Offshore outsourcing - a concept that made IT & India synonmous with each other in the first decade of 21st century is loosing its glamour quotient consistently. It seems that by 2010, hundreds of software companies will run out of steam as they loose their competitiveness in the ever changing industry, since their business model has been worked around cost arbitrage alone.

Some hard facts which makes me feel so:

Increasing wages in India: Salaries are constantly moving skyward. Every year IT companies are forced to raise wages by 20-25% to remain competitive in the job market. Some hot IT destinations in India have become as expensive as Australia and Canada (if not USA and UK) in terms of manpower costs. With advent of offshore facilities of US / Europe based software companies, the trend will continue to move north.

Shortage of skilled manpower: Indian IT industry is facing a major shortage of employable skilled manpower. The education system has not gone through any fundamental improvement to fulfill the ever growing demand of the industry. Large companies are hiring semi-skilled and non-skilled professionals (not really) to fill in the positions that exists in their team. This is continually detoriating the quality and quantity of work that gets done resulting an increase in effective cost of production for the customer. At one point of time or other, this will pinch and will make offshore outsourcing non-competitive.

Appreciating rupee, depreciating dollar: With the economic upswing, the rupee is scaling new heights. On the other hand, due to economic slowdown in sight, US dollar is declining heavily. This is resulting in direct losses of revenue for most offshore outsourcing companies. There has been a 10-14% decline in revenues just because of currency appreciation. This is a net loss to the company since the effort / cost of servicing the client remains the same.

Increasing operational expenses: Cost of doing business is on a rise with zooming real estate prices, increasing fuel prices and towering living expenses. Companies are forced to spend a lot of money in the x-factor to impress prospective employees. All these put together are increasing the operational expenses and overheads for offshore outsourcing companies. In fact inflation is heading towards 10%, which is not making things better.

Companies are adpoting global-sourcing: Large enterprises in USA / Europe which were dependent on offshore outsourcing till date are now aggressively adopting global-sourcing. Many of these companies are directly setting up their software development centers in India (or a competitive location), resulting in a dent in the revenues of offshore outsourcing companies who used to serve them. The trend towards captive offshore development delivery will only increase in years to come.

New destinations: Several new offshore outsourcing destinations are coming up including China, Brazil, Ukrain, Ireland, Poland, South Africa and Russia. Many of them do not rank close to India in terms of the combo-punch of english educated, logically strong, hard working Indian IT worker. But they are making

But as it is said, when the going gets tough, the tough gets going. I am sure many companies will evolve their business models, move up the value chain and give customers more than one way to outsource to them!

Afterall the outsourcing story has just begun! 

• The SEZ Act is under constant change. So whatever is stated there cannot be taken as a confirmed policy from the Government.
• The Act has been poorly and loosely drafted leaving a lot of ambiguity, areas of misinterpretation and scope of misuse by people who have the best lawyers at their disposal.

1. Manufacturing or service companies - They will get duty-free import capability and relief from various direct and indirect taxes including VAT, Service Tax, Excise Tax, FBT, Dividend Distribution Tax and above all Income Tax. These sops are given so that these businesses invest for setting up new infrastructure and in their business within the SEZ marked area.
2. Real estate companies - They will develop the SEZ infrastructure and multiply the value of land literally overnight and reap rich dividends.

• SEZ scheme is mainly helping large, established businesses and is working against small and medium sized businesses. Large companies like Reliance, Infosys, Mahindra, etc. who can buy and build infrastructure measuring 25 acres or more will reap the benefit of tax exemption for another 15 years, while small companies will struggle with a collective tax burden of more than 50% of the total turnover. Big will become bigger, small will have a tougher time and perish.
• SEZ scheme is brining back (in a new package) the age old zamindari system. The SEZs which are being developed by real estate developers to accommodate medium sized companies are leasing out infrastructure at abnormally high costs (almost five times of normal rent) which makes it out of bounds for most entrepreneurs. There is no regulation on the ownership / lease / rent process between these real estate developers and the SEZ units. In one of the agreement that I have managed to get my hands on, the SEZ developer made a mix of Deed of Assignment and A Sub-lease Agreement keeping best of both worlds in his own favor and charging a price which a Freehold Land. Few companies, who will manage to afford it, will end up spending a major of their cash flow on rent/lease cost alone. This will make them highly vulnerable to cyclic depressions in the market which are very common on a new industry.

• We do not mind paying taxes. If IT industry should do away with subsidies, Let everyone pay taxes! There should not be double standards by retaining tax benefits for large established players and punishing small & medium sized enterprises for being what they are - i.e. small.
• Please come out of the dream that infrastructure creation is fundamental to IT growth. IT is not like heavy engineering, steel or shipping business which depends heavily on top-quality infrastructure. In fact IT infrastructure has the highest depreciation and technologies / equipments get obsolete overnight. The largest companies in Silicon Valley have come out of garages and dorms. IT industry needs entrepreneurs and people for its growth. Focus on growing talent in colleges and universities. 
• IT industry has low entry barriers. Try to keep it low. This will help innovativeness and constant evolution of the industry. Let entrepreneurs take control and scale new heights. Facilitate them, don’t frustrate them.

Hello Friends,

I will be visiting London from 13th October till 23rd October for some business meetings.

If you -

• are an existing client of Indus Net Technologies (or any of our service brand) OR
• are a business considering outsourcing your web design, web development or Internet marketing business OR
• just want to meet up for a friendly 1-2-1 meeting

Please drop me a line at talash@indusnet.co.in and we will meet up!

Abhishek

There is a big debate over India becoming an IT super-power. Every few days I will meet an over-excited guy who is impressed with the growth of Indian IT companies an think that they will take over the world soon!

Let us do an acid test to determine if this is true!

Let us consider a hypothetical scenario that India & the USA are no more allies in economic growth. Let us further consider that both countries have imposed trade restrictions and sanctions on the each other!

Now, the USA does not have access to a big English-speaking pool of talent to develop their superior software at a lower cost.  That’s a big blow. Will the USA survive this? I think they can. There are other developing economies like Brazil, China, Taiwan, etc. which can fill in the gap (initially they may be not as good). So overall they will have a tough time.

Now, consider that India does not have access to products and technologies developed and patented by US based companies. What will happen? Life without Microsoft products, Oracle databases, Google, etc.

Think. Think harder.

Possibly we cannot think of such a scenario! It is beyond our imagination.

This means that India, as an economy is dependent on the technologies and products developed by US companies and not the other way around as many software outsourcing companies think (and as their CEOs will debate with me at length).

So, India works as an "employee" and/or "self employed entity" for US - the "businessman" and/or "investor" (if I have to go by the definition of Robert T. Kiyosaki of Rich Dad Poor Dad fame). This means that Indian IT economy at this point is not "financially free" and is totally dependent on the "investor" who controls the game. It will be very difficult to change the scenario, unless, Indians stop day dreaming of the "IT super power status" and get out of the "luxury bed of benefits and perks" and start working for themselves.

Now we know - who needs whom!

India has been regularly "labeled" as the ultimate software offshore outsourcing destination. Advantage India has been expressed in terms of location, better adaptation to english language, cost, quality talented pool and a young population.

However, it seems that India is fast loosing the low cost advantage due to inflating salary bills in IT industry. India is leading in terms of attrition and salary hikes. It is inevitable in a growing economy, but the question is - how long can we sustain this? I know of several software service companies where there is an annual increase of 40-50% (on the lower side) in salary bills. There is not a very high increase in skill level of the professionals either.

So what is the end result?

A declining profit curve (read it right - profit per person / per month)! It might not be immediately visible due to growing "net profit" which is increasing since all the companies are in a mad rush to hire as many professionals as they can to keep "up" their net profit by working in volumes as profit per person dips.

But this is definitely going to make the dent. And it is already visible in patches! Check out how a company decided to move to US to save money on his operational cost! 

I have spoken to some HR managers about their "suggested" solution for this situation. In general I have heard of these two workarounds -

1. Moving up the value chain

2. Averaging of salary

Option 1, is most attractive. However it is not very easy for a company to move from an "outsourcing" business to a "consulting" business which is the next logical step in the value chain. It not only requires physical presence (unless someone comes up with an innovative way to do it online). But if any company can do it, nothing like that!

Option 2, is what most companies are doing. They hire a top professional and then make up for the high salaries by hiring several junior professionals to balance out the spike in salary and get an average salary which is profitable to them. This works and will work, as long as the company keeps expanding. But it has a limitation in terms of "critical mass" where it will no longer be feasible and the balancing act will become so complicated that it is bound to result in a miss. The worst thing is that a miss at that "critical mass" will result nothing but disaster.

At this point there is no "silver bullet" solution for this problem. However this is for sure that India will not remain an attractive destination for outsourcing for low cost labor for long. Either it will loose its edge to emerging low cost economies or it will reinvent itself as an economy which is higher up the value chain.

Only time will tell, which way things go!