India’s Labor Arbitrage Strategy

It has been an interesting few days of being on the receiving end of tremendous hate mail due to my widely syndicated, and (apparently) extensively read, and discussed "Death of Indian Outsourcing" article.

The article has met and exceeded my expectation in terms of a tool for catalyzing thought and debate. For those of you who have discussed it on this site, thank you for your comments. And for those who have discussed it on the rest of the blogosphere, also, please accept my sincere thanks. Forbes and Rediff readers - if you are reading this message, thank you as well for both your positive, and negative arguments. A debate is interesting only when both sides are represented.

Now.

For those of you who are my regular readers, you know me well-enough by now, to know that I am not a negative thinker by any stretch of the imagination. My instinct has always been to look for solutions.

This particular piece was preceded by my Sridhar Vembu story, in which I showed readers an example of an entrepreneur who has been creative in seeking solutions to problems. Have any of you stopped to wonder why I published those two stories in that sequence?

My hope is, that with hard-hitting pieces like the "Death of Indian Outsourcing," I will be able to raise awareness of the problems that are brewing in India, and catalyze action, solutions.

In public and private discussions, the metaphor that comes up continuously, is that the Indian industry is burying its head in the sand. [Look through the 100+ quotes on Rediff.] It is this attitude that I have chosen to speak against.

I have also chosen to speak against complacence, which I see rampant in the Indian industry. But with the hope that things will change.

In Sridhar Vembu’s story, there are ingredients of that change.

Not only that, in India, Sridhar’s operation does not hire engineers with high-flying IIT degrees, thereby squeezing the cost-advantage. No. We hire young professionals whom others disregard. We don’t look at colleges, degrees or grades. Not everyone in India comes from a socio-economic background to get the opportunity to go to a top ranking engineering school, but many are really smart regardless. We even go to poor high-schools, and hire those kids who are bright, but are not going to college due to pressure to start making money right away. They need to support their families. We train them, and in 9 months, they produce at the level of college grads. Their resumes are not as marketable, but I tell you, these kids can code just as well as the rest. Often, better.

I have shown in my piece that if a 15%+ salary hike rate continues, India loses its edge. But it doesn’t need to be so. For starters, Indian companies should look at Sridhar’s example and open operations (BPO, KPO, Call-Centers, IT Services Centers) not only in second and third tier cities, and away from Bangalore, Mumbai, Delhi, but also in small towns like Kohima, Siliguri, Jodhpur, and hire and train a population that is not part of the current IT workforce.

Increase supply. Reduce salary levels. This is Economics 101.

Yes it will take time. English training. Accent training. Programming training. Big charter. But, as Sridhar shows, it CAN be done.

I pointed you to Atanu Dey’s RISc model earlier. He suggests a move to a micro-city model, as follows:

India’s economic growth depends critically on the development of its 700-million strong rural population living in 600,000 villages. The challenge is to manage their transition from a village-centric agricultural-based economy to a city-centric non-agricultural economy urgently.

The total rural population of India can be covered by about 6,000 RISCs each servicing the needs of approximately 100,000 people. By providing a full complement of services, RISC creates a ‘micro-city’ which seeds the formation of a city by drawing to it the population from the surrounding areas. RISC focuses on the development of the rural population, and not on the development of villages which are destined to be extinct anyway.

I like the model as an alternative to the bursting situation at the cities. My suggestion is to align each of these 6000 RISCs with a major IT employer that can employ at least 5,000 people. Infosys (INFY) can have 10-20 RISCs, IBM (IBM), Wipro (WIT), SAP (SAP), Cisco (CSCO), Microsoft (MSFT), … yes, the low-end work is at risk of being near-shored and smart-shored, but if India can create a compelling case for keeping the jobs in India via strategies like this, the horizon can be extended dramatically.

Atanu’s equation offers an additional 30 million people - perhaps not very educated people - but people who can be trained and brought into the workforce, thereby preserving the labor arbitrage advantage for the non-differentiated work.

And, in fact, if the cost-structure is pegged at the right level, and a training methodology can be put in place by these employers, India can also do work for other emerging markets, including Latin America (Spanish speaking, except Brazil, which is Portuguese speaking), and Europe (multi-lingual). And, above all, India can do work for itself.

Ultimately, India’s population can be an advantage, but the population needs to be “processed” in order to be turned into an advantage.

In conclusion, I would like to see some serious long-term thinking from India’s IT leaders, instead of this 15% salary hike trend, and The National Association of Software and Services Companies' [NASSCOM] unsophisticated rah-rah “everything is fantastic” analysis.

Comments

[User 157527]

The key to skilled labor arbitrage is availability of highly skilled and inexpensive labor. You seem to suggest that low skilled inexpensive labor will also do. In the early days of IT growth in NA we had experience with re-trained philosophy major graduates entering field in great numbers to satisfy industry demands. We still have them on unemployment rolls, and a new crop who will be better source then under-educated Indians. We need Math, Engineering and Physics graduates not just "smart" kids to do highly complex IT work. The companies in India, like Sridhar, are just a quick rupee artists feeding off and undermining high reputation the companies like Infosys have build over long time.

[nk001]

Wow! Its great to come up with revolutionary ideas and to dream big. But where is the dose of reality? What are each of these 6000 SLUMS going to do? Why not instead propose a model for industrial centers in rural areas (much like the MIDC’s in Maharashtra) and let people go where they will. One may draw a parallel to the Button/Zipper cities in China but to think that there 6000 SLUMS are going to offer world class IT services is .. the nightmare ending to the dream. Visit rural India and get some perspective.

[User 160512]

Sramana, the tone of your article was quite cynical and frankly, offensive. Had you simply noted the problems faced by the outsourcing industry without judgement and then provided solutions, it would have been better received. On the contrary, you suggested that Indians do not think. What kind of a statement is that? What suggestions did you offer in your article?

Raju
myindiabook.com

[gps dude]

>> I have shown in my piece that if a 15%+ salary hike rate continues, India loses its edge. ... Increase supply. Reduce salary levels. This is Economics 101.

Ahh.. so what you suggest is not innovation, but merely extending the wage arbitrage model :-D So much for <b>new, out of the box, hard hitting</b> thinking :-D ..

[Rajiv Sethia]

Sramana, you are absolutely right. There is no innovation at the big Indian names, they treat their employees quite poorly despite the golf courses and the swimming pools on their campuses (that you never see a single person using). They are body shops - one and all, Infy, Satyam, Wipro, all of them. "Sir, can I place any people please on your project? Only 35 dollars on site". Narayan Murthy and all the other superstars, they are no different than fat cat labour subcontractors, that is the reality. Bitter it is, but that is what the facts are.

[User 160919]

I agree with Srama Mitra on most of her view points. On a long term, I agree, we cannot sustain 15% hikes, because in the next 5-7 years the cost will outweigh the benefit. That doesn't suggest that Indian should be paid well for their hard work. The tone here is consistensy and sustaining the value we create now.

Despite out ability in management and other areas, India is still viewed as a back office operations center by big blues. Sramana's article proposes solution in a way that we continue that momentum while getting a generation past a major downturn. Keep this mind. What goes up fast will come down fast. We don't want our fellow Indians to be in such roller coaster rides.

[Aditya]

End of the day..one cant disagree with you.But do think about this from the employee's shoes.Indian cities are becoming expensive.Forget small towns...the small towns still lack basic ammenities that they should have.Why would anyone want to work there ?
Yes you can hire from the smaller towns itself and train them.Eventaully they would try moving into the larger cities for higher salary.
A lot I think has to be done from the government's side.The process of getting admission is messed up and the cost of higher education itself is increasing alarmingly.Cities cant support the growth anymore.Supply can be increased with a efficient education system,and growth can be distributed by making other locations attractive.Eg :Mysore near Bangalore has taken of a huge extent,but not Hubli,Mangalore or Dharwad .
I attended a informal session organized by few geeks all who were CEOs,CTOs etc of their startups ,few were in Wall street firms and all of them were against Outsourcing for their critical projects.Its scary...

[Prideleader.]

Goa has a Portugese past and Pondichery a French one.Can Pondichery be developed into a laucn pad for French based out sourcing services?

[pricepoint]

Agree that India cannot sustain 15% hike but it is not that Indian companies behind it but it is the market demand. This increase is also trickling down to other sectors such as Real Estate and Services in India. Once the IT development centers in Eastern Europe and South America catch up with Indian IT salaries, Indian IT firms will have rethink but as of now they still hold the EDGE.