A rooftop dealer who fixes expensive and exclusive rooftops for houses in Manhattan, New York be worried about the stock market falls in Asia. What's the connection? As unconnected as it seems, the individual identified that his market was for the wealthy, and his wealthy clients are exposed to international markets. And, the expensive rooftop is almost the first item that they'll cut in their budget, if they're feeling the pressure of drop in international markets.
It's such an integrated world! When we say "world is flat" - it's flatter than it has ever been, and continuing to get flatter.
If international currency vagaries affect people in the US, what happens to the offshore outsourcing firms in India, whose sole business is dependent on the international currency and the differences in currencies thereof? How about the outsourcing companies that have anywhere between 60-99% business revenues coming from the USA? On the other hand, Indian economy is strengthening on a quarterly basis and the Rupee is becoming stronger on a daily basis.
Dollar is weaker than it has been in the past several years - and it continues to slide against major international currencies. There are recession fears in US. The report on GDP on January 30, 2008 talked about an annualized growth of 0.6% during the last quarter of 2007- while it's not negative as yet, there are fears that it's only a question of time before it goes negative.
In this scenario, wages are not staying flat. In the effort to make the world flatter, the Indian software engineers demand salaries that are increasingly looking like the wages in the USA. While you can say that it is rightfully so, there's no telling how that will affect the macro-economics of doing business in India.
Some points that Indian outsourcing companies can consider to tackle this problem:
* Lots of companies are establishing centers around the world - chasing the lower cost paradigms available in the emerging outsourcing destinations. But, those destinations lack the mass and maturity of Indian IT outsourcing industry. It can be overcome by shifting some of the mature processes and experienced people from India to those centers. Of course, some companies are also attempting to acquire local companies - to give them a management team that knows the rules of the local business landscape.
* One increasing trend is also for the outsourcing companies to expand the operations in the USA - by shifting more and more engineers from India to the USA. Traditionally, Indian companies have had a huge portion of revenues come from "onsite" operations - and last 3-4 years saw the trend of decreasing the onsite presence and increasing offshore presence. Now, in the next few years, the reverse will start happening, as it's providing a natural hedge on the currency - you earn in Dollars, and your expenses are in Dollars, and hence the currency fluctuations does not affect profitability. While this may not be openly communicated, it's suspected that this will start and continue to be the trend.
* Gartner predicts global outsourcing spend to increase from 408 in 2007 to 441 billion in 2008. Outsourcing as a business model is still vibrant and it works. There can't be sudden reversals. An increasing number of outsourcing companies view scale of operations, operational efficiency and process improvements as key growth parameters as opposed to just pure wage and currency parity. The work on IT in the world has not depleted, and hence the demand for IT work will be stable at least for the next 20 years. It's like fuel. We need it, and the consumption is very unlikely to reduce as much because of increased prices. So, outsourcing companies are also increasing their contract prices to counter the effects of wage and currency factors.
The demand for IT is so huge, and on the talent supply side, there is no country that can match India easily! But, there is a perception that Indian software engineers in outsourcing companies have very low average age and hence can hardly command a premium in pricing, while salary costs are increasing. Lots of companies are countering this by improving their training effectiveness and bringing industry and academia closer to ensure higher preparedness in the new job entrant.
* Another factor is also increasing opportunities worldwide. All outsourcing companies, including the biggies like Infosys and TCS are reducing their dependency on the US markets. Today, Infosys has only 60% plus and TCS has only 48% business dependent on the USA. As a matter of fact, even a number of US based companies are increasing their revenues from emerging markets like India, China and Africa. So, it fits very well in this scenario of increasing opportunities in the developing world as well as in Europe and other developed world destinations. Obviously, the macro-economics is going to shift the advantage to companies operating in the local land.
* Popularly called as buffet approach, companies are moving away from long-term contracts to smaller contracts.
While this double-whammy of reduced dollar value and increased rupee costs may paint a bleak picture, the outsourcing companies in India are smart enough to take care of the challenges. And, the inherent strength of Indian software engineers will buck any of these trends and come out strong. After all, tough times don't last. Tough people and tough companies do!
Related Links:
Upshot of US Economic Slide on IT Market
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