India's outsourcing bubble is bursting

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.