India’s Scarce Talent, Rising Wages, Balky Clients – BusinessWeek

Faced with a shortage of workers, India’s outsourcing industry is struggling to maintain its profit margins—and its global market share

In India, of all places, how could outsourcing companies be struggling with a labor shortage? The country has over 1.2 billion people, and the industry has boomed, thanks largely to its abundance of inexpensive and English-speaking workers.

The numbers can be misleading, warns Krishnakumar Natarajan, chief executive of Bangalore-based outsourcing company MindTree. There are 400,000 engineers entering the workforce each year, he says, “but the fact is, only 20 percent of them are industry-ready.” And competition for experienced workers is heating up since cutbacks during the financial crisis resulted in fewer newcomers to the industry. “During the recession, nobody recruited,” he says. When business revived last year, “suddenly there was a huge shortage of people.”

With demand so high, churn rates have increased from the traditional level of 12 percent of all IT employees to 17 percent now, according to Nasscom, the New Delhi-based industry association for IT services companies. Call centers and other basic services are seeing attrition rates of 55 percent, up from 40 percent a year ago, according to an April report from the Associated Chambers of Commerce & Industry of India (Assocham). High attrition rates “might prove to be fatal for the survival and growth of India’s business-processing outsourcing sector,” says Assocham Secretary General D.S. Rawat.

Nasscom President Som Mittal expects wage increases for new hires will be as high as 12 percent this year. More significant, he adds, experienced workers jumping to other jobs “expect 15 to 20 to 25 percent increases.” Case in point: Divya Bajaj, a 25-year-old who lives in Bangalore. Bajaj used to work at Google (GOOG) and last year joined Infosys Technologies (INFY)—with a 30 percent increase in pay. “Costs are going up,” says Sudin Apte, chief executive of Pune-based consulting firm Offshore Insights Research & Solutions, “but clients don’t want to pay more.” Five years ago typical profitability for an Indian outsourcing firm was 30 to 35 percent, according to Apte. Now it’s down to 20 to 25 percent for the top providers and as low as 10 to 12 percent for lesser companies. “In the next five years,” he says, “it will go down another three, four percentage points.”

In the lingo of Indian industry, many of these companies rely on “linear” growth—they increase revenues by increasing head counts. More workers, more business. As Indian workers become pricier, this model may grow obsolete, given the availability of talent in Southeast Asia and other inexpensive locations. There, low-cost rivals “could definitely be a threat” to the Indians, says Praveen Bhadada, manager of Zinnov Management Consulting in Bangalore.

Tata Consultancy Services (TCS), India’s largest IT services company, with $8.2 billion in revenue for its latest fiscal year, is trying to develop more of a nonlinear model. The company wants to standardize some software and services it has developed and sell them to customers more aggressively. For instance, last year TCS started offering a cloud-computing service to small and midsize customers, says Vish Iyer, head of Asia-Pacific operations. The goal is “leveraging our intellectual property, not leveraging our head count,” he says.

Yet even TCS still gets more than 90 percent of revenues the old-fashioned way, by adding bodies. “The needle won’t shift very quickly,” Iyer concedes. “But it will.” The company is also diversifying, opening offices in 41 other countries, including China and the Philippines.

Bangalore and other Indian cities still maintain many advantages. “There are no other locations where you can get such a large-scale head count for export work,” says Apte of Offshore Insight. Still, he adds, a change is taking place. While India has between 75 and 80 percent of the market today, by 2015 that share is likely to fall by 10 percentage points.

The bottom line: Margins for Indian outsourcers have dropped as wages rise and attrition has reached 55 percent. Clients resist paying more.

India’s Scarce Talent, Rising Wages, Balky Clients – BusinessWeek.

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