Escalating wages are putting the profit squeeze on Indian outsourcers.
For Indian outsourcers its the problem that just wont go away: wage inflation.
Widely acknowledged by the outsourcers themselves and until now kept at bay by strong growth, the continual increase in salaries at top Indian firms like Wipro, Infosys and TCS (Tata Consultancy Services) is changing from mere annoyance to a present danger.
When Wipro, based in Bangalore, India, on July 18 reported first fiscal quarter net income of $134 million, up 44 percent from a year ago in 2005, it saw its stock drop 5 percent because investors were concerned about the problem.
And Wipro is not alone. The preceding week, Infosys Technologies, also based in Bangalore, in announcing its quarterly results, took pains to explain the steps it is taking to deal with the wage inflation problem. In its earnings call, TCS, in Mumbai, also took note of the impact of rising wages on its performance.
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The experience of one customer shows that some Indian firms will not only have to overcome the wage spiral, they will have to offer better value. Kana Software, a customer service software and solutions provider in Menlo Park, Calif., brought its product development operations back to the United States from India, following an unsatisfactory experience working mainly with Indian provider HCL Infosystems, of New Delhi.
"Doing the TCO [total cost of ownership], I found we werent saving much money at all. We determined we were saving about 5 percent. Most companies have not taken the time to do a total cost evaluationthey just think they can get an engineer for 25 percent of the cost here," Kana CEO Mike Fields said in an interview. "Also, with global companies setting up their own operations in India, theres tremendous turnover among the outsourcers."
Indeed, the Indian firms are no longer merely competing with each other for the best and the brightest, they must also compete with IBM, which now has approximately 40,000 employees in India.
During Infosys earnings call the previous week, Infosys CEO Nandan Nilekani addressed the twin topics of wage inflation and employee attrition, saying that the company will increase starting salaries from $5,122 to $5,763, a 12.5 percent increase, on average.
Nilekani said the centerpiece of his companys strategy for combating employee attrition is its big training center in Mysore, which can handle 20,000 new recruits annually and where new employees head for a 16-week training program. Infosys spent $100 million on training in 2005 and will spend $125 million in 2007, Nilekani said in an interview. He said 8,000 recruits joined the company in the first quarter and 7,000 were hired in the second quarter of 2006.
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"If a company wants to play, they will have to invest in training. We have a huge, huge investment in training," Nilekani said. "Our objective is to give competitive salaries to make sure we have a very good learning and working environment for our employees. This will keep our attrition one of the lowest in the industry."
A key contributor to the high attrition rate of the Indian outsourcers is job-hopping, in which workers with valuable skills skip from one job to another at a higher wage. This practice adds fuel to the wage inflation flames and keeps the need to train new hires at the forefront for the Indian firms.
Nilekani asserted, however, that IBMs efforts in India are not having an effect on the companys recruitment or operations.
Ramesh Emani, president of product engineering solutions for Wipro Technologies, said the problem of wage inflaation is very real, but is cyclical. "At this time, we are definitely seeing more pressure. We tend to see it every two years or so. We went through this in 2004; 2005 was not bad; in 2006 were seeing bigger numbers." He said Wipro is now seeing average wage increases of 15 percent.
He said the pressure comes from a very strong Indian economy, in which the retail and auto industries are hiring aggressively. "That adds to the pressure on wage inflation in the IT group," he said. He also countered that wage inflation in the United States has increased since last year, and is currently between 5 and 8 percent.
Emani voiced a complaint that is common among Indian IT companiesthat Indias colleges and universities must do a better job of educating the Indian work force so that Indian companies will not have to spend exorbitant sums training new recruits.
Eugene Zakharov, an analyst at Technology Business Research, in Hampton, N.H., disputed the idea that Indian wage inflation has reached the critical point. "They are feeling the pain, but I dont think the rising costs will turn away the benefits of India. Even if the wage inflation rate continues to grow at the present rate, then only in 2031 will there be an overlap with the rates of U.S. software engineers," he said.
But if Kanas experience is any indication, Indian companies will have to increase their value proposition well before Indian wages catch up with those in the United States.
"Im a firm believer in globalization and outsourcing, but in the case of Kana, it was the wrong choice. We werent saving much money at all. For every five to 10 engineers in India, they needed a program manager there who would spend time in India to drive the process. There were communications and duplication of equipment costs," Fields said.
Part of that attempt to offer better value is a new emphasis on quality an innovation, Zakharov said. "Thats why Infosys, TCS and Wipro are establishing research centers. They understand once the cost advantage goes away then they have to do some thing else to offer increased value."
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