Mountains Look Like Molehills

Satyam Computer Services recent analyst day in New York was at once an occasion for self-congratulation among top management at the Indian outsourcer and a time to look skeptically at storm clouds that might be on the horizon not only for Satyam but also for its offshore outsourcing brethren.

Satyam CEO Ramalinga Raju did the honors of ringing the closing bell at the stock exchange on Sept. 12, marking the fifth anniversary of the companys IPO (initial public offering). The companys stock has performed quite well in that time, starting at about $12 at the time of the IPO and closing at $38.25 as Raju signaled the close of trading for the day. Satyams market capitalization is $6.24 billion; its annual revenue is $1.14 billion, up 35 percent over the previous year.

Its a heady tale of success by any measure for the No. 4 outsourcer in India. But Wall Street analysts werent born yesterday. With the dot-com boom and bust still fresh in their memories, theyre on the lookout for an Indian bubble. Its just possible, they reason, that a perfect storm of rising wages, declining profit margins and a global economic slowdown could wreck the Indian fleet. Those were just the warning flags raised by Sanford Bernstein analyst Rod Bourgeois at the Satyam analyst day. Possible? Yes. Probable? Well, no one is going that far just yet.

Satyam casts a wary eye at the world economy. Click here to read more.

Rising wages? Everybody knows about those. Hearing the Indian companies talk about the problem reminds me of Garrison Keillors description of the community of Lake Wobegon, where all the children are above-average. The Indian outsourcers all acknowledge the wage inflation problem, but each claims its own rate of wage inflation is lower than that of its peers.

In Satyams case, the company unfurled a generous raise of 18 percent for its employees over the summer, after its annual attrition rate, another well-known scourge of the Indian companies, had reached 19 percent. A fat wage hike, perhaps, but not far out of line with what other Indian companies have been paying out.

How about declining profit? Satyams profit margin plummeted to a measly 33 percent. Yes, it dipped, Satyam management admitted, but its still way above that of big global rivals such as Accenture and EDS.

And what about that global economic downturn? That may or may not happen. International Monetary Fund head Rodrigo Rato sent a ripple of worry through the financial community when he said in a recent speech that the risk of a downturn had increased since April. But the tone of his remarks was far from bearish, overall.

What else could be amiss? Raju said in an interview that his company is getting tired of doing so much training of new employees. As his company and his Indian peers continue to increase in size, something must be done. The first place to start is in improving the Indian college and university system so that graduates not only have an academic degree, but they also are prepared to go to work. The need: soft skills. One analyst from India at the conference said the Indian educational system is so academically demanding that students cant afford to spend any time learning how to communicate or work with others—just the skills they need when they enter the work force.

Still, Satyam apparently is doing a good job of training. Bourgeois praised the management of Satyam and the other big Indian players. Sure, Indian wages are much lower than almost anywhere else in the world, but the annual high-wire act of hiring up to 7,000 new employees and assimilating them into a company is no mean feat. Its this practice of hiring at the bottom that, despite upward wage pressure, keeps the Indians pay scale so much below that of bigger rivals, and their profitability rate so much higher. With IT budgets cruising along at a healthy, if not irrationally exuberant, 3 to 6 percent growth rate, outsourcers can feel fairly secure that their revenue stream wont dry up overnight.

Executive Editor Stan Gibson can be reached at stan_gibson@ziffdavis.com.