Previously we wrote about:
But besides possible issues regarding affirmative action, recruiting bias and discrimination against certain groups entering the IT industry in India as outlined above, the outsourcing boom has caused a real shortage of IT talent in India. Outsourcing part or all of a firm’s infrastructure management is the trend. Nonetheless, this does not come without some costs, such as the risk the firm takes by doing this in a country where the infrastructure leaves a lot to be desired:
FACTS TO KEEP IN MIND
So what do we know about this outsourcing boom that has led to rapid growth of such firms in India? Let us take some ‘local’ examples such as Infosys, Tata Consulting Services and Wipro.
- Infosys was founded some 25 years ago by Founder of Infosys ‘ N.R.Narain Murthy’ (retired 2006-08-20). Current Chief Executive Officer (CEO) of Infosys is ‘Mr.Nandan Nilkeni;’
- revenue-per-employee for IBM in 2005 was $ 277,002 in contrast to Infosys that made about US$38,000 per employee (NO WONDER IT ENGINEERS ARE CHEAPER in India than in Germany or The Netherlands);
- The market capitalisation-to-revenue ratio in 2005-06 is as follows:
10.21 for Infosys,
8.49 for Wipro,
7.22 for Tata Consulting Services,
1.42 for IBM,
1.47 for Accenture and
0.7 for EDS;
The first three are all Indian success stories, the latter three in the above list are international firms.
- Infosys Technologies’ growth was generated from the following business lines during 2005-06:
54% “development and maintenance”
4% “business process management”, and
1.8% “engineering services.”
Hence, most growth is still generated in the price sensitive and low margin development and maintenance area. Something needs to be done to move up the value chain and, most importantly, justify Infosys Technologies’ comparatively high capitalization-to-revenue ratio (10.21 see above);
- within the first nine months of 2006, Infosys has filed for 58 patents in India and the US – however, these were all so-called process innovations in IT services for which the firm would most probably be unable to get a patent for in Europe.
The above indicates that outsourcers in India are generating most of their revenues with so-called business process outsourcing a somewhat commodity-type business that generates low margins. Revenues generated per employee of the amount of US$38,000 suggests low salaries for engineers and, as well, low margins for the firm’s doing this type of work.
In turn, enterprises outsourcing to such providers are well adviced to make sure that they have made their homework before signing the dotted line (CT31RIT0003-Outsourcing-offshoring-risks.pdf). Once they have signed there is little margin for error and the outsourcer is most likely unable to accommodate any changes without a hefty price to make sure a profit can be generated from the business at all.
The above also suggests that knowledge process outsourcing is a new field for these firms in which they must succeed to justify their market capitalization-to-revenue ratio compared to their international competitors. To help gather more business in the knowledge process outsourcing area, prices for these services have been squeezed in recent months. For instance, Europe’s financial industry has benefitted from being offered highly attractive prices for moving some of their IT work to Indian outsourcing firms. With margins being squeezed so much to secure the business needed to foster growth, the question remains if these firms can deliver on their promises CT31RIT0002-Outsourcing-KnowledgeProcesses.pdf), while securing high enough margins.
Apart from the above issues, unless the educational system in India is able to supply the industry with the graduates in engineering and computing science they need, human capital will become even scarcer than it already is today. Previously we pointed out that about 1.7% of school leavers enter the science stream in India compared to 5.9% in China, 13.9% in the U.S. and 23% in South Korea (see also Deshpande, Satish (June 17, 2006). Exclusive Inequalities. Merit, Caste and Discrimination in Indian Higher Education Today. Economic and Political Weekly, 2438-2444).
These statistics indicate that the current outsourcing boom cannot continue at its current pace due to ever greater scarcity of human capital required to feed the boom. Besides, India media has pointed out that falling academic standards represent a serious threat to the country’s economic growth prospects:
Nonetheless, Indian outsoucring firms such as Infosys are changing their strategy to assure the human capital they require. We discuss this in detail in our next posting here: