IndusFusion’s Outsourcing Blog

Here we go … Let the Politics of Offshore Outsourcing begin anew – or shall we say continue. Ms. Hilary Clinton gave a ‘satellite speech’ to the IIT (India Institute of Technology) alumni last week.

Among her comments were:

“I am concerned that trade is becoming a zero-sum game, instead of being a means to lift up all who participate”

“If globalization pushes down US wages, other countries will be affected.

“Workers in the U.S. are concerned about outsourcing, as I’m sure you know. And I think they have a right go be,”

Our take is like the current immigration ‘conversation’, outsourcing will be one of the political rhetoric whipping boys over the next year. Typically epitomizing another topic where the politicians fully understand the big picture, yet will placate speech to the masses with a nationalistic focus. If you take these comments to heart, you could be lead to believe that the New York Senator is sounding an alarm to the future of protection-free global sourcing. Thankfully (or hopefully) we all know better.

This year, like all election years, will bring even more anti-outsourcing bills and protectionist talk to congress. Hilary’s not alone, Obama’s opposition talk about outsourcing is even worse, and the Republican candidates are not free from negative rhetoric either. So we know the talk is coming, let’s just continue to assume that also like most years it fades into obscurity like it always does post election.

Alan Blinder a professor of economics at Princeton University, vice chairman of Promontory Interfinancial Network and vice chairman of the G7 Group recently penned a Washington Post article raising another Lou Dobbsesque ‘the coming tragic effects of offshore outsourcing to the US economy’ alarm. While Mr. Blinder’s piece (I’ll avoid the pun reference as I am sure he has had well enough) supplies some depth to the more relevant issue (what needs be done), he, like most of the rest, falls short on what we believe should be the conversation: How does the US best take advantage of the inevitability? Turning what we believe already to be actually good news for the US, into an even greater success story.

Some points we feel not represented in the story

(and we won’t even speak to the altruistic values unrepresented as always)

1. With the possible exception of China, most economist agree the other large and expanding offshore outsourcing markets will evolve into huge surplus trading partners with the US.

2. If US corporations are unable to leverage the costing economies of outsourcing to these geographies, it will not be long until their market share and competitiveness against like Japanese and European entities who do outsource will soon fade. The end customers will migrate to lower cost products and services offered by the foreign competitor entities, the US companies will cut jobs, stock prices drop, stock holders lose money… we are not Princeton economist but I think we see the potential negative impact here beyond just jobs.

3. Will somebody please do a study that shows the impact of jobs and capital coming back into the states directly attributed to these offshore service providers!? Our bet is offshore outsourcing is pretty effect neutral with this contribution alone.

4. ‘Time to market’ - the reference always used as to why US corporations utilize offshore resources is always “lower cost than US equivalent staff”. This simply is not true. For example: it is very common, from tech based startups to Fortune class firms, to have a development need arise that requires lots of staff in a short period of time to complete a current project. Going out and quickly hiring a large US based team with high end development skills in short order just is not feasible in many cases. Again, perhaps Mr Blinder can share the economic effect if ManilaSoftwareServices Inc. gets their Microsoft Vista equivalent product to market first? (I know that’s a stretch example, but the point remains).

5. Many sourced efforts are not ‘jobs’ at all. They are simply short term project needs. Would we prefer to develop a societal class of temporary employee’s?

6. It is typical in sourced IT projects that what is offshored is the more mundane, lower end activities. This leaves the true IP class development for the US employees. Thereby leading to a more skilled employee stateside as their efforts are focused on the true sunrise activities versus (his words) “sunset” ones. It is these sunrise teams that allow for the US’s continued leadership position in creating and bringing to market new technologies and industries.

Does the VCR evolutionary cycle ring a bell? Remember when the alarm went off when we had developed a new technology but it was the East who were reaping all the rewards by selling the players? Yet in the end, the low cost players ended up spawning hundred’s-of-thousands of new US jobs based on the growth in related and new industries because of the mass availability of the players.

7. We would also ask that Mr Blinder share some of his expertise as to the effect to the US economy if, for example, consumers have to pay $1800 for their new laptop versus $1400 because Dell, Microsoft, HP, etc have to move out of India and replace those roles with higher cost, greater benefit US employees?

We of course could go on and on. But our objective to comment on the piece is to encourage the conversation be directed toward taking advantage of the marketplace realities versus the same old alarmist propaganda. The article offers a couple of excellent thoughts to that direction: “rethink our educational system”, “invest in our capital markets to keep them strong” “directing future educational activities toward roles that cannot be sourced”, etc.

There are surely a lot more ways to leverage the opportunity, many that even the most protectionist commentators could agree on. For starters, how about more US investment in these growing markets? The bottom line is the conversation needs to change. Leveraging the ever changing global marketplace has been a US forte’, let’s keep it that way, and at the same time enjoy and appreciate the contribution outsourcing provides - both abroad and domestically.

Tags: Outsourcing Washington Post India Offshore

We have seen a lot of commentary, reports, etc. as of late about the growing human resource challenges experienced by offshore BPO (Business Process Outsourcing) agency providers. A recent report by Forrester Research indicates the obstacles for the offshore captive groups are even greater.

A lot of attention has been focused on the ever increasing attrition rates of the rank-n-file team and mid management. As the market continues to expand in these geographies, there is an ever increasing base of employment options allowing for the inevitable “I just want something different” or “I need to build my experience base”, “this has better hours”, “my friend works there” “it’s a little better pay” etc.. These factors, coupled with some of the traditional growing pains of an expanding domain within a geography will of course have some go forward impact.

The assumed primary impact as it relates to the sourcing agencies and agency users is expected to be increased costs for all. The logic being the primary mechanism that will be used by the agencies to retain the experienced staff that they have invested in will be to put more money into the positions. These higher wages will require the groups to pass the costs along in the form of higher fees to the buyers of their services. The assumption then goes: with higher costs these offshore locations will then lose some of their commercial savings appeal for the US buyers and then the whole BPO Provider industry is at risk.

IndusFusion does not subscribe to this logic path. Taking India as a perfect example (and where a lot of the attention has been focused), we see a far more likely scenario to be that there will be a ‘lowering of the bar’ as it relates to hiring and staffing in an effort to maintain costs. The fact is, when commercial terms and costing expectations have been established, there is no going back. India’s BPO agency growth has been near an exact parallel of the experience of US outsourcing provider industry – only in a much condensed time frame, and we expect no variation relative to attrition obstacles.

Should the same evolutionary cycle to US outsourcers continue to play with India and other offshore locations, post this ‘lowering of the bar’, there will come an ever expanding separation of the have-and-have-not’s. Meaning, much less mid-size BPO agency firms as the leading groups become the only option for the big users of services. The mid size groups will fight with even lower terms in order to maintain their share, leading to the inevitable lowering of staff experience and quality, eventually rendering them a non option for large US outsource users. The small player agency base expands by on focusing on the buyers who’s exclusive requirement is cost, and by catering to very small niche markets. What’s left is “Big guys and Small guys”.

The net is, we don’t foresee costs rising and markets shifting, we see the product lessoning. Then from there…. Well again, if parallels remain it’s not long before the maturity cycle of domains within these offshore locals are running together with the US providers – then we all get to watch what’s next.

Technorati Tags: BPO Outsource India

Please see IndusFusion comments below article

Grassley, Durbin Ask for Details on Companies’ Use of H-1B Visas

Monday, May 14, 2007

WASHINGTON - Senators Chuck Grassley and Richard Durbin today asked the top nine foreign based companies in 2006 that used nearly 20,000 of the available H-1B visas to disclose further details about their workforce and their use of the special visa program.

“More and more it appears that companies are using H-1B visas to displace qualified, American workers,” Grassley said. “Now, as we move closer to debate on an immigration bill, I continue to hear how people want to increase the number of H-1B visas that are available to companies. Considering the high amount of fraud and abuse in the visa program, we need to take a good, hard look at the employers who are using H-1B visas and how they are using them.”

“Supporters claim the goal of the H-1B program is to help the American economy by allowing U.S. companies to hire needed foreign workers. The reality is that too many H-1B visas are being used to facilitate the outsourcing of American jobs to other countries,” Durbin said. “We have to look at the system that generates these visas and the way they are used. This legislation will help protect American workers first by stopping H-1Bs from being exploited and used as outsourcing visas.”

The letters are part of an effort to determine if the H-1B program is being used for its intended purpose which is to fill a worker shortage for a temporary time period. He said that he expects the companies to cooperate and answer his questions to ensure that accurate information is being used as Congress begins debate on new immigration policy.

Grassley and Durbin recently introduced legislation that would overhaul the H-1B and L-1 visa programs to give priority to American workers and crack down on unscrupulous employers who deprive qualified Americans of high-skill jobs.

A copy of one of the letters appears below:

May 14, 2007

Mr. Nanden M. Nilekani
Chief Executive Officer
Infosys Technologies Limited
6607 Kaiser Drive
Fremont, California 94555

Dear Mr. Nilekani:

As members of the Senate Judiciary Committee Subcommittee on Immigration, Border Security and Refugees, we have a responsibility to oversee and evaluate our country’s visa policies. We have been concerned about reported fraud and abuse of the H-1B and L visa programs, and their impact on American workers. We are also concerned that the program is not being used as Congress intended.

While some Members of Congress have focused on increasing the annual cap of the H-1B program, we believe it is important to understand how H-1B visas are being used by companies in the United States. We have received helpful data from the U.S. Citizenship and Immigration Service with regard to H-1B visa approvals in 2006 for the top 200 participating companies. Your company was one of the top companies on the list. Therefore, we are requesting your cooperation in providing additional statistics and information on your use of H-1B visa workers.

First, some groups, such as the Programmers Guild, have analyzed the wages paid to H-1B visa holders. They have found that the average annual salary of foreign workers is significantly lower than that of new U.S. graduates.

Second, a number of consulting firms reportedly recruit foreign workers and then outsource the individuals to other job sites or companies. Many of the top 20 companies that used H-1B visas in 2006 are firms, such as yours, that specialize in offshore outsourcing.

Third, a number of firms have allegedly laid off American workers while continuing to employ H-1B visa holders. The American people are concerned about such lay offs at a time when the demand for visa issuances and the recruitment of foreign workers appear to be increasing.

Because of these concerns, we seek your cooperation in answering the following questions:

NUMBERS

# How many United States citizens do you employ in the United States?
# Is your company an H-1B dependent employer?
# How many visa petitions did you submit to the Citizenship and Immigration Service for Fiscal Year 2007?
# Of the total number of petitions requested, how many have been approved for Fiscal Year 2007, if known?
# How many H-1B visa holders is your company currently employing? What percentage of your total workforce are H-1B visa holders?
# What is the average age of the H-1B visa holders that your company currently employs?
# What is the average number of years of experience of your employed H-1B visa holders?
# Please describe your efforts to recruit Americans for the positions for which you employ H-1B workers.

WAGES

# What is the average wage of your company’s H-1B visa holders? What is the median wage? What is the highest and the lowest salaries for those H-1B visa holders currently employed by your company?
# What is the average wage of your company’s workers who are United States citizens in the same occupations?

OUTSOURCING

# Of the 4,908 visas your company received in 2006, how many of those workers are currently employed and paid by Infosys Technologies Limited?
# Of the 4,908 visas your company received in 2006, how many were outsourced to other companies and how many employees’ salaries were paid for by a firm other than Infosys Technologies Limited?

LAY OFFS

# Has your company experienced any layoffs in the United States in the past year? Any lay offs in 2005? If so, how many people lost their jobs?
# If your company has laid off workers in the United States, what job positions were part of that lay off?
# If your company has laid off workers in the United States, how many of those workers were H-1B visa holders?
# If your company has laid off workers in the United States, did any H-1B visa holders replace those dislocated workers, or take over any of the laid off employee’s job responsibilities?

We appreciate your cooperation, and respectfully request that you respond to our questions no later than May 29, 2007.

Sincerely,
Charles E. Grassley
United States Senator

Richard J. Durbin
United States Senator

—————————————————————————–

This has IndusFusion’s attention, as it should all groups engaged in outsourcing - in particular any India based groups. We will track this story as it develops, but you can be assured that this will have an impact on the large India based BPO groups with US offices (take a look at the list they reference, all India based groups). Without question, there has long been some social and political negativism related to offshore outsourcing. However for the most part when the ‘whole story’ is recognized, the many acknowledged advantages and benefits come to light and the stories blow over. We feel this one will not.

There are several questions from the Senators letter that will prove a challenge to the groups, and three in particular stand out:

1. How many United States citizens do you employ in the United States?
2. Please describe your efforts to recruit Americans for the positions for which you employ H-1B workers.
3. Of the 4,908 visas your company received in 2006, how many were outsourced to other companies and how many employees’ salaries were paid for by a firm other than Infosys Technologies Limited?

To the first question; anyone who has dealt with the domestic offices of the larger groups knows this number (as a percentage basis) will be low. The fact is (and it effects the other two questions as well) that it is far easier and more economical for the groups to bring in younger graduates, set them up housing and compensate with wages somewhere in between India and US rates. The companies get a known quantity in the employee, likely better experience, and an overall lower cost than if they were to hire US citizens.

As for “effort to recruit Americans”, this too will be a challenge. While surely there are efforts, any answer that will appease these politicians would at best have to be feigned in rhetoric more than practice.

The last question is the death nail. Unless someone can share with us different, the number there will likely be 100%. With little exception, all the sourcing groups listed bring in the staff to work on the client projects - based on the skill set required. This will then have the Senators circling back to question two with “what did you do to look domestically to staff that role”.

We will add more thoughts on this story as it evolves. However suffice to say, that one cause-and-effect we project is that there will be increased M&A activities in the US for these firms. We are also likely to see tie-up’s with groups where some of the visa requests can be diverted. If I as a leading business house acquire a US based entity, then when I have to answer the “how many US citizens” type questions, it gets a lot easier…

THE below article from the Hindu Business Line discusses India based BPO employee attitudes toward long term employment within the space. The authors seem to find the referenced percentages as high, while we find them not at all outside reasonable expectations and go forward assumptions. More enlightening would be to illustrate the differences in captive units versus contracted providers, voice versus non voice, night positions versus day, (if voice) service versus sales orientation, etc.

Equally relevant is the age factor. It’s just not uncommon (regardless of geography) to assume a twenty something year old to respond to any question posed about their long term career plans with some form of “this will be short term for me”. More relevant to us would be questions focused on “how long do you plan on being here?”

Students still see BPO jobs as a stop-gap

Moumita Bakshi Chatterjee

New Delhi , Sept. 19

EVEN as the business process outsourcing industry in India has attained a $5.2-billion size employing 3.50 lakh professionals, a majority of students across India still consider working in BPOs as a `stop-gap’ employment option.

According to a survey by market research company Hansa Research, about 66 per cent of student respondents felt that joining a BPO company is a short-term employment option.

The perception is particularly strong among students in Chennai and Mumbai, although bulk of students in Bangalore did not subscribe to this view.

As many as 61 per cent of the student respondents in Delhi, 77 per cent of the respondents in Mumbai, 70 per cent in Kolkata and a whopping 89 per cent in Chennai said that BPO was a stop-gap employment option while they decided what to do next.

In contrast, close to 65 per cent of students in Bangalore considered BPO as a long-term career option.

Overall, 71 per cent of the students covered in the survey said that working with a BPO company is considered fashionable among their friends.

The survey covered over 1,000 students across the country, including Bangalore, Mumbai, Delhi, Kolkata, Hyderabad, Chennai, Coimbatore and Pune. An overwhelming majority of students saw BPO jobs as a “quick opportunity to make money,” but almost an equal number said that BPO jobs allowed them to have fun and earn money at the same time.

When contacted, the Vice-President of the National Association of Software and Service Companies (Nasscom), Mr Sunil Mehta, admitted that the latest findings were in line with the association’s own surveys on the perception of BPO jobs conducted about six months ago.

“The main reason for this perception is that the BPO segment is seen as a relatively new industry and hence, people are not sure how it would grow. Also, the high growth witnessed by the industry in the past, may raise fears of a boom-and-bust phase. Moreover, there are people who feel it is impossible to work on night shifts for years at a stretch,” he said.

Mr Mehta said that Nasscom is taking measures to change the perception. “Captives constitute 60-70 per cent of the industry and people are beginning to realise that these well-known names are here to stay.

“We are also encouraging BPO players to reduce their exposure to voice-related activities, as it would enable them to offer flexible hours to employees.

“In addition, companies are implementing a high level of training for their employees to give them knowledge in specific domains,” he said.

In a recent article from Rediff.com they write about the growing offshore outsoucing markets (in particular China) and ponder on how India needs to react to cement it’s position to ward off the coming tide.

Outsourcing: Will India continue to be No 1?
From Rediff.com
May 08, 2007
India remains the top global offshore outsourcing destination today. However, China is catching up fast on the back of strong governmental support, says reports.
Having the right combination of cheap resources and robust technology infrastructure for an offshoring destination, India is expected to pick up the lion’s share of global offshore spending on IT services and is predicted to touch $50 billion by the end of 2007.
In about five years, India will face increasing competition from Brazil, China, Mexico and the ‘nearshore’ eastern European countries like the Czech Republic, Hungary, Poland, Russia and Philippines.

Does India have the potential of fighting its contenders? Is it equipped enough to beat its competitors hollow? What measures does it need to take to surge ahead as the biggest outsourcing hub despite the odds?

Do you think China will give India a run for its money? What should India do to consolidate its outsourcing business in years to come?

IndusFusion’s take is that India will continue to control a large portion of the global offshore outsourcing market primarily due to:

1. The overall scope and scale of resources already within the various sectors.
2. The current breadth of domain penetrations.
3. Ongoing and increasing offshore outsourcing applications.

The key for India will be number three (increased applications) and insuring they are consistently in a leadership position as the new sourcing applications come about and scale. Legal, medical, pharmacentrtic, research, and education are sectors likely to have exponential growth in the next few years. If the India BPO majors can position themselves with domain expertise, and aggressive partnerships within these domains, then it’s leadership position will continue in the face of growing competition from other geography’s.