3 articles on outsourcing
3 articles on outsourcing
Date: Thursday, August 09, 2007 3:24 AM
<<<<< JOB DESTRUCTION NEWSLETTER No. 1739 -- 8/09/2007 >>>>>
Two Businessweek articles on outsourcing have some interesting information,
like for instance the rise of Estonia as a center of outsourcing (this is no
joke!). These three things really caught my eye.
(1)
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.
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.
I have been saying for years that Indian bodyshops are racist because they
only hire Indian nationals of the Brahmin caste. They don't change their
hiring habits when they move to the U.S. either. Of course I get called a
xenophobe for saying such things, so it's nice to see an Indian writer say it
for me this time. It never seizes to amaze me that companies like this can get
away with such blatant sexism, racism, and ageism just because they are
foreign owned.
The mainstream media never gets tired of ignoring the routine discrimination
practiced by the Indian bodyshops. As an example, this propaganda masquerading
as journalism appears in Fortune Magazine and CNN:
"Indian call center lands in Ohio".
It would be easy to imagine Reno, Ohio, as the type of place that
would be hit hardest by outsourcing - a small American town losing
out to the invisible hand shifting jobs to places like Bangalore
and Guangzhou. Instead, outsourcing is bringing the jobs to Reno.
Across the street from an Army Reserve center and next to a farm,
a customer-service call center hums, its 250 workers answering
phones for online travel agency Expedia. The center's owner?
Indian conglomerate Tata Group.
That article gives the false impression that the Reno office is full of
American workers. I would have to see it to believe it because Tata isn't
about to hire an office full of diverse Americans who are black, white,
Hispanic etc. Anyone they hire will be from India and they won't have blonde
hair or blue eyes -- and most importantly none of African descent.
Brahmins consider dark skinned Africans as sub-human which is why in India
they are called "untouchables".
(2)
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.
We have all heard the blurbs in the news about the huge numbers of engineers
that India graduates. Those scare statistics are used to justify H-1B
increases and to denigrate Americans. So here is the reality: not all of the
Indians working at Tata are geniuses, and in fact many of them aren't even
engineers with PhD degrees.
(3)
The consulting firm says that by 2010 about 30% of Fortune 500
enterprises will outsource to three or more countries, from less
than 10% today.
Hopefully this is wrong because if it's true it means that the number of jobs
we have lost to outsourcing is just the beginning of a stampede.
Gartner research says that in less than three years the number of companies
that outsource will triple.
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.businessweek.com/globalbiz/content/aug2007/gb2007086_988535.htm
Asia August 6, 2007, 7:49AM EST text size: TT Is the Party Over for Indian
Outsourcers?
Infosys, TCS, and Wipro still rake in profits, but they face challenges
ranging from a stronger rupee to the likes of IBM and Accenture romping on
their home turf by Manjeet Kripalani
In 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.
Diminishing Returns
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."
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.
Outsiders' Edge
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."
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."
Kripalani is BusinessWeek's Mumbai bureau chief.
With Nandini Lakshman in Mumbai
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://www.businessweek.com/globalbiz/content/aug2007/gb2007086_988535.htm
News Analysis July 31, 2007, 12:01AM EST text size: TT The Outsourcing
Upstarts Parts of Eastern Europe, Africa, and the Middle East are vying to
become new offshoring hubs and nudging aside established players by Rachael
King
In 2000, when employment-screening service provider HireRight was looking for
a low-cost locale for software development, the Irvine (Calif.) company turned
to an unlikely destination: Estonia. The Baltic nation hasn't traditionally
been thought of as a hotbed of tech talent, but it presented HireRight with a
pool of well-educated, tech-savvy workers; a modern telecommunications
infrastructure; and costs that were 2.5 to 3 times lower than they'd find in
the U.S. "It's very easy to do business in Estonia. We didn't have any
roadblocks at all," says Stefano Malnati, vice-president for engineering at
HireRight.
The secret's out. Estonia has become a target of several other companies
hoping to take operations offshore at the right price. Internet calling
company Skype has set up shop in Estonia's capital city, Tallinn, home to the
largest office of the eBay (EBAY) subsidiary. Estonia has become such an
attractive destination that this year it made its debut at No. 15 on A.T.
Kearney's list of the top 50 global offshore outsourcing locations, beating
out more established countries such as Russia, Argentina, and Canada.
Very Competitive Market
Estonia is just one of many countries learning from the example set by India,
which remains the top outsourcing destination on A.T. Kearney's list, and the
country is eager to carve out a piece of the bulging market for offshore
outsourcing services. The global market for shared services and outsourcing is
expected to grow to $1.43 trillion by the end of 2009, from $930 billion in
2006, according to a report released this month by consultancy Frost &
Sullivan. Globally, companies spent about $233 billion on IT outsourcing in
2006.
Offshoring upstarts are making so many inroads, in fact, that by 2012, they'll
significantly dilute India's dominance, says consultancy Gartner (IT). The
consulting firm says that by 2010 about 30% of Fortune 500 enterprises will
outsource to three or more countries, from less than 10% today. "So many
governments have realized what an opportunity this is and there's a lot of
effort being spent in promoting their countries to the market," says Johan
Gott, manager of A.T. Kearney's Global Services Location Index.
The jockeying has become so intense, and the field so wide, that the big
challenge facing many new entrants isn't just getting established as an
offshoring hub but hanging onto that distinction. Since 2005, when A.T.
Kearney last compiled its list, it has added 10 new countries, including
Latvia, Uruguay, Mauritius, Lithuania, Sri Lanka, Pakistan, Morocco, Senegal,
and Ukraine. Four of those countries ranked in the top 25 in the
2007 list, released in March.
Lowering the Bottom Line
Becoming and remaining an attractive outsourcing location depends on a number
of factors, including language and education skills and the reliability of a
nation's telecommunications infrastructure. At the heart of most outsourcing
deals, though, is lower cost. So when A.T. Kearney puts together its list, it
gives a 40% weighting to the financial attractiveness of a country, taking
into account the cost of wages, infrastructure, and taxes. Vietnam and
Pakistan, for instance, are even more financially attractive than India,
according to A.T. Kearney. Conversely, high costs are the primary reason that
countries including Ireland, the U.S., and Canada are slipping in the
rankings.
In fact, the recent appreciation of certain foreign currencies in relation to
the U.S. dollar has begun to affect corporate decisions to outsource or set up
their own operations in certain countries. U.S. companies have long outsourced
work to Canada, where they've enjoyed a similar business environment along
with a 20% reduction in labor costs because of the exchange rate. But the
appreciation of the Canadian dollar has wiped out most of those savings and
some U.S. companies are wondering why they should go to Canada if they can get
the same thing locally without having to cross a border, says A.T. Kearney's
Gott.
Besides costs, considerations include the education and language skills of
workers, the availability of labor, and attrition risk. A country's economic
and political environment and the quality of its infrastructure also factor
into outsourcing decisions. Some emerging countries may not appeal to U.S.
companies as outsourcing destinations but may find markets in other parts of
the world. For instance, the appeal of Pakistan's IT workforce of 90,000
people has been overshadowed by post-September 11 security concerns. "It's
fallen off the radar screen of U.S. buyers," says Frances Karamouzis, vice-
president for research at Gartner. Other analysts say there is still a market
for Pakistan's services in the Middle East. And countries such as Senegal and
Morocco are becoming attractive places for French-language call-center
outsourcing for Francophone Europe.
Infrastructure Is Key
HireRight found it easy to do business in Estonia in part because of its
political and economic environment, as well as its infrastructure and cultural
affinity. Estonia has invested significant resources in improving its
technology infrastructure since it gained independence from the Soviet Union
in 1991. During the late '90s, the country began modernizing its
telecommunications infrastructure and providing Internet access and computer
labs for schools.
Estonia's Baltic neighbors, Latvia and Lithuania, also former members of the
USSR, have undertaken similar initiatives. Since the late '90s, there's been a
conscious effort on the part of all three governments to use technology to
transform economies, according to research from VTT Technical Research Centre
of Finland. "Most countries were trying to attract tourism and build a
manufacturing economy, but locations like India have shown them that you can
have a vibrant services economy that is more vibrant than a manufacturing
economy," says Atul Vashistha, chief executive of management consultancy
NeoIT.com and co-author of the book The Offshore Nation.
Building a vibrant services economy, though, often takes buy-in from the
government. India, for instance, knew it needed to overcome cumbersome
government policies and procedures and poor communications infrastructure to
become a successful outsourcing destination (see BusinessWeek.com, 3/19/07,
"The Trouble with India"). In 1991, it created an autonomous agency known as
the Software Technology Parks of India under the Ministry of Communication &
Information Technology. The agency helps provide the technology infrastructure
for companies that want to do business in India and serves as a liaison
between government and industry. It also helps provide tax breaks and other
incentives for doing business in India.
Kenya's TEAMS
Government support is crucial, given the significant investment in
communications systems and liberalization of the telecom sector. Kenya, for
instance, is trying to become a destination for business process and IT
outsourcing. The Kenyan government has worked in recent years to liberalize
its telecom sector, which has lured more operators and helped drive telecom
services prices down by 70% in a short time, according to the World Bank.
Yet the country relies on satellite connections to link to the rest of the
world. That makes it costly for outsourcers to do business. "Lack of high-
capacity bandwidth connectivity has limited Kenya from exploiting its full
potential," Mutahi Kagwe, Kenya's Minister for Information & Communications,
said in a July speech at the Kenya College of Communications Technology. So
Kenya's government has collaborated with the United Arab Emirates to install
The East African Marine Systems (TEAMS), a submarine cable from Mombasa to
Fujairah in the UAE that will give Kenya affordable high-capacity bandwidth.
Kenya will need to address not only telecom issues but also the readiness of
its labor force. "If I wanted to have 150 people there tomorrow, it would take
six or seven months to hire that amount of skilled people with business
acumen," says Gartner's Karamouzis.
In many of these emerging outsourcing countries, the lack of available labor
could eventually hinder growth. In fact, that's one of the challenges facing
HireRight in Estonia. "The talent pool is not very big," says HireRight's
Malnati, who says that HireRight now sees more competitors for talent. Yet,
instead of pulling up stakes and moving to another destination, HireRight is
trying to maintain its low attrition rates by giving Estonian employees
incentives such as inviting them to spend time at its headquarters in Irvine.
A winter trip from frigid Tallinn to sunny Southern California, Malnati says,
can do wonders for employee retention.
And the interest from more companies like HireRight may even boost Estonia a
few rungs in the outsourcing rankings.
Check out a slide show of outsourcing upstarts.
+++++++++++++++++++++++++++++++++++++++++++++++++++
http://money.cnn.com/magazines/fortune/fortune_archive/2007/08/06/100141303/index.htm?cnn=yes
Indian call center lands in Ohio
More foreign companies are finding that hiring Americans offers distinct
advantages, reports Fortune's Jia Lynn Yang.
By Jia Lynn Yang, Fortune writer-reporter August 3 2007: 5:49 AM EDT (Fortune
Magazine) -- It would be easy to imagine Reno, Ohio, as the type of place that
would be hit hardest by outsourcing - a small American town losing out to the
invisible hand shifting jobs to places like Bangalore and Guangzhou. Instead,
outsourcing is bringing the jobs to Reno. Across the street from an Army
Reserve center and next to a farm, a customer-service call center hums, its
250 workers answering phones for online travel agency Expedia. The center's
owner? Indian conglomerate Tata Group.
The phenomenon has a name: "insourcing," the term experts are starting to use
when foreign multinationals open offices on U.S. soil and hire Americans, at a
higher price, to do the very jobs they once lured overseas.
In this case the center in Reno is targeted toward companies willing to pay a
premium - its workers there cost up to 40 percent more than their counterparts
in India - to give their U.S. customers a more culturally fluent, less
frustrating 1-800 experience. (No more hearing someone read from a script ten
time zones away.)
Tata, which is based in Mumbai, established its Reno roots last year when its
business services unit, SerWizSol, bought the call-center business of travel-
processing firm TRX; the deal also gave it a call center in Milton, Fla. "We
want to be able to say to a client, If there's a piece [of call-center
operations] you want to keep in America, we can do that for you," says Ricardo
Layun, head of U.S. operations for SerWizSol.
Multinational corporations, of course, have been hanging shingles in the U.S.
for years. According to the Organization for International Investment, firms
headquartered abroad employ 5.1 million Americans in their U.S.
offices. But while these jobs have typically been in manufacturing (think
German carmakers' factories in the South), the mix is changing, and more
companies are finding that hiring Americans offers distinct advantages.
Some companies feel hearing a fellow American makes callers feel more
comfortable. Other foreign firms think Americans bring a more entrepreneurial
attitude to their work. In Expedia's case, its call-center workers need a firm
grasp on U.S. geography.
Tata is trying hard to make a connection here. The company, which has a
history in India of caring about social causes, has encouraged workers in Reno
to get more involved in the community. There was a Tata float in the local
Thanksgiving parade. Workers recently swept up a playground that had fallen
into disrepair. And when an employee was injured in a car accident, Tata
donated $500 to the family. Christy Rice, senior team leader, says those
efforts demonstrate the biggest difference under the new owners.
"It's less about numbers and more about people," she says.
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