The falling US Dollar and Outsourcing

Interesting views have been shared in media. Views of whether the Indian Rupee is appreciating or the US Dollar is depreciating. Or there is a combination of both. This debate will continue till the 'cows go home'. The point is; whichever side we look at it, profitability of Indian IT companies is getting hit.

To recap, the 1^st wave of outsourcing was about sending engineers to the US to work here at low salaries. The 2^nd Wave was about taking applications and moving them offshore. Using low cost labor and gaining out of labor arbitrage. Profitability is based on the value difference between the Indian Rupee and the US Dollar – of course, the standard of living and competitive industry salaries were the key factors which kept the salaries lower in India. The Western world gained from this. This helped them reduce their costs and keep the light burning.

Here's a view of Indian IT companies have depended on till date:

1. Playing the price game in a commodity market – Large enough market for this
   
   1. Zero differentiation
      
   2. key earnings come from Labor arbitrage
      
2. Strong processes supporting the 2^nd wave in the framework of a lower valued Indian Rupee
   
3. More emphasis on volume of programmers rather than quality of talent
   
4. Finally, they have focused on breadth
   
   1. More the verticals the merrier
      
   2. Scale is the game
      

In one line, cheap commodity business, with high operating costs and a shot gun approach.

This is exactly how the second wave of outsourcing describes a successful company. Exactly how each of the biggies of the Indian IT industry has grown. So what's wrong with this silver bullet today?

Moving back to today's scenario of Indian Rupee going stronger against the US Dollar (relative to the earlier years), there is a reality check that every outsourcing firm grappling with. The issue is simple. Less Indian Rupee flows in for every US Dollar of earning. Hence, the charts show a dip in profitability. If profitability is lower, can the industry continue with the ride that it has had over the years?

During a Sunday brunch in Redmond, WA, a prominent person from the Indian IT industry spoke about the pressures he is facing from investors and how difficult it is to get clients to pay more money, "we can't expect them to pay us higher monies for the same work. Some client may pay us more, but that is a short term solution". He is bang on target; this is certainly not a solution as the 'green' is depreciating back here in the US. Outsourcing companies are riding the 2^nd wave of outsourcing – it has been a successful one – till now. I presume it will still hold good for the next 2-3 years. But there will be pressures on new business acquisition, quality of talent, process efficiencies, margins and finally valuations.

Why does this change / fluctuation in the currency (hope it is only a fluctuation and not a change) get Indian IT companies sweating? One, it has real and tangible impacts on their businesses in the short and long term and two, it is difficult to change the way they have been working – doing incredibly well for a couple of decades.

If (God or markets forbid) the Indian Rupee appreciates to a high of below mid 30s against a USD, hell will break loose. The IT industry could bottom out due to profit pressures and marginalization of quality resources. The silver bullet needs to be changed to something that provides tangible value in a more differentiated market – the 'new', 'improved' and 'power packed' silver bullet. The objective is not to make it sound threatening – it's just a reality. Part of a business cycle.

In the next article, I will try to provide options of tiding this business cycle. In the mean time, your comments, your thoughts and views are welcome.

The Third Wave of IT Outsourcing

“Have you tapped the talent pool from India? They have some good talent and they come at low prices. If you haven’t yet, get them in to your company.”

This is what we were used to hearing a long time ago (late 60s, 70s, 80s and early 90s). This was the ‘first wave’ of outsourcing where we shopped for talent (often addressed as resources). Good minds in IT (coding actually – due to their engineering background coupled with analytical skills) and low cost of hiring. Finally a large pool of unemployed talent. Offer them a job at half the price of an American talent and they will be loyal to you always – and they will live happily ever after. People moved from India, China, Malaysia, Eastern European countries, Russia and many such countries to the US of A and later UK. They were the early professional labor that was attracted by American companies – particularly in the field of IT. This was certainly the first wave of outsourcing – glorified slave trade – onshore professional services. IT is outsourced to talent that was not really from the ‘land’. In those countries, economies were being built on IT – exporting talent. But then it’s only human to be more greedy.

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“Have you outsourced your IT application maintenance to one of those growing economies somewhere around the globe? May be India or China or some Southeast Asian countries?”

This is what we heard in the late 90s and do hear of it even today. This was certainly the ‘second wave’. Of course, the Y2K bug (what did they debug?) was the best excuse. India actually led the pack. Corporate IT saw a different aspect of talent. The greed of increasing margins coupled with the local paucity of skilled labor, IT coding started moving ‘offshore’ – well literally. Imagine doing work at almost 1/10 the cost. This meant that one could release core IT staff on site to do innovative work rather than mundane maintenance work, which could easily be outsourced as all it needed were processes and people skills. Well put by Geoffrey A Moore in his book ‘Dealing with Darwin’. Interestingly, the outsourced or rather offshore work was so lucrative that every American IT company worth their salt, who were delivering ‘IT consulting’ (in the true sense of the word) and to some extent business consulting developed models in offshore outsourcing. They moved from ERP manufacturers to ERP maintainers. But, why not? It made financial sense. Hence, the second wave was really about offshore development and maintenance of codes.

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“I sell an SOA based application platform for policy administration in Life and Annuities Insurance companies in US. And based on third party tests, it is the best platform available today…”

I was surprised to find this Indian company representative talking of their own IP and design that is meant for the American market. Going by ‘The World is Flat’, I believe him as surely do many of his company’s customers. Its natural. India and many other countries (small number of companies – certainly not the most well known ones) are starting this new wave. The ‘third wave’ of outsourcing is just around the corner. Companies that did basic maintenance have now gotten extensive domain knowledge and are designing and developing applications that are meant for the global markets. This wave can accelerate in the next 3-5 years. And it will then be very difficult for the large outsourcing companies to move in here as their DNA was either built on or has been mutated to large volumes to code development. It will be interesting to watch the new geniuses as they move ahead with a vision for industries and companies in mature markets. Ride the ‘third wave’ of outsourcing!

I would appreciate your views on this third wave. Please do post your views, critics and comments. All welcome!!! Cheers!!!