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Is Indian IT sector headed for a slowdown in 2012?

Viral Dholakia — Wed, 18 Jan 2012 10:07:57 +0000

It’s been a long tradition now – just like a temple priest flags off a ritual with sound of a conch (shankhnad) during startup; even software bellwether Infosys Technologies is accustomed to kick start the quarterly earnings season in style and panache.

In fact, few years ago, the results and annual guidance provided by this IT jewel used to set the mood rolling in the Indian stock markets and was considered as the most significant event of the financial year. Business news channels used to organize day-long analysis of the Infosys results announcement.

Infosys used to be the barometer of the health of Indian outsourcing industry. But, prior to 2008-recession, this frenzy was bust on the back of steep appreciation in the value of rupee to almost 40 per dollar. This led to huge under-performance of the IT industry amidst strong rupee, while the Indian benchmark indices basked in the glory of their lifetime peaks.

Gradually, the weightage of the software outsourcing industry in the Indian markets have stooped to a low, where it can no longer duress the benchmark indices to dance on its tune. This pin down can be confirmed from the fact that despite Infosys disappointing the street with its earnings and stock price over last many quarters, Indian markets have remained stable.

Here’s one more instance – though Infy reported better than expected numbers in the Q3 FY12 amidst weaker rupee, the company disappointed shareholders with its biggest ever FY12 dollar guidance downer for the fourth quarter.

The outsourcing giant has signaled almost zero growth in revenues for the next quarter, as against its initial forecast to notch 3.2% to 5.2% growth during Q4 FY12. On annual basis too, the company rolled back its guidance from 17-19% to 16.4% in dollar terms.

In the words of Infosys CEO and MD, S. D. Shibulal:

“The environment is very uncertain. There is no definitive answer to the Euro zone crisis at this point. Client confidence is down. Budgets are getting closed; the early indication is that we will be flat with marginal down.”

He further indicated that pessimistic client confidence is very much likely to translate into curbed spending amidst cautious environment. In my opinion, the real pigeon will come out of the hat only during the next quarter, when the IT behemoth will spell down its FY13 guidance.

For sure, it would be the toughest task for Infy management to forecast its full year guidance at a time when its key market, the euro zone, is reeling under the severe debt stress, without showing any signs of the crisis subsiding anytime soon.

Contrary to Infosys, TCS has always remained away from providing earnings guidance, thus leaving lesser scope for equity speculators to lay their fragile bets on. However, even TCS share price fell to two-month lows on concerns of anticipated demand growth slowdown and delay in “discretionary spending” by the US clients going further.

TCS, India’s biggest software services exporter, reported Q3 FY12 numbers that were in-line with Street expectations with net profit up by 21.8% at Rs.2803 crore from the year-ago period, with margin improvement largely driven by forex benefit.

Moreover, brokerage firms have given thumbs down to the TCS – while Emkay Global Financial Services lowered its rating on the software major to ‘Hold’ on missing relatively modest expectations; CLSA is cautious on IT sector and expects TCS to under-perform on lower client confidence.

In a nutshell, Indian IT bigwigs can no longer rest on the laurels of depreciating rupee alone to yield them unexpected forex gains on a constant basis. Finally, it will boil down to outsourcing business prospects and earnings that will seal their fate, once the rupee-dollar equation settle down from volatility.

Do you see Indian IT industry softening up in 2012?

Lufthansa Cargo Wants To Crowdsource Business & Process Innovation [Contest]

Ankit Agarwal — Tue, 15 Nov 2011 11:36:27 +0000

From brainstorming to crowdsourcing, more and more companies are looking to tap into the collective intelligence of masses to solve their business problems.

Lufthansa Cargo has taken crowd-sourcing a step further and has created a public co-innovation platform primarily targeted at finding innovative solutions for its supply chain.

Lufthansa Cargo has launched Air Cargo Innovation Challenge and is inviting people from across the globe to submit their innovative ideas around key supply chain processes like Green Solutions, Add On Services etc. and even general process improvement ideas

The innovation challenge is essentially a crowdsourcing platform wherein Lufthansa Cargo is asking brilliant folks to think up innovative ideas to improve Lufthansa’s operations and get rewarded in return. The central theme of the contest makes me think that crowdsourcing could actually help the company find some real strategic ideas to implement.

I am firm believer in the power of crowdsourcing and if executed right the same can provide tangible benefits to businesses of all size. There are too many success stories which highlight the power of crowdsourcing be it Unilever’s Pepperami campaign, Lays Ad campaign and even IBM’s translation project

Green solutions and Add-on services are two primary ideas wherein a larger set of people can participate and emerge with brilliant solutions. For Green solutions, the company may not have the best ideas emerge in-house but if there is a thought leader around Green solutions, he /she can submit their idea and Lufthansa can tap into a subject matter expert at minimal cost.

The same goes for ’Add on services’ wherein forget a large audience, the existing customers can themselves suggest new services and service improvements that they encounter on a daily basis while working with either Lufthansa Cargo or other carriers.

The contest which started on 1 Nov, 2011 is already seeing decent interest and as many as 31 ideas are submitted by various people. The overall community engagement is also rather positive with lots of comments and messages happening on the site.

What is also interesting is that the rewards are non-monetary in nature. The company is going to invite the top 3 winners to present their ideas to the corporate team at Lufthansa Cargo and provide a guided tour of the operations center.

So, the company is not going for too many idea approach (in lieu of rewards) but has rather tailored the contest to ensure that people who are passionate about the contest topic only submit their ideas.

What are your thoughts on Lufthansa Cargo’s innovation challenge? Are you going to be a part of this crowdsourced initiative

The Heat Is On For Indian IT Service Providers as Margin Pressures Mount!

Ankit Agarwal — Mon, 11 Jul 2011 08:10:00 +0000

It goes without saying what the Indian IT sector has done for the economy of India. From the time the economy opened up, Indian IT bellwethers put India on the world map. No wonder then that the IT / ITES sector continues to be one of the most significant contributors to Indian GDP.

Indian IT sector has for the most part has continued to grow at a healthy pace even during the financial crisis and economic crisis. However, things haven’t been rosy for the IT sector lately as the profit margins of these companies constantly face mounting pressures. The latest negative indicator for IT companies like TCS, Infosys, Wipro etc. seems to be coming in the form of billing rate reductions from some of the largest IT outsourcers in the United States.

Companies in the US are striving to negotiate for lower rates and are gunning to reduce the billing rates by as much as 15%. Mature outsourcers like Walmart, Cisco seem to have already started the trend with the likes of TCS, Infosys etc. expected to witness a 1-3% hit on the margins for the quarter.

The times are getting tougher for IT/BPO service providers for sure. Even as top companies continue to grow at 20-30% annually, a lot of factors are negatively impacting the profit margins for companies in the sector

Operational costs are escalating for companies in the sector. For IT/BPO companies, cost of revenues is largely made up of employee salaries and the salaries have been rising consistently
Regulators and Policy makers in the US especially don’t seem to like the outsourcing model especially as unemployment looms large in the nation. From offering incentives to companies to provide IT contracts to home companies to hiking Visa fees, IT companies are not only seeing reduced margins but also a bleak outlook for growth in the region.
Issues on taxation have also been plaguing the Indian IT/ITES sector. Tax benefits for companies in the sector seem to have reduced and a few companies have recently come under the scanner for their tax payments

Will Indian IT/BPO Companies Be Able To Ensure Profitable Growth?

Well, growth is definitely not an issue because outsourcing as such is not going to go anywhere. However, revenue growth along with a healthy margin is going to be challenge going forward. Large companies in the sector are trying to get into high billing services like Consulting etc. and are also considering diversifying to newer markets beyond US.

I personally think the industry is going to reinvent itself incrementally if it needs to sustain in the challenging markets. As I pointed out in my Is The Indian BPO sector in trouble article, cost as a value proposition could have been the pillar of the IT/ITES sector but that alone is not going to suffice and companies in the sector will have to position themselves on quality and excellence along with cost.

What are your thoughts on the margin pressures for Indian IT giants? Will these companies be able to battle it out and find alternative ways to maintain profitability?

Could The Indian BPO Sector Be In Trouble?

Ankit Agarwal — Tue, 05 Jul 2011 04:44:31 +0000

Apologies for the extremity of the title because the premise could be a one-off anomaly. However, there is something fundamentally missing from the Indian BPO sector that could halt the growth of the sector in the times to come.

A UK based company has stopped outsourcing its work to an Indian BPO (Mumbai) and is rather setting up a BPO in UK (Burnley)

This piece of news caught my eye and left me wondering what could have been the reasons. The article sights that the UK company did a cost-benefit analysis and found that outsourcing its BPO operations to India were not resulting in any significant cost savings. The company found out that running a center from UK promises them similar savings and better efficiency in terms of native language support etc.

The whole cost angle actually does not come as a surprise. The real estate prices have been rising in India and so are employee salaries. It is evident that the BPO operators are feeling the heat and they must be absorbing the increasing operating costs by hiking their prices. This makes it challenging for Indian BPO providers to provide services at reduced cost.

Additionally, regions like Philippines have fast emerged as effective alternative destinations for BPO operations what with superior English speaking levels and better time zone support. In lieu of the increasing competitive market, I wonder how a large number of BPO providers will be able to continue providing services.

True, the UK company pulling the plug on a BPO contract should not raise the alarm bells for the sector as a whole. Large BPO players are concurrently setting up operations in Philippines, Indonesia to counter the competition, Tier-2 and Tier-3 cities are being considered for setting up operations to avoid the high real estate costs.

So, there is no cause of worry and India will remain at the forefront of BPO marketplace even in the times to come. I so hope it does but could it be that BPO providers have not evolved from a market positioning standpoint

Low Cost Is No More A Value Proposition For Outsourced Operations

Outsourcing and Cost go hand in hand. The basic premise of outsourcing continues to be driven by significant cost savings as compared to doing the work in-house. India was quick to capitalize on the outsourcing opportunity since it could offer similar services at marginal costs as compared to say US or UK. Reasons? There was a sizable cost advantage for companies even as they became the poster child of job market by providing high salaries (as compared to traditional jobs then).

Come to the present and the tide has turned. Competition is driving the prices, attrition is high and the cost advantage is slowly but slipping from the BPO providers. So, where could have they failed? Providing value over and above cost is where the BPO providers seem to have lost the way

Sample this –

"The average handling time in the UK is three minutes. But if you go out to India, you need to add another minute unless it’s a very efficient operation, so that means we can actually reduce the headcount with the saving".

This is a statement from the chief of the UK company in the context. To a certain extent, having native language support could save time but with the kind of maturity in the Indian BPO sector, shouldn’t the average handling time had become comparable already. Additionally, why haven’t the BPO providers considered adding a much more sell-able value proposition other than the cost advantage alone?

Contrast this with IT service providers and I think the industry has been quick to respond to the evolving marketing conditions. Product focus, verticalization, high-end consulting services are some of the value proposition strategies IT companies have adopted to sustain. I might be ill informed but I haven’t read any change in value proposition coming from BPO providers!

What are your thoughts on the BPO value proposition in India? Do you think the BPO providers need to move away from traditional and improve their value proposition?

Now Obama urges US businesses to feed on Indian Middle-class Population!

Viral Dholakia — Tue, 08 Feb 2011 15:26:45 +0000

Well, you can say it’s almost an about-turn! The US President Barack Obama has come up with a view which now urges US business groups to target burgeoning middle-class population of India and China to seek demand for their products and accessories.

In order to not sound too apprehensive over here, I would take pleasure to say – you’re welcome to our shores, Mr. Obama! But, for once, I would also like to pose a query: doesn’t your thought sound dichromatic in nature?

No please, let me refrain from number crunching over here! We’re not here to debate whether or not Indians have replaced American job opportunities. We all know how the President has been more than vocal about Indians taking away American jobs.

Moreover, he has left no stone unfurled in a bid to curtail the practice of outsourcing jobs to India. So much so that the country which preached the world about the benefits of free-trade, took a cover under the protectionist measures such as creating tougher tax codes to discourage more value-added savings from outsourcing job contracts.

The President Barack Obama presides to its business community saying:

The truth is, as countries like China and India grow and develop larger middle classes, it’s profitable for global companies to aggressively pursue these markets and, at times, to set up facilities in these countries

Further, he admits that the country has signed export deals with two of the most powerful emerging market economies that will tend to support over 2.5 lakh jobs in the US. But, at the same time, as if he is warning the outer world – not to rule out the creative spirit and entrepreneurial ability of the United States to overcome the on-going economic crisis.

He also insisted for greater investment in education and technology in a bid to provide impetus to innovation-led business models seeking new opportunities and opening new markets for goods.

In a nutshell, what irks me is the dichromatic thought process emanated by Obama – at first, against anti-India outsourcing view; and now, directing US entrepreneurs to target the very same India and China to tap the growing demand from their middle-class population.

A simple point narrated over here being – not to challenge the ethics or the message given out by Obama; he is perfectly fine in what he said. I just seek to pin-point that if you’re openly advocating business opportunities from overseas, please feel equally free to tone-down your anti-outsourcing slogans as well.

Am I asking for a bit too much – what’s your say?

Move over outsourcing! Indians are creating jobs for Americans!!

Aseem Rastogi — Tue, 04 Jan 2011 11:21:29 +0000

America has for long been critical of Indians taking up jobs meant to be theirs. So much so that Obama has always criticised companies who first offer jobs to Indians and then their own citizens. He has introduced measures like higher taxes for companies who have branches in India and also brought down incentives for such organizations. All this while he has harped on the fact that American youngsters should work together to overcome their Indian and Chinese counterparts. But protests against this came to fore when the anti–outsourcing bill sent by Obama was not passed in the House.

It has been proved that outsourcing jobs to India hasn’t caused problems for Americans but instead the culprit may be their numerous free trade agreements which have created problems. As is their wont, the Americans have the habit of blaming anyone and everyone for their problems.

According to some interesting statistics, India has created more than 60,000 jobs with an investment of US $26.5 billion in the US over the past 5 years. This involves investments of US $21 billion by 239 Indian companies and 127 greenfield investments worth US $5.5 billion. The top three states for investments include Ohio, California and Texas. Investments have taken place in sectors like IT / ITes, biotech, chemicals, automotive, telecom etc. Indian organizations are increasingly opening up units in the US and also providing large scale employment opportunities in USA giving rise to a strong reverse outsourcing trend.

India has emerged as one of the largest FDI players in the US after the United Arab Emirates. Even after recession when economies were trying to save their money, India was going all out to increase its FDI in countries. If not the main, it was one of the main friends to the US in helping it come out of its recession. The largesse shown by the Indian corporate and the financial support given has never been acknowledged as Indians have never gone for publicity for their actions.

The recent US $10 billion export deals worth for the US employers like Boeing signed by Obama with many Indian leaders is expected to create more than 50,000 jobs in Seattle.

A developing country is calling the shots for the world’s super power. And after this all they do is blast India with their rhetoric on all there is to outsourcing. Only their jealousy can’t make them acknowledge India’s largesse to the world, can it?

Your views on this?

Anti-offshoring bill blocked in Senate – Obama’s anti outsourcing rhetoric stopped in its tracks?

Aseem Rastogi — Thu, 30 Sep 2010 10:04:42 +0000

Barack Obama has been critical of Indian outsourcing industry even before he came to the fold as the President. Be it in education or in the outsourcing industry he has always looked for opportunities to try to better Indians or go one up as the case may be. Nothing wrong with that – Except for the fact that outsourcing is something which even the US companies have encouraged over the years for a variety of reasons like low costs, better skills etc. which are already known.

And so in his intensifying movement against outsourcing, the Anti Offshoring Bill was brought into the picture.

Some of the provisions of the “Creating American Jobs and Ending Offshoring Act” include: –

Providing businesses relief from the employer’s share of the Social Security payroll tax on wages paid to new US employees in the event those jobs had returned to the US from an overseas location
Preventing businesses from ‘deferring’ US taxes on income they make from foreign subsidiaries (Under the current law, US organizations can defer paying tax in such scenarios until that income is brought back to the US)
Providing relief in payroll tax

The bill needed at least 60 votes to be passed. But instead, the Republicans blocked the passing of the bill with a 53-45 vote.

This bill was destined to fail because instead of “Creating Jobs” as it proclaims, it was actually doing completely the opposite. Its approval would have restricted jobs in the US as well as denied tax breaks to US companies which moved jobs overseas.

The bill spoke of protectionist and regulatory policies in an era when the world is becoming a smaller place and globalization is the name of the game. For economies and businesses to grow, these kinds of policies are a strong deterrent. The relief in payroll tax may give some benefit to US companies for hiring locally. But it cannot play a game changer in the outsourcing industry.

It’s nice to know that better sense and vision of thought has prevailed among the majority of the Senate members. But who knows, when someone else comes up with such a bill next time?

Your thoughts?

Could outsourcing to India be at threat not from anyone else but US itself? And NO, it’s not from Obama this time…

Aseem Rastogi — Mon, 27 Sep 2010 05:32:13 +0000

For years India has been the leading outsourcing destination for companies from the US. A number of factors like cheaper labour, lower costs, rising productivity and also the language factor have fuelled a boom in this sector. The recent speeches by Obama against it and also Philippines rise an alternative destination for outsourcing have not caused much of an impact.

But now there’s something bigger happening in the US itself which could put India’s tag as an outsourcing destination in jeopardy.

A number of small IT companies like Saturn Systems, Rural Sourcing, Onshore Technology Services, Cayuse Technologies are among 20 such companies which have sprung up in remote parts of US.

Two important reasons have given way to the growth of these companies: –

Dissatisfaction with India in terms of service, their poor understanding of the work and also their takeaway of jobs meant for the US
Challenges with visas issuing

Many of these companies have bagged a large number of corporate clients, built up very detailed and useful software and also started hiring in large numbers.

On an hourly basis they may cost about 10% – 150% more than their rivals overseas. But if one factors all the additional costs such as quality control and oversight, the rates are comparable. The rates they offer are cheaper than the domestic counterparts. They also have the big advantage of understanding the US regulations much better than their offshore counterparts and thus can be easier to handle.

Top Outsourcing Countries for U.S Companies

India has high outsourcing revenue of $50 billion which is expected to triple in size by 2020. In contrast to this, the rural outsourcing market in the US is worth lesser than $100 million. The interest in this has risen over the past couple of years since US has had its worst recession in years and the government is looking at ways of creating jobs. Factors like cost pressures on the economies of India and China may also help in the development of the rural outsourcing industry.

The biggest problem for the development of rural outsourcing in US is finding the right kind of people and also maintaining such a skilled workforce. But as Randy Willis, Cayuse Technologies says –

"The good news is we can supplement with lower-skilled work while we’re growing the deeper skills."

Do you think these rural outsourcers in US can sustain themselves or prove a threat to the Indian outsourcing story?

Is There A Way To Curb The Increasing Attrition In IT Sector?

Arun Prabhudesai — Mon, 20 Sep 2010 16:54:52 +0000

Submitted by Anonymous Author

Jobs are back ! After a horrendous past 1.5 years of the global economic slowdown which especially saw the jobs in IT industry vanish out of thin air, past few months have seen a complete turnaround. Hiring seems to be following an upward spiral with IT/ITES sector gunning for candidates.

However, the increase in hiring activity from the IT/ITES is not all rosy. This rapid increase in hiring activity is not exactly a function of companies hiring more people, a good part of the hiring activity is the aftermath of the rampant attrition.

With improved market conditions, employees which stuck around with their employers during recessionary times are now looking to cash in on better opportunities in the market. The IT companies are left with no choice then to get aggressive with their recruitment process to fill the empty spots.

Attrition specially in the IT sector has always been relatively high. A lot of it could be attributed to the demand and supply issues for specific technology areas which makes employees job-hopping as a means to improve their pay packets and advance their carriers. But, shouldn’t this be a common problem across industry verticals even though IT sector definitely seems to employ more people

IT of all sectors is primarily a people driven sector. Shouldn’t then be something fundamentally wrong with how IT sector in general treats its employees. Here are some pressing issues that I think plague the IT/ITES sector and account for the unabated attrition

USP For The Customer, But No USP For Employees:

Indian is the hub of IT companies with a majority of them offering a similar portfolio of services. Millions of marketing dollars are spent to communicate the Unique Selling Proposition (USP) or the differentiation factor. While it is extremely critical, can you identify a IT services company in India which has a truly remarkable and differentiated message for prospective employees.

In a company where people determine the survival and growth of the company, there isn’t a well-defined value proposition as to why ‘One should become an employee of the firm’. HCL has recently launched a new strategy “Employee First, Customer Second” which does harp on the unique USP for employees though I can’t comment if it has helped in checking attrition but I think is a good step.

Without a unique employee centric message, I think employee pretty much are left with comparing pay-packets while job-hopping. One might argue that pay-packet is indeed the most critical parameter for job-hopping, I beg to differ based on numerous discussions with people in the sector.

If the employees are able to buy in the fact that their employer does indeed consider its employees central to the growth, I am sure it would have a positive impact

Transparency in Appraisals:

Again, this may be an industry agnostic trend but IMO appraisals trigger attrition in IT industry like nothing else does. When co-employees working together are graded differently on their performance appraisals the relative comparison starts. This in itself is not a problem since merit should be rewarded but there is a lack of transparency in communicating the difference in performance of two different employees.

Even if reasons are provided, why should they be provided pretty much at the fag end of the appraisal period when the employee cannot remedy any shortcomings.

Periodic appraisals or for that matter, informal discussions could be used to highlight employee specific shortcomings so that they don’t feel cheated during appraisals. An employee who was not told of any shortcomings for a major part of the year might find it hard to digest his/her team member getting rewarded better

Cost to acquire is always higher than cost to retain

This is one aspect which fails to make sense to me. To put this in perspective, salary hikes are generally a function of percentage of current salary. So, each appraisal cycle employees receive a % increase in their current salary.

The problem with this is that most of the times the revised salary will never mimic the market value for the employee’s skill set and experience. No wonder the employee is going to consider an exit strategy. Companies seldom negotiate terms with existing employees specially in terms of salaries which I fail to understand.

Cost of acquisition of resource to replace an outgoing candidate is in all probability higher than it could have been if the company would have kept the salary hike in sync with the market value if not exact. At the end of the day, they are going to shell out the same amount or even more to bring in a replacement and lose an employee who they had already had

There could be hundreds of other reasons including the opportunity for employees to take up different roles and such but then those might often need personalization at individual level. I am not saying that the reasons cited here have a clear cut solution and remedial actions with respect to these reasons could help curb inflation.

However, from a organizational perspective I think these are some macro level constraints which could be worked upon to increase employee retention. What do you think ?