Monthly Archives: April 2013

The IT Outsourcing Bandwagon- India & China – who wins the labor market

India and China are long considering the primary and secondary outsourcing countries. While China has a head start  benefiting from  the manufacturing outsourcing boom, India scored big on the IT outsourcing with its huge English speaking skilled graduate pool.  China hurt itself due to lack of English knowledge which it is trying to make up now to level with India at some point.   Communist China in 80s and 90s continued to adopt the policy of keeping English out which immensely helped India entrench itself in an enviable position today.

China continues to invest heavily on all fronts – training its people, providing sops to IT providers, currency devaluation support to keep rates in check, infrastructure support, investing in English language education and vocational training.

No doubt China dominates the hardware market and is flexing its muscles to drive advantages to translate into software side.  It is trying the acquisition route too gobbling up smaller niche firms to forge an entry into western markets.  India’s strength is in IT and software now extending slowly into broader areas within the ambit of outsourcing of IT extended services. However the labor is not cheap anymore – it used to be in the nascent stage, but the values are eroding faster than expected.    India does have  some of the brightest talent in the world that keeps the business leaders to keep going there. Some of the biggest companies in the world have more Indians on their board than Chinese. Look at the silicon valley startups, more and more of them have the Indian connection than Chinese.

What is worrisome is both India and China are not looking at long term prospects to sustain the growth  – growing inflation, increasing wages, infrastructure worries, lack of talents, language barriers, in some cases fraud with its judicial system  a major challenge, lack of governance from NASSCOM are top reasons.   The prospects for growth are tremendous.  By its own admission, NASSCOM predicts another 30 lakh jobs or 3 million jobs will be added in the IT sector by 2020.  That is not a lot of jobs. By adding 3 million jobs,  India will double the workforce that  they have now. 6 million IT jobs may seem a lot. But, it is not. The population of India is well over a billion. The number of IT jobs is below 1% of its population.

Let’s deal with India the outsourcing giant.    In 1990s, IT services in India was the next big thing. There were so many obstacles for industry leaders to get a head start in this businesses.  The IT industry together with NASSCOM did a good job of removing obstacles and created a new breed of industry which is now stable and growing.   It is now an established  industry and considered a cash now that even has been spared from taxation to a large extent.   Here is where the leadership of NASSCOM comes into play.  It needs to be more open and supportive, create a congenial and level playing field for all its stakeholder and create more transparency and offer governance to  surmount new challenges.  The judicial system is a major challenge with most matters settled out of court.  It needs a major revamp.

Both India and China have Outsourcing business as one of its global aspirations to emerge as world leaders by 2020.  To achieve greater success and drive the growth to its advantage both  need to create conducive climate and the overall infrastructure, training and education capabilities  for its IT providers to create products and brands which command a global premium and compete in this emerging market. The only way to do it is to improve their overall capabilities.   As competition from smaller countries heat up, both these giants will have to concede some of their portfolio.  Their near term outlook looks strong.

Has the offshoring boom largely run its course…..

The current resurgence of Manufacturing jobs coming back into US will certainly have its influence on IT outsourcing as well leading to some of the jobs coming back to the US. The statistics in manufacturing is proving the point already. IT Outsourcing was down 33% according to research firm Ovum, that was lowest in 9 years.

Couple of years ago pundits mourned the loss of manufacturing that would never come back. But the tide is turning slowly. Lots of factors are playing an active role in this aspect. Global recession sent business leaders on finding smarter solutions to reduce costs, automation has brought down costs to a good extent, pressure on unions to negotiate has helped drive labour costs down, it brought down pay that was sky rocketing, inflation is in check, cheap loans are common, government grants and subsidies are plenty, real estate is cheap, energy costs are down, market optimism is picking up, companies are hoarding cash and willing to experiment in bringing jobs back in manufacturing and be ready for the next boom when economy gets into full throttle.

This isn’t a blip. It’s the sum of a powerful equation refiguring the global economy. U.S. factories increasingly have access to cheap energy, thanks to oil and gas from the shale boom. For companies outside the U.S., it’s the opposite: high global oil prices translate into costlier fuel for ships and planes, which means some labor savings from low-cost plants in China evaporate when the goods are shipped thousands of miles. And about those low-cost plants: workers from China to India are demanding and getting bigger paychecks, while U.S. companies have won massive concessions from unions over the past decade. Suddenly the math on outsourcing doesn’t look quite as attractive.

The next couple of years will definitely see a rising trend of manufacturing jobs coming back which will pave the way for IT industry to look at this aspect closely some of it for the very same reasons that manufacturing is benefiting from. The cap on H1B more so going into lottery this year will mean companies source more locally. Large IT contractors needs resources onsite, lack of continuity in visa process means more jobs onsite here than offshore. The rising wages in IT sector in India and China is another aspect which is weighing on the minds of business leaders. it is expected to rise upwards of 50% by 2018 which will mean less incentive to offshore considering other costs.

If the market continues to improve leading to more investment here in US and as businesses see growth prospects and invest cash they accumulated during the last few years it will only improve jobs coming back.

There are still pressing factors like talent shortage, visa issues which still encourages near shoring to low-cost locations, cost savings which still seems attractive, new technologies that have severe shortage here while it is available offshore like Big Data, Cloud which are in huge demand now and the fact that today’s business thrives more in a global environment needing 24/7 attention via staffing.

Looking from an optimistic perspective we can as well claim “offshoring has run it course” it time to see winds change its course albeit slowly.

Immigration reform and its influence on IT Outsourcing

This week Mark Zuckerberg, founder of Facebook announced formation of new organization fwd.us

It is co-founded by leaders of USA’s technology community to focus on immigration issues and advocate a bipartisan policy agenda to build the knowledge economy. In my previous blogs I did mention how much IT outsourcing is influenced by this topic, free movement of people back and forth is key to keeping the knowledge economy humming. The statistics of how immigrants shaped the silicon valley is there for all of us to see. It has only increased with lot smaller players now emerging with innovative and cutting edge initiatives.

Unlike other sectors, in a knowledge economy the most important resources are the talented people that we educate and bring into our country. Keeping with us those that we educate in our best of the breed universities will be a big boost to our knowledge sector. Losing those talents to the poor immigration policy is a big loss in our effort to build a knowledge enterprise of the future.

The notion that welcoming immigrants in knowledge sector will take away jobs of the people who are already here has been proved to be wrong in many ways. For every immigrant that we welcome in this knowledge economy it creates two to three American jobs. A good example this year is shutting the doors to qualified immigrants via h1B going lottery way is the worst we can do ourselves to damage our fledging social media revolution which we badly need to boost our economy to grow after a recession. The need to drive down federal deficit means adding to our economy jobs and precious money via taxes, also consider the fact that the immigrants are amongst the hardest working, paying taxes and use less of entitlement that government doles out.

It’s time to think out of the box and accept the true benefits of immigration reforms and exploit it for helping grow out knowledge sector. Why settle for mediocre returns when we can be leaders.

Attrition in IT Outsourcing firms

There is no magic bullet to this problem. This has been a burning issue for several outsourcing firms and many of them have used innovative methods to retain talent. My observations looking for the some of the biggest reasons are manifold. The scorching market for job seekers during the last decade (it has slowed down a bit during the last two years) was among the biggest cause. When there are fewer talented job seekers to fit a rising wave of outsourcing from west, the tendency to jump ship for wage increase is immense, this was so rapid that recruiters often sat outside their outsourcing rivals poaching on their trained pool often just asking for their last payslip and giving them a fat raise and an immediate offer to join. Some firms have been paid the severance that the old employers applied, or dangled carrots in various forms to entice them to quit.

The recruitment teams are not trained as well to screen the candidates, the evaluation was poor to identify bad hires before they start. Sharing of information on why someone left their last job was just not available. All the recruiter was looking for was short cuts to fill their open slots that went begging with billing tied to them for incentives.

If there is one platform all the outsourcing companies join hands it is this one. So much that they have joined forces to share information on candidates via a common database that provides lot more information than the background verification.

Again some level of attrition is expected – somewhere in the range of around 10% is okay since you do want to hire some fresh talent, swap skill sets, etc. However the range of 20% and above which was the case for couple of years steadily is not acceptable. Outsourcing firms typically follow the pyramid model where they want to keep very talented, employees that follow their culture and willing to building a long term career. They welcome resources to leave that are underperforming and those that don’t fit into their scheme of things.

Attrition is also caused by lack of good Infrastructure where an hour to two is spent commuting each way, lack of transportation facilities e.g. Bus, Car, lack of amenities in the buildings, poor leadership on teams, not so meaty assignments where resources get struck with dumb roles just because they continue to be billable and client likes them do the same thing till they need much against their career aspirations. Also remember the resources pool is often in the age group of anywhere from 21 to 35 which forms the highest block and they often are moving targets with marriage or joining spouses, going for higher studies, migrating to other cities or changing professions, venturing into self-employment etc. One more reason is not finding an onsite assignment, come to think of it, a very small percentage of the large pool gets to go onsite, so the rest are left to finding it on their own often moving into firms that won large contracts recently or are known to rotate their resource pool.

The rate of attrition at all levels of outsourcing providers in several hubs has seen a fall in the range of 25-50%, in the last two years, mostly due to a fragile global economy. An uncertain global economic environment, together with cross-currency fluctuation. This has compelled employees to adopt a wait-and-watch policy, leading to a sharp decline in the attrition levels in the IT-BPO sector, which has been grappling with a talent crunch due to a shortage of competent managers at the middle and senior management for quite some time. This has led to a fall in hiring activities, bench strength and a high employee retention rate can been seen at almost across all levels of management.

It has come as a blessing in disguise, considering that human resource is the key to the success of this knowledge-intensive industry. Employees are wary of switching over jobs due to continued apprehensions of the economic slowdown being likely to continue for some more time till the economy really warms up and Europe gets back on its sound footing. The fact that is not likely to happen very soon means outsourced providers can breathe some relief with lower levels of attrition till it lasts.

Bottom-line there is no one good reason why this attrition occurs, often several of the above play a factor, sometime there are one or two dominating factors that nudges the percentage a bit either for good or bad.

Clients can alleviate some of this by providing a conducive environment, treat the consultants on par with their own employees, encourage their consulting pool to achieve the same levels as their own, provide work life balance, conduct surveys to find out what makes them tick, bridge gaps by encouraging visits from both sides, provide rewards and recognition, competitions to encourage their show of talent, rotate resources to keep them motivated – there are many more creative ideas that clients use to keep their consulting pool from their outsourced providers ticking which directly translation into billing efficiencies.

In one of my next blogs I will throw more light on how this subject means hidden costs.

IT Outsourcing – the magic percentage

What is the magic percentage of the IT outsourcing mix ? All firms big and small have found it elusive to decide. You always start small – most firms do so, however once they reach a critical point, they don’t realize when to take a step back and see if they are at optimum. Some don’t even realize they have already crossed the threshold for their set up. The eagerness to benefit from low cost is what kills the golden goose. Once companies see the costs going down rapidly with outsourcing they continue down the path of accelerating, not realizing what they already started to lose e.g. subject matter expertise, skillset that took ages to develop, the leadership and management abilities, local availability against offshore presence, cultural sensitivity, punctuality, time to market, competing with their peers etc. these are just a few.

It is not often that you come across CFO’s who often dictate the percentage with an eye on the balance sheet than on the continuity of the business while the CIO / CTO and their business folks reel under the duress of taking a hit and people at the fore front of execution and customer service pay the price. It is important to review once you reach the percentage that is optimal for business. For call centers it can be high, for KPO / BPO type of arrangements it can be larger than other modes of IT outsourcing with some transition and monitoring of key SLAs. However staff augmentation in complex technical and niche areas like product development, testing, Research and Development, prototyping, Engineering are some of key examples to pay attention to and stop when you reach the critical mass. It is easy to fall a prey to short term financial goals rather then seek a long term objective of sustaining and growing the business using IT outsourcing as a tool.

There are several cases where clients went renewing their 5 to 10 year contracts couple of times only to realize they lost everything they had connected with IT, they very own competitive spirit, time to market, raising IT budgets and were at the mercy of their IT outsourced providers who had more interest in making money than their clients ability to prosper. For them the mantra was simple, if not you I have dozens lining up like you to save. Then these companies go back to their drawing board, invest in high end consulting to draw a roadmap which will take several years of investment to gradually undo the damage they did to themselves.

Collaboration tools do help to achieve higher percentages however there is a limit on exploiting it even with high levels of maturity. Also consider the time zones. If your resource are on the other side of the globe, and though work your time zone to some extent that is not enough to guarantee full-fledged support you need and is not an excuse to ratchet up the percentage outsourcing.

If you are already in an outsourced environ revisit your optimal percentage, and make sure you have checks and balances to stay there and leverage efficiencies. Having a bloated outsourced environment will have hidden cost, instead work your tolerance given the nature of business and the responsiveness you need. Average ratio of your full time employees to contractors should be monitored closely to ensure the span of control is not sacrificed, it can be high in some areas like call center, KPO, BPO where supervision is not entirely needed with some management support, while collaborative development, R and D, Testing, Training and other niche areas needs ratios to be capped to achieve efficiencies and benefit from outsourcing.

Types of contracts in IT outsourcing

There are 3 basic types of outsourcing agreements

a) The Standard Vendor Agreement – for one-off or pilot or long terms, sometimes called MSA or Master Services Agreement

b) The Partnership – for short-term projects it could be fixed price bid, or staff augmentation etc.

c) The Alliance – for long-term projects – sometimes called Relationship, Technology partner as well.

Many of the contracts fall under one of these umbrella for sure. There are many more by different names that both clients and their outsourced providers have tried to come up with but they all are different names to help them socialize with their fraternity.

The standard vendor agreement is the most common – most often it covers a gamut of services and could have sub-contracts for various services with a rate table. I mentioned on my previous blogs how rates work – tiered, blended etc.

Some firms give up their infrastructure for upkeep with defined SLAs while keeping the application development under their control for better control of their products and applications. Sometimes the assets are also transferred or assets are owned by the principals while outsourced providers help manage them. Legacy applications are at times outsourced completely for maintenance with SLAs to concentrate on core production platforms and services. KPO and BPO are again best taken up differently with more specific SLAs. Call centers being unique need a separate set of SLAs as well.

The bottom line is to do as much research as possible upfront before signing these contracts. Start slow and don’t fall into the trap of signing an omnibus contract. The cookie cutter approach of one rate fits all services is not worthy though some IT providers are selling it. Engage a consultant, do your due diligence and go with what is appropriate for your business keeping in mind the size, complexity, maturity, experience, depth of the IT provider etc.

How IT Outsourcing global rates play

Many India pure play firms negotiate global rates – the same rates apply wherever the resources work under T&M, staff augmentation type of contracts. Once agreed upon IT firms work on a ratio that will help them drive towards making sure they can still make profits in the competitive market.

The rates are broadly anywhere from 75% offshore and rest on site or even lower at times to 90% offshore depending on complexity. Most operations nature of work is higher in offshore ratio while more complex development will have around 60% or above. support nature of work falls somewhere in between.

it is important to understand the contract and keep an eye on the ratio on the leverage is not unduly benefiting one side. ofcourse there are always ways to negotiate. Also checking weekly or monthly on how the ratios prevail is a good idea.

Lot depends on how big the contract is. Smaller contracts don’t make a lot of difference while large contracts with more than thousand resources will make a good impact on ratios.

Initially the ratio on site would be higher to gain knowledge and as the learning curve improves the ratios start to level off to contractual levels.