India's outsourcing bubble is bursting
Summary
Topics
It looks like the global economic turmoil and the dramatic Wall Street meltdown is beginning to hit Bangalore.
Until recently, in India's outsourcing hub it used to be one big Googlefest, with all the pampering and cosseting that employees enjoy at the company's Googleplex headquarters in Silicon Valley.I don't know what the latest from Googleplex is. But in Bangalore, it sure looks like the party is slowing down.
The first sign is in real estate. In a city where residential communities like Silver Manor, Golden Enclave and Platinum City sprouted to house thousands of young, upwardly mobile technology workers, instead of 200 million-rupee homes, developers are now beginning to market 2 million-rupee condominiums.
Departmental stores sport 'sale' signs every other week as credit-card-happy tech workers are cooling off consumption.In India's top management schools, including the Bangalore branch of the Indian Institute of Management, technology outsourcing firms, multinationals and Wall Street banks used to slug it out for Day Zero spots during Placement Week. For students in the graduating class, that exercise is months away. But the schools are already planning to offset an expected slowdown in placements by inviting more companies.
The collapse of top US financial firms will cause a dramatic slowdown in hiring among outsourcing companies. The banking, financial services and insurance sectors account for 40 per cent of revenues for India's $52 billion outsourcing industry (as of 2007-2008).
Firms such as now-bankrupt Lehman Brothers and bought-out Merrill Lynch were big customers and provided millions of dollars worth of lucrative contracts to Indian technology services companies.
Consequently, in the past home-grown Indian outsourcing companies grew by impressive numbers. Infosys and Wipro, the big two employers in Bangalore, were each hiring 10,000 employees or more during recent years. Such spectacular ramp-ups are unlikely to recur any time soon. One large call centre with European and US customers is now refusing to hire anybody that does not stay within a five-mile radius of their centers: the costs are just too high.
For tech employees, jobs no longer come with a lifetime guarantee. Companies are shedding people in small numbers and keeping their actions under the radar. The dreaded pink slips have arrived in Bangalore.
The biggest indicator of the slowdown is the salaries and raises. It used to be acceptable to have lateral hires ask and get 30 per cent increases on their previous salaries. Annual hikes have varied between 15 to 40 per cent in the good years. All that is now a thing of the past. Wage increases are now down to more realistic, single-digit numbers.
A Bangalore-based headhunter whose job used to be hunting down and luring top managers at outsourcing firms with juicy offers from rivals says the role is reversed. She is the one who is now hounded by anxious managers looking to check out the job market.To survive the slowdown, outsourcing companies will have to learn to be thrifty. The successful ones have already been doing this. At Wipro, legend has it that chairman Azim Premji would ask that toilet paper be rationed, and insist employees switch off lights and air conditioners when leaving a room.
In fact, Premji, one of India's richest men by virtue of his share in Wipro, apparently practices frugality to the extent that he orders 'by-two' samosas in the office café. 'By-two' is a famous local habit, quickly adopted by newcomers, of splitting one order of anything (coffee to soup) between two people to save on costs.
More such prudence will become commonplace as businesses weather the economic storm.
It may not all be bad news, though.
Some outsourcing companies see a bright lining to the cloud--lower attrition rates. In the last few years, Bangalore firms have averaged attrition rates between 20 to 40 per cent, the highest in any Indian city. The head of the business process outsourcing unit of Wipro once told me the unit churned its entire workforce every four years or so. If attrition rates were in the low two-digits, that used to be a talking and selling point for the company. Expect this to become the norm in future.Indian outsourcers may also be able to prospect for gold amid the rubble of the collapsed Wall Street firms. Some analysts seem to think that, as the fall of financial firms leads to business slowdowns for the Accentures and IBMs in the US and Europe, they may move more work to lower-cost offshore locations such as Bangalore.
Still, the day may not be far off when outsourcing companies offer their employees reflective yoga instead of salsa dancing. And then the Bangalore workforce will go back to feeling like average tech workers instead of modern-day Maharajas.
Talkback Most Recent of 80 Talkback(s)
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India's outsourcing bubble is bursting
Probably because outsourcing doesn't work.
Loverock Davidson30th Sep 2008 -
Really?
Then how did Ross Perot make his millions?
Cold reality is that IT is a fast moving moving field and those that try to do it all in house get left in the dust.
IT_User30th Sep 2008 -
Really!
If you notice those outsourcing firms always get their
contracts canceled. The quality just isn't there and
employers know this.Loverock Davidson30th Sep 2008 -
No
They don't "always" get their contracts canceled. They don't even "usually" get their contracts canceled. The largest of the Fortune 500 learned years ago that running an unrelated business within their own business is bad business. Companies that can't manage an outsourcer can't run their own IT department either. The IT services sector is alive, well and growing.
I'm not a cheerleader for outsourcers, don't care one way or another. Just sticking to reality. There's a reason they do well.IT_User30th Sep 2008 -
Yes
They usually do get their contracts canceled. Why?
Poor quality. If you don't care about quality,
outsource. Period. If you do, cancel and move the
work back to where it will get done and done
correctly. Simple reality that most companies are now
realizing.
Narg1st Oct 2008 -
Flexibility, not Quality
The trouble with outsourcing is that you lose agility in your business. If your data is in-house, you can have smart staff quickly modify or create a new application that solves an urgent problem. With outsourced data, you have to negotiate the work, write tight requirements, have little oversight of what is happening, and you might not get what you wanted.
I suspect this is one reason why we get massive data leaks from the UK government. When someone wants so new information from the data, it is quicker to dump the whole lot into an unsecure program on a laptop and do it there, than it is to have the outsourcer agree and implement a new application at extra expense. The same problem occurs if you let IBM or one of the big consulting firms to all your data design.
Some people feel that running an IT department isn't part of their core business. That is like saying that their customr and marketing data isn't part of the core business. There is a role for outsourcing, e.g. using hosted servers in someone else's secure datacentre, but you are giving up a lot of flexibility if you limit your company to what an outsourcer offers.
Yes, you can save money that way. You can also save money by turning off the heating. All savings are good, yes?
A.Sinic7th Nov 2008 -
You might at least get the facts straight...
Ross Perot made his fortune with EDS way before outsourcing to India was in vogue. He made a a bunch of money when EDS went public in 1968. Again in 1984 when EDS was bought by General Motors. Then while he was a GM board member, he spoke his mind on how HE thought GM should be running and Roger Smith and other board members got their feathers ruffled to the point where in June 1986, GM bought him out for $700 million. He also made a lot of money doing real estate development in the Dallas/Fort Worth area. He put up the capital for Steve Jobs to start up NeXT Computer in 1986.
Oh and in 1988, he founded Perot Systems.
http://en.wikipedia.org/wiki/Ross_Perot#Business_career
Oh and BTW, EDS has it's own "EDS India" so they aren't really outsourcing to India, just moving jobs from USA to within the same company. I should know, I retired from them last year and several good friends were just downsized last week by "EDS, an HP company".
dinosaur_z6th Nov 2008 -
Long overdue
It's about time. It never should have gained traction in the first place. It makes me cringe everytime I hear out political leaders saying how "education" is how we must compete in the global economy. It has nothing to do with education or talent, its all "where can I hire people for a third world wage"? It why we're in the mess we're in now. Reduce middle class wages here by shifting jobs overseas (to pad excutive pay) and workers here can no longer afford houses. This in turn forces housing values down because "value" is tied to what can(will) people pay for a home. The foreclosures follow, and then the current crisis.
ddmattison30th Sep 2008 -
Thank God the economy is "collapsing"
Everything can start "growing" again after the "collapse".
Time to sweep out the sick greed.
Capitalism will eat itself. Capitalism becomes communism.
If the state bails out the greedy, then you're basically Communists anyway.
fr0thy230th Sep 2008 -
Gulags to come?
If the state bails out the greedy, then you're basically Communists anyway.
The current situation resembles fascism, only because of state ownership of industry. What we can be thankful for is that we don't have the social repression (yet) that goes along with fascism (oh, except on college campuses). Hopefully it'll never come to that.
Mark Miller2nd Oct 2008 -
Fascism
Fascism/Nazism wasn't about state ownership of business. Rather, it was about the state working hand in glove with business, each feeding the other at the expense of the people. So, business is short of labour, the state provides cheap or even slave workers. The party needs funds, business is happy to provide. Workers want unions, business complains and the state stamps them out. Workers are disatisifed with their lot, the state provides someone else to blame (e.g. an ethnic group or foreign power). The army needs new technology, business is happy to help. The unemployed need jobs, business and the state put them all to work. Some people dont like all this undercover collaboration, well they need to be silenced.
What is scary about fascism is that it can be very efficient. Unlike communism, there is much less incentive or opportunity for internal corruption, and business can be flexible and innovative without the weight of 5-year plans made by ignorant central authorities.A.Sinic7th Nov 2008 -
not the same thing
communism ≠ socialism ≠ fascism
Look them updinosaur_z6th Nov 2008 -
Re: not the same thing
Communism = Let's give to everyone the same crap.
Socialism = Let's make your pocket flow with money at masses's cost, after all is a pocket socialism !
Fascism = It was already discuted here.
Gradius28th Nov 2008 -
Outsourcing a sign of commoditization
The industry celebrates standardization, but standardization breeds stagnation of innovation in certain aspects of technology. Not to say this is all bad. Standardization creates a space where predictable things can happen, so more systems can interoperate. It also creates commoditization. Skill sets become well defined. Once you've learned the skill set you are qualified to work on the software/equipment. As standardization increases it becomes more and more a matter of "anybody can do this". You can set up predictable training regimes that can churn out hundreds or thousands of people, all qualified to do the same things.
The microcomputing revolution that grew up and came into the data centers, where mainframes once ruled, has matured. There's nothing left to do with it except optimize the same old processes, and optimize personnel costs. Hence outsourcing.
The one ray of hope is, and I know this is quite an audacious statement to make, is that the computer revolution hasn't really happened yet. There is much more to go, but I contend it can't happen with our current model of computing. That's matured. It's time for something new. Centers of innovation are being formed outside of the stagnant corporate and academic worlds, though you have to look for them. They're not high profile. This is long overdue.Mark Miller2nd Oct 2008 -
Bingo
Exactly why the economy is collapsing, people cant pay bills, and boost the economy when their jobs get moved to other countries.
You can call it global competition all you want, but its just the same old slave labor that built this country.
Eventually corporations will run out of 3rd world countries to exploit.
Suicida|3rd Oct 2008
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