[OT] Offshore outsourcing....again
From: John Smith (a_at_nonymous.com)
Date: 05/09/04
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Date: Sun, 9 May 2004 15:12:41 -0400
I have not yet seen an off-shored project in the financial services sector
come in on-time and on-budget, not even if it was the 3rd or 4th project
between the same pair of customer-supplier companies. For most projects I've
seen the final all-in cost is about what it realistically would have cost
done domestically.
http://www.nytimes.com/2004/05/09/business/yourmoney/09indi.html
May 9, 2004
As a Center for Outsourcing, India Could Be Losing Its Edge
By NOAM SCHEIBER
In early April, Infosys Technologies, an Indian outsourcing firm, had a
party to celebrate reaching $1 billion in annual revenue. It gathered nearly
10,000 employees under a tent on its Bangalore campus and plied them with
food and entertainment.
The company also distributed some $23 million in bonuses. "And we're doing a
lot of other things to retain employees," said Stephen R. Pratt, chief
executive of the Infosys consulting arm in the United States.
Infosys is hardly the only Indian company making a serious effort to attract
and keep employees. Over all, according to a recent survey by Hewitt
Associates, the consulting group, wages in the country's major outsourcing
sectors have been rising by close to 15 percent a year.
The reason is increased competition for labor, thanks in large part to
American companies' rush to outsource work offshore. In fact, the
competition has become so fierce that typical Indian operations in business
processing - including call centers and offices handling payroll, accounting
and human-resources functions - can expect to lose 15 to 20 percent of their
work forces each year, versus single-digit percentage losses in the late
1990's.
The surge in offshore outsourcing has attracted the attention of American
politicians worried about the loss of jobs at home. In late April, the
presidential campaign of Senator John Kerry announced its "Jobs First" tour
and said, "While the president and his economic advisers have insisted that
outsourcing benefits America, a record number of U.S. workers have lost
their jobs to countries overseas."
But the data from India show that, to some extent, the offshore outsourcing
phenomenon may be self-correcting. Though outsourcing shows no sign of
fading, rising wages and rapid turnover in Indian hubs may reduce the
savings American companies reap when they send work abroad.
The stiffest competition for offshore labor tends to occur in India's
so-called first-tier cities: Bangalore, Mumbai, New Delhi and Hyderabad. In
some sectors of the outsourcing market, attrition rates are 50 to 75 percent
a year, according to Sunil Mehta, vice president of the National Association
of Software and Service Companies, or Nasscom, an industry trade group in
India.
Managers in the business-processing sector, in particular, have difficulties
keeping workers. A typical outsourcing contract sends workers from an Indian
company "onshore" - to the American company's headquarters - while the
outsourcing project is starting. The problem is that the onshore experience
becomes a valuable credential in the American or Indian labor markets.
"Many don't want to go back offshore," said William S. McCarter, chief
operating officer and executive vice president of ePolicy Solutions, a
company based in Torrance, Calif., that focuses on Web-based technology
services. "Or if they do go back offshore, they have a marketable skill to
churn in the Indian market."
The situation became so dire last spring that, according to a report in
India in The Business Standard, the top outsourcing firms in business
processing reached an informal agreement not to poach employees from one
another. Other retention measures included clauses in employment contracts
to require each new worker to observe a three-month cooling-off period after
the hiring date before accepting another job offer.
Not surprisingly, wage increases have been the most common method of
attracting and retaining employees. For example, Wipro, the big outsourcing
company, gave its 24,000 employees in India an average raise of 10 percent
last October; the increases were as high as 15 percent for managers. These
costs have largely come out of its bottom line - denting its operating
margin by 1 percentage point to 1.5 percentage points a quarter - rather
than showing up as higher prices. (The leading Indian outsourcing companies
have operating margins of 20 percent to 25 percent.)
But part of Wipro's higher costs have been passed along. "Certain customers
got a price increase" last quarter, said Sridhar Ramasubbu, a company
spokesman.
Indian executives like Jaithirth Rao, the chief executive of the MphasiS, an
outsourcing company, and the current chairman of Nasscom, argue that the
labor shortage, especially for middle managers, will be temporary. Local
universities have already begun expanding the enrollment in two- and
four-year business programs, according to outsourcing company executives.
There are, to be sure, pockets of the country where less-skilled technical
workers have difficulty finding jobs. But there are reasons to believe that
India's shortage of highly skilled labor could be stubborn. A recent Nasscom
report projected that if India continued to produce college graduates at the
current rate, demand would exceed supply by 20 percent in the main
outsourcing markets by 2008.
"Candidly, we see a labor problem in India right now," said Dan Zadorozny,
the vice president for applications delivery at Electronic Data Systems, the
big seller of computer services that is based in the United States but has
operations in India.
Even with wages rising 15 percent a year, the cost for a computer programmer
or a middle manager in India remains a small fraction of that for a similar
employee in the United States. A programmer with three to five years'
experience makes about $25,000 in India but about $65,000 in the United
States. But the wage savings from offshore outsourcing have never translated
directly into overall savings; typically, an outsourcing contract between an
American company and an Indian vendor saves less than half as much as the
wage differences would imply.
Praba Manivasager, the chief executive of Renodis Global Outsourcing
Solutions, a company based in Minneapolis that advises clients on
outsourcing projects, sees two reasons for that. The first involves the
costs of the transition from doing work in-house to offshore - usually a
one- to two-year process. During the transition, employees of vendors based
in India must work in the United States. The second involves the cost of
maintaining the relationship. Employees of the American company must make
frequent trips to India, and the vendor needs some continued American
presence.
"The vendor says, 'We'll save 40 to 60 percent; we'll give you such a great
rate - $22 or whatever,' '' Mr. Manivasager said, referring to hourly wages.
"But if the onshore rate is $50 to $55, and you have half the people
onshore, the savings aren't going to be what are advertised."
IT is not as if offshore outsourcing is going away. Indian outsourcing
companies may simply shift operations to cities like Nasik and Ponticherry,
where wage inflation is relatively mild. Others may outsource work offshore
themselves, to China, Southeast Asia and Eastern Europe. Still, most experts
say India is years ahead of countries like China in its workers' facility
with English, its telecommunications and the sophistication of its legal
system
Another possibility is that American companies may turn increasingly to
global companies based in the United States - like I.B.M. Business
Consulting Services, E.D.S. and Hewlett-Packard. These companies have the
advantage of locations in dozens of countries around the world - E.D.S. is
in 57 - so they can constantly shift work to the most efficient destination.
That trend may bring a measure of relief to American workers. Of E.D.S.'s
135,000 global employees, nearly half are based in the United States. Wipro,
by contrast, bases more than 80 percent of its 28,000 employees in India.
(The difference is that E.D.S. uses American workers for the onshore
component of its American contracts; Wipro uses Indian workers, dispatching
them to the United States when necessary.)
If the increasing competitiveness of the Indian labor market begins to
benefit companies like E.D.S. and I.B.M., outsourcing may one day no longer
be a dirty word in a presidential election.
(c) 2004, New York Times.
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