Offshoring…for how long?

Most of you readers (if not all) would know that I work in IT industry as a Business Development Manager and my firm uses Global Networked Delivery Model (Off-shoring/Right-shoring).

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Yesterday, I was with my team in southampton to celebrate with those who completed major milestones (3/5/10 yrs) in terms of careers with my organisation .

We had a great party at the local Indian Restaurant. We played some interactive games and all of us discussed on how IT industry has given us all as much as it has given our clients. We all thanked the industry and the organisation for the wider exposure and constant learning.

We also discussed about some nos. $30 bn USD exports from Indian IT Services companies, more than a million directly employed by IT&ITES, more than 700K directly employed in IT industry etc etc.

It is at this point, one of the team members asked a pertinent question—So far So good but then whats the Future of offshoring?

Nasscom-McKinsey reports suggest that India will add another million jobs in IT&ITES in next two years leading to $70 mn+ exports in IT services by 2008. I believe that there is a great future for next 2 years for fact, 5 years as i can sense and 10 years as i dream.

There are largely three issues that threaten this dream. 1. Political backlash from western countries, largely US 2.Resource crunch and 3. Diminishing cost advantage.

1.

By 2008, average age of Indian IT folks would have still been around 26 years. At that stage there will be more than a million and half who would have spent less than 5 years in IT industry. All that they would know is programming languages like java and .net

God forbid but what would happen to the career of these 15 lakh (1.5 mn) IT engineers if there is slowdown in the export of Indian IT Services due to political backlash? Will we see Kerry campaign in 2008? Will the intesity of the campaigns be so significant in 2012 making it biggest political issue on which US presedential polls will be contested?

I heard a podcast this morning by US economist who argues for offshoring to become a bigger econopolitical policy issue than other monetary and fiscal policies in coming two decades in US elections.

In a nutshell, while Diana Ferrel of McKinsey Global Institute, Economist Jagadish Bhagwati and ONS studies in UK argue for advantages of offshoring for US/UK/..economies, there is still this danger of political backlash.

2. Resource Crunch:
McKinsey study notes that only 13% of Indian graduates are suitable for jobs in MNCs and that could pose a problem of resource crunch. In my question to Indian IT minister Dayanidhi Maran at India House in UK, he also recognised this to be one of the biggest issues to be tackled by the govt. There is this passing the buck one can see between nasscom (industry) and Govt on who should take the responsibility to make investments in improving this conversion rate from 13%.

I do belive that there is an urgent need to make joint interventions by Govt-Nasscom to encourage ventures like NIIT (version 2.0) to ensure that this 13% is brought up.

Though one would belive this risk to be more in control as compared to the first one.

3. Diminishing cost advantage:

Salaries for Indian IT employees is growing more than 10% on average every year but Indian IT chiefs (like now retiring NRN Murthy) dont see it to be the biggest worry. He has been quoting this simple arithmatic in media (including economist of this week)–If salaries increase by 15%, it has impact on 14% of cost that contribute for employee salaries and hence there is this 2.1% increase in cost or reduction in margin if the productivity is to stay at the same level.
Indian IT companies so far have been able to improve the productivity by more than 2% [thanks to tools and higher billing rates] to keep the margins intact and will do so, in my opinion, for at least next couple of years. Other than the salary cost there are cost increasing apsects like investments in other geographies and more services coming from non-india Global delivery centers that will have impact on margins. One reckons that these margins will still be higher than the competitiors.

In conclusion, i think offshoring is here to stay. The only question is how profitable can each party (Service providers and service seekers) make it for themselves. For India, as long as they recognise each of the above mentioned 3 issues and take concrete actions against them, there is no reason to get paranoid.

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