, if the current hiring binge, the steady increase in industry wages, and the demand for any and all services supplied by the workforce on the subcontinent from around the world decreases as a result of increasing costs and nominally increasing productivity.
I’d like to rebut Mitra’s assertions with two main points.
First, it’s fairly common-sensical to determine that the Indian IT sector, in all its phone-support-heavy, code-producing glory, will not continue to grow at the rate it is. Market saturation will inevitably occur, and the ascent in wages will diminish in speed because such an industrial limit will have been reached. Yes, Indians, given the opportunity, will seek better jobs and better salaries (as we all generally do), and thus have been flooding the IT trade to get in on the action. But there are only so many seats at the table - despite the fact that the table is expanding in size at a brisk clip. So there’s reason to forecast a period at which Indian IT will plateau, figuratively speaking. And that moment will likely be reached in tandem with the leveling-off of demand for various services.
Furthermore, it’s necessary to consider the larger, fuller picture of the evolving Indian IT world, which, according to data shown in this Mashable piece published last month, is seeing a marked rise in venture capital investments. In 2007 alone, India saw nearly $1bn in financing. This essentially means growth for Indian IT, whether infrastructural or specific to Web startups, is gradually being driven by businesses that are built to cater largely to the homeland. Self-sustainment is on the rise.
Will the slow-down in the outsourcing industry transition seamlessly into the rise of India-to-India business? Hardly. It’ll be a rough shift, for sure. The market comprised of tech giants like Infosys and Wipro will not experience a leisurely move into middle and old age. But might things work out okay in the end? It’s not out of the realm of possibility. It would be quite unlikely to find India exhaust itself of this IT boom its endured for so many years already. India still has a long way to go before the fuel supply isn’t enough to sustain the fire, so to speak.
In all, I imagine outsourcing will not go away for a good number more years. It has numerous benefits for many corporations placed elsewhere. We should count on all excess weight in the outsourcing sector to be moved into other areas, absolutely. There’s no question that outsourcing will peak. Whether it will chart a significant decline in the short term, however, is something I happen to remain very skeptical about.
Mar 3rd, 2008 #4
All arbitration business die over time. The labor outsourcing business is in major parts (though not wholly) wage arbitration. Indian wages will go up, US wages will come down over two to three decades. At some point it would no longer make sense to offshore to India and will be more economical to work within US.
It won't happen over night and it will mature in different directions.
For example, Indian insourcers will target non-US rich countries. I think the majors already derive 30 to 40% revenue from non-US clients.
Secondly instead of merely IT, it will change with R&D, Analytics, Legal, even telemedicine making ever increasing contributions.
Finally, India's own internal demand will become an equal target, given the projections of growth in India's economy.
But beyond all this, a larger proprtion of companies will stop calling such arrangements offshoring. Even today there are global companies that don't recognize workforce arranegements as offshoring.
Jul 18th, 2008 #5
In the new Forbes study that compared business climate from various angles in 121 countries, India dropped 13 places to 64th from 51st last year.
In spite of all the hypes from India Inc. and the Indian Government, India has deteriorated substantially as a country that can attract top foreign direct investments. The inflation and slow progress in infrastructure development are the main causes. Indian population is talented but wage and commodity inflation is rampant. India depends on the foreign oil and gas. That has caused a massive problem for the economy. According to Forbes, ''demonstrated resistance to increasing personal freedoms. Higher inflation from food and other commodity costs, as well as increased burdens on entrepreneurs also held the world's most populous nations back as business destinations''.
The corruption is also on the rise. Use of corporate assets for personal use is on the rise in India.
The biggest detriment comes from the communists. On one side they oppose privatization. And, at the same time they engage in human rights abuse to help Indian oligarchs like Tata establish factories stealing land from poor farmers in the state of West Bengal. India failed as a nation to provide protection of human rights for people in Nanadigram and elsewhere where communist militia controls the police force. According to Forbes, ''Privatisation of government-owned industries remains stalled and continues to generate political debate; populist pressure from within the UPA government and from its Left Front allies continues to restrain needed initiatives.''
In a nut shell India is declining fast as an international business destination because of a shortage of talented work force, higher inflation, slow progress in infrastructure development, corruption, communists creating human rights abuse as well as blocking privatisation, and lack of clear and open access to Indian consumers.
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