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Why Fall of Indian IT Companies is imminent?

Why Fall of Indian IT Companies is imminent?

Last updated on: May 29, 2011 at 11:05 pm by Desh Kapoor

Why Fall of Indian IT Companies is imminent? 2011-05-29T23:05:52-05:00 Desh Kapoor

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On a typical project done by an Indian IT company, the resources in India are charged at an average of $25-35/hr. Some years back it used to be $45, but it has steadily fallen. The other component are the resources from Indian practice working onsite. These resources are charged around $75-145 / hr – depending on which company it is. Then come the resources hired in US and residing in US. These come upwards of $100/hr. Except for the “Consulting practices” of WIPRO and Infosys, these resources are charged at for a maximum rate of $175. For most part, the rate is in lower 100s.

This is the resource mix for most projects done in the US. And US is the largest market for most of the Indian IT companies of any respectable size. Such is the dependence on US and Western Europe markets that companies like Infosys until 2 years ago did not even consider India as a market to do work. There was no “India practice”, even though Infosys was the largest employer in Indian IT industry. It is a strange dichotomy. While foreign consulting companies were talking internally of BRIC countries being the future growth markets and slowly entering the Government sector, India’s own IT “giants” had no love for the home turf.

Consulting vs Offshoring

There is another area that is worth looking at – Consulting. Consulting in US versus Offshore work have two different models. Consulting works on providing Value, while Offshore works on providing Lower cost work. A project lifecycle includes a lot of steps – typically they are: Analysis > Design > Implementation > Testing > Go live > Post Go Live support.

Of these first two phases and the overall management of the third (i.e.; Implementation) are the “High End” in terms of cost and value. During the implementation, there are some areas which are highly process centric and some more code/configuration centric. Of these two, Process centric implementation steps deliver higher value.

Typically speaking, the Indian IT companies have very poor showing in the higher end areas. They generally operate in the lower end areas – work that is repetitive or has lower strategic value.

The higher end areas is where the “Big 4” consulting firms like IBM Business Consulting, Accenture etc and the boutique firms – with special skills in specific areas operate. They are typically US based. The Big 4 like IBM and Accenture are a strong play in both the segments now – Consulting and Offshore. While Consulting is a Value business, Offshore is a Cost business. The distinction is like Macy’s vs Dollar Store.

Most of the work in Indian IT companies is of the Offshore type. Even when they send people to US, they are not suited for higher end work. An Indian employee on deputation to US client site is usually managing the offshore team or typically closely interacting with the client team to do daily testing, requirements gathering and configuration work. It helps for the client to keep a balance of seeing some of the workers daily and routing mission critical work to them.

Since the average rate of Indian staffers that is charged has reduced over time to a very low – $25-35 an hour, there is not enough room to pay high salaries to Indian employees. But then, the attrition rates have been to the tune of 20-25%. Which means statistically, every 4-5 years the entire lower to middle management either moves up or leaves. Only so many people can move up, because then they are an overhead (as they earn nothing), while the rates for those who earn money is going down every year.

When you take into account that the management workers in these IT companies are really not earning the revenues for most part – since they are into project delivery or team management or resourcing (activities which aren’t billed on a client project) – and that things are achanging in the immigration policy and the Rupee is getting weaker versus the Rupee; one will see that the profit margins of the Indian IT companies will be hit badly.

Also, as the latest reports suggest, the US Immigration is coming hard on many of the practices followed by the IT companies. (Infosys to counter visa misuse charge in US) How they keep sending H1 workers or people on business visa to do actual work (not allowed on such a visa) – and how the US Homeland Agency is looking to charge the companies for all that; then you see that things can change a lot.

Unless the Indian IT companies start hiring US based people – Green Card holders and US Citizens – to represent them the way the H1 workers did, the trend may be towards a higher India-based workers ratio. For our discussion purposes, keeping the number of workers to be the same overall (no disproportionately higher hiring happens in the US and the US based workers are reduced while India-based are increased) – one finds that such a proportional change will be disastrous for the Indian IT companies. In such a scenario – Rupee goes up from 46/dollar to 44/dollar and the proportion of India/US 4:6 to 7:3 (which is what it might come to) – the decrease in revenue (as per my quick and dirty model) could be to the tune of over 30%!

US Immigration as a Strategy Pillar: Intriguingly, although no one ever acknowledges it, the most important pillar in the entire strategy of Indian IT companies was the US Immigration policy and more importantly its implementation. That is scary. Because your future depends on something that is not within your control. Suppose, US decides that all the immigration for next 1 year will be frozen – because some terror attack happens or the economy tanks – then what??

Over the years, has any Indian IT company invested in creating viable technology that obviates an employee from being in front of the client all the time? Has any company – in the real sense – created ANY standards (project management and delivery related)? I have been with the Big 3 of the Indian IT, and I can say that except for one, where its US subsidiary forced it (and the Indian Parent employees didn’t really cared much for it) – no other company had anything that promoted standards in Project Delvery. Nothing!! Yes, its all there on the website… and in the CEOs speeches, but on ground there is nothing. If you have worked at say, Deloitte or IBM, you won’t even miss those standard tools. But they matter. When your model requires people to be in another hemisphere, then a consistent set of standards help.

How about interaction technology? People are using Lotus Notes or MS Outlook, and probably Sametime and MS Office Communicator; but that isn’t even standard and used commonly across everywhere. No one has even invested in a good desktop sharing technology. A few months back, a Chandigarh based company sold a cutting edge conferencing online product – DimDim.com – to Salesforce.com. I was hoping that one of the Indian IT majors may buy it, but I didn’t know them enough I guess. What a miss!!

How about video conferencing? How about buying something like Skype? Or one of its many clones out there? Would that be important?

Marketing and Market: Last year I happened to read a “Research Analyst report” on Infosys. The analyst of a decent Indian Investment bank had done a SWOT on Infosys. The first strength he mentioned was “Brand Recognition”. Huh!! Brand Recognition?? Now, Infosys’ main market is US. And believe me, as an employee and as competitor of this company I have seen what its brand means to the CIOs of the main companies. Indian IT companies are the Dollar Store brands of IT. For Infosys in particular, one would see that the highest Brand Recognition is in India, but then India is ironically also one of its smallest market.

We see an interesting situation – Brand Recognition is the highest in the Lowest market, and Brand Recognition is lowest in the Highest Revenue market.

Flawed Selling Model:

There are enough who would challenge that – specially after the advent of the Consulting practice at Infosys – which is very high quality outfit. But how are the sales made by the Consulting partners? That “I have so many years of experience at Deloitte, and my team has consultants from Big 4 and firms like AT Kearney – so I am good”. Do you see the central issue there? That Infosys partners sell themselves not because they are Infoscions but because they are ex-Big 4!! Are they selling Infosys or its competitors? And why wouldn’t a partner say – “Give me a strategy or process re-engineering project BECAUSE I am from Infosys”?? Because the moment he says “I am from Infosys” the expectation in the mind of the CIO and other CXOs is that he comes from an Offshoring firm engaged in low quality work.

The creation of the unshakeable link between Offshoring and Low Quality and therefore Low Cost – is the most singular achievement of the Indian IT industry!

This one rather dubious success has created a Suicidal Spiral for all the companies.

If you set the expectations with the customers that one drops the rates every year to keep competing, and no one gets any value proposition to the table, then the customers will expect the same even when there is no room for it (immigration issues take their toll).

Worse still the sales team has never been wired to think in terms of Value. Its only plank has been cost.

Now, having said this, I am not saying that High Quality work does not happen in the Indian IT companies or they do not have people in the Strategy area who can compete with the best of the best. They have. But there is no one equipped to sell their services. Sales folks would rather sell the cheap guy than a strategy guy from India. It is not worth his time. And Value selling requires understanding the pain points of the client. A programmer who became a sales guy cannot sell Financial Strategy services. But that is what almost the ENTIRE Account Team comprises of – ex-Programmers!

The problem with the Indian IT industry is of lost opportunities but even more than than its a story of bad ethics and high incompetence.

Bad Ethics? Huh! The doyens of the Indian IT industry are constantly held in high esteem in India. But, one needs to go at the grassroots of the company to know how the employees are abused.

When an employee is sent to US without any administrative backup – no time to get the SSN, or Bank account, or any apartment or car – and is paid pittance to acquire all that ($2000 for a car in the US – I would wish Narayana Murthy is sent to Minneapolis without any help and asked to buy a car for $2000!!).

There was a time when the Big 4 were hiring people from India in the late 1990s and putting them up in fully paid furnished apartments. That is no longer the case. Why did this change happen? Because the Indian IT companies demonstrated to them that this was not necessary.

We Indians “don’t need such luxurious treatment” was the subtle message when a TCS or a WIPRO would send its employees with a monthly stipend of $2000 and hardly any money to get a car or an apartment in an expensive city. Soon, the American companies learnt the lesson. They modified their corporate structure and created special companies where people from India are hired / transferred into. A special company ONLY for Indian hires! And the rules are different. One person on a project is an employee in US but has different rules/benefits and the other happens to be a transfer from India but an employee in the US and has different rules.

Such discriminatory scenario has been institutionalized in the American companies – and in most Indian IT companies as well. Why? Because Murthys and the Premjis from India suggested to the CEOs of Accenture, IBMs of the US – that “Saar, we Indians don’t deserve anything good. Please kick our ass, we will work happily!”.

Shame on the Indian IT doyens for having lowered the value of Indians in the vast arena of the IT market!

Conclusion

When you put the scenario of the Suicidal Spiral and the coming changes in the US immigration laws, one finds that unless something drastic happens within the DNA of the Indian IT leadership and even more importantly, the middle management – the future of Indian IT industry is rather bleak!

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