Higher pay slows India's growth

strauchr

Interesting article from the Australian IT. Who didn't see this coming?


Higher pay slows India's growth

JUNE 27, 2006

SOARING salaries and poor quality of staff are prompting foreign firms to shut outsourcing operations in India although there is no cause for alarm yet, officials and analysts say.

Apple Computer and software maker Pervasive have been joined by Powergen, a British subsidiary of German energy supplier E.ON, in announcing the closure of their centres in India's technology hub of Bangalore.
"The potential cost savings of an offshore development operation can be mathematically compelling," Pervasive Software president and chief executive John Farr said.

"However, we have found the complexity of managing such an operation and the increasing costs of labour, employee turnover, training and facilities in such a hot market as Bangalore makes it challenging to realise those savings," Mr Farr said.

India's premier software body, the National Association for Software and Service Companies (Nasscom), said starting salaries had shot up between 11 per cent and 15 per cent in the past few years, while wages for senior managerial positions had risen by 30 per cent.

Analysts said labour arbitrage for India existed only at the entry level, where engineers earned about $12,000 annually -- about one-seventh of the wages paid to counterparts in the US.

Consultancy Stanton Chase International said salaries of managers with 10 to 15 years experience in the US were between $US100,000 to $US150,000 ($130,000-$200,000), while in India they were paid at least 10 million rupees ($300,000).

"At the start of the technology boom, in 1993, the top management people were paid about three million rupees," Stanton Chase principal consultant G.C. Jayaprakash said.

"The most worrying factor for foreign firms is the steep increase in salaries.

"Big companies such as Cisco, Motorola and others are only hiring freshers and at lower managerial levels. This is for the simple reason that IT managers from the US can be accommodated at a much cheaper rate," he said.

Besides steep salaries, the quality of staff is also proving a challenge for technology firms.

Powergen announced last week that call centres in India would no longer be answering telephone calls from its customers because of complaints about the poor standard of service.

Industry and government needed to find ways of producing more employable talent, McKinsey and Company director Leo Puri said.

India produces about 400,000 engineers annually, according to Nasscom.

However "only a very small percentage is employable," Mr Puri said.

"Rising salaries are a long-term threat to the industry. For competitiveness it will hound the industry in the next three to five years," he said.

"That does not mean we must sound the alarm bells just because a handful of firms leave."

India remained competitive compared with the Philippines or Vietnam as labour arbitrage was only a secondary driver of offshoring, he said.

"We have the capability to put together large quality oriented business processes and have a track record of innovation.

"India can still deliver a huge cost benefit and it will continue to do so for the next 15 years."

India's software and outsourcing revenue was expected to grow between 27 and 30 per cent in the current financial year to between $US29 billion and $US31 billion, according to Nasscom.

Anant Koppar, president of Mphais Technologies, an outsourcing firm acquired by US giant EDS earlier this month, said the middle-level salary increase was mainly due to "supply constraints".

"We need to look at the people coming out of the institutes and make them industry-ready. These engineers and graduates have to be tuned in to industry's needs," he said.

"The moment you have more people with skills the salary levels will come down. Salary costs account for almost 60 per cent of the total costs of a firm."

Nasscom said it expected a shortage of 500,000 people in the outsourcing sector in the next four years.

India still dominated the outsourcing sector, Nasscom vice-president Sunil Mehta said.

"Companies that employ fewer people and do not take advantage of economies of scale are the ones that are facing problems," he said

TheShadow

Good to see that my economics 101 class is still valid after all these years.

strauchr

Shame some of the businesses that spent huge amounts of money to go through major outsourcing initiatives didn't go through economics 101.

Oh well.

JDMurray

"However, we have found the complexity of managing such an operation and the increasing costs of labour, employee turnover, training and facilities in such a hot market as Bangalore makes it challenging to realise those savings," Mr Farr said.

How on Earth would an Economics 101 class teach you that offshoring technology business in India would result in managerial complexity that would make the venture unprofitable? That's a cross between Economics 300 and Asian History 500 if I've ever seen it.

India produces about 400,000 engineers annually, according to Nasscom.

However "only a very small percentage is employable," Mr Puri said.

This is an absolutely stunning statement to me. I'd sure like to know the reasoning and assessment behind this finding. This must include all types of engineers, not just CS and EE.

sprkymrk

jdmurray wrote:

India produces about 400,000 engineers annually, according to Nasscom.

However "only a very small percentage is employable," Mr Puri said.

This is an absolutely stunning statement to me. I'd sure like to know the reasoning and assessment behind this finding. This must include all types of engineers, not just CS and EE.

I had a friend from another under-developed and poor country. He was educated in law and science. He told me that in his country, since there are no jobs, everyone stays in school until their late 20's and early thirties to have a better shot of getting a job in another country like UK, US and France. However, due to financial issues, the schools have no real lab environments and old (if any) equipment to train the students on. He said it is not unusual to turn out a Master's in Comp Sci that had never touched a computer. They write all their programs with pen and paper. I think the same goes for their engineers. This is why only a small percentage are employable (besides possible language barriers). The ones that can afford the better schools may actually get a chance to practice the skills they are taught. The rest go through books and tests only.

TheShadow

That is really a shame. IBM used to seed universities, those days are past but you would think the major PC companies could do something or a little more arbitrage. Global issues, uhh Bis425 or as JD says Eco300 and something else. Maybe there is a really big market for simulators from Boson.

rcoop

jdmurray,

A recent article in ComputerWorld said that the engineering numbers from India and China are overstated, but they still outproduce the US in engineering graduates.

I can't seem to locate the article, but I did find another that is basically stating the same thing as the above article except for China:
http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyId=10&articleId=111620

I have yet to find anyone that enjoyes speaking with Dell's Indian Help Desk (support)... and it's not because the tech's aren't nice.

Take Care,
Rcoop

rcoop

There is definitely an increasing number of Indian visa holders (H-1B) that I work with on a daily basis here in the U.S. Although many are well qualified, and just 10 years ago it seemed that it was the Asian engineers that were often seen getting high-tech jobs in the U.S., it is interesting because they seem to have decent resumes, but it is hit or miss with their skill sets (of course these are normally programming positions, SAP, or Database-related).

Immigrants and these visa holders, definitely prove the value of a decent education and willingness to relocate (even to a foreign country) to pursue a good job that pays well.

Take Care,
Rcoop

oldbarney

A relevant report titled "Heard the one about the 600,000 Chinese engineers" recently appeared in the Washington Post. The highlights are:

In fact, about half of what China calls "engineers" would be called "technicians" at best in the United States, with the equivalent of a vocational certificate or an associate degree. In addition, the McKinsey study of nine occupations, including engineering, concluded that "fewer than 10 percent of Chinese job candidates, on average, would be suitable for work [in a multinational company] in the nine occupations we studied."

After an exhaustive study, researchers at Duke University also pummeled the numbers. In a December 2005 analysis, "Framing the Engineering Outsourcing Debate," they reported that the United States annually produces 137,437 engineers with at least a bachelor's degree while India produces 112,000 and China 351,537. That's more U.S. degrees per million residents than in either other nation.

oldbarney

rcoop wrote:

There is definitely an increasing number of Indian visa holders (H-1B) that I work with on a daily basis here in the U.S. Although many are well qualified, and just 10 years ago it seemed that it was the Asian engineers that were often seen getting high-tech jobs in the U.S., it is interesting because they seem to have decent resumes, but it is hit or miss with their skill sets (of course these are normally programming positions, SAP, or Database-related).

My employer brings over engineers from India for 90-day stints. Those guys and gals usually work on the lower-level engineering tasks.

JDMurray

TheShadow wrote:

That is really a shame. IBM used to seed universities, those days are past but you would think the major PC companies could do something or a little more arbitrage. Global issues, uhh Bis425 or as JD says Eco300 and something else. Maybe there is a really big market for simulators from Boson.

One of the problems with India in particular was that they would break trade agreements with the USA by buying computers and resell them to countries that had restricted trade with the USA. In the 1980's, many of the IBM and VAX computers sold to India eventually found their way to China and the USSR. I realize that this occurred decades ago, but the same type of mentality still exists.

TheShadow

Ahh Very true I had forgotten about that.