Indian IT sector faces pay for results

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The FT ran an interesting article expressing the views of Nasscom about the post-recession period.

The statement, from Nasscom's head Som Mittal, that the Indian services sector will grow 15% to be worth $70bn this year revealed confidence that businesses are spending on IT services again.

Read the article here.

The article also has Mittal admitting that Indian suppliers have had to change since the recession. One of the key changes mentioned in the FT article is the increase in contracts where suppliers are paid in relation to results.

Bindi Bhullar, director at Indian supplier HCL Technologies says customers  are becoming more sophisticated in their purchasing of IT services and are looking for more outcome based pricing models. 

"As a result, the frequency with which executives approve major consulting deals casually during a round of golf is diminishing. Instead, several developing trends are shaping client expectations for the client-consultant relationship. These trends include more centralised purchasing, better information sharing among clients and higher skilled IT workers."

Here is a blog post I wrote last year about paying for results.

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So, there are a number of interesting angles in the FT story.

Basically, the honeymoon is over for the Indian global IT and outsourcing players. They now have to face the same challenges as their other global competitors. Join the Club, as it were.

But there is a cost base issue for the Indian majors. As the Indian economy has grown and continued to grow, so has GDP inflation (12-14%) and wage inflation, especially in the software engineering sector. So people who used to be cheaper than infrastructure are now much more expensive than they were. The old business model of large-scale, FTE-loaded, projects is almost over. Indian IT and outsourcing companies have to find alternatives.

The other problem they have is that, because their most resourceful resource is in India, they have to fly it to onshore destinations, with the visa problems mentioned in the article, and with a further cost whammy, i.e. the cost of keeping expat staff onshore for management, analytics, transition and transformation.

The irony is that, if the Indian IT and outsourcing majors automated more, they would in time do away with these problems. That's the dilemma facing them: there is, compared with their global competitors, no shortage of clever technical and business people; they know how to write software better than almost anyone; and they know how to keep their customers satisfied - but they are stuck in the big-scale, FTE-loading model. Automate, and you lose the need for as many FTEs. And to automate, you need to be as inventive and imaginative as the Japanese became and the Koreans have become, i.e. you have to invent smart stuff. Not something the Indians are yet known for in the IT industry. (Within India, it is said that Indians are far better at improving other peoples' software and processes than making their own.)

Will be interesting to see how this plays out.

BTW, the particular issues with Infosys and Wipro may be more to do with management changes than anything else.

There is increasing scrutiny of visas and it is causing problems for those that rely on moving Indian IT workers to client sites. IBM, TCS, Accenture, Cognizant and HCL have all recently had suspensions from the BEP visa program by the US Consulate in India due to "visa fraud":
http://www.rediff.com/business/slide-show/slide-show-1-tech-visa-woes-end-for-ibm-tcs/20110614.htm

Infosys is being investigated in the US for using B1 business visas to circumvent H-1B and L1 visa restrictions.

About time the reality of the whole offshore model is surfacing!

My experience at a major bank that used 3 large partners was:

- extremely little happened offshore
- little happened with their onshore "talent" ( although they were very good at hanging out front and smoking cigarettes and playing political games )
- when it came implementation time, the local contractors were worked to the bone to coverup what really was produced ( while the offshore "talent" smoked more cigarettes and ate the free pizza the bank was kind enough to fund )

I always knew this whole TCS/Wipro/Cognizant et al. was one big bubble waiting to go poof!

Here we go...good thing this is all happening as my current client is closing shop ( offshore again ) and I will be looking soon!

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About this Entry

This page contains a single entry by Karl Flinders published on June 13, 2011 12:36 PM.

IT Outsourcing is still a green field for many businesses and plenty of room for growth was the previous entry in this blog.

Real IT services spending recovery could be around the corner is the next entry in this blog.

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