IBM's massive Indian expansion poses risks for its competitors

Are there enough indian software workers to go around? Bloomberg's Andy Mukherjee reports on a hugely ambitious IBM plan to expand its indian operations, and its implications: IBM's India Plan Shows Need to Boost Talent

International Business Machines Corp.'s recent announcement that it would triple its Indian investments to $6 billion by 2009 has stunned the country's local software companies, and for a good reason. That figure equals the combined global assets of Tata Consultancy Services Ltd., Infosys Technologies Ltd. and Wipro Ltd., the top three Indian software exporters.

A bigger headache for the local companies is the inevitable price inflation that IBM's investment will create in an asset class that doesn't appear on their balance sheets and yet must be purchased, maintained and enhanced year after year: workers.

Some Indian companies are already feeling the pinch. Satyam Computer Services Ltd., the No. 4 exporter, last month reported an employee attrition rate of almost 20 percent in the quarter ended June 30, compared with about 17 percent a year earlier. To stem defections, Satyam raised its workers' pay in India and other low-cost countries by 18 percent starting July 1. Tata Consultancy and Infosys increased wages by 15 percent on April 1.

Some commentators have expressed concern that wage inflation in India is blunting the country's competitive edge in software services. These fears are overstated. It isn't particularly worrisome from India's perspective that the country's software engineers are now only a sixth as cheap as their U.S. counterparts. In 1998, that wage difference was about twice as large. The skills gap between its computer programmers and those from developed countries is shrinking even faster.

The reason IBM or Electronic Data Systems Corp. are scaling up their presence in India is because their clients are increasingly comfortable getting the work done by $500-a-day engineers in India, rather than by $3,000-a-day consultants in a developed nation.

So the real question isn't whether wage inflation in India will end the country's software boom -- it won't, for many years to come. The more pertinent issue is whether homegrown players will yield leadership of the outsourcing industry to international heavyweights. That might indeed happen if the local companies get cornered in the labor market and end up paying substantially higher wages without matching increases in productivity.

The domestic Indian software companies have woken up to the challenge. Their stress is now on value, rather than volume. They want clients to consider them on par with IBM and Accenture Ltd. and pay the same rates. "In the long term, we are moving into higher-value services like consulting and package implementation, which have got higher billing rates,'' V. Balakrishnan, chief financial officer of Infosys in Bangalore, said in July.

If this migration is successful, higher revenue productivity per employee will compensate for pay increases. On the other hand, if IBM and Accenture manage to use their Indian units to pare employee costs faster than Tata Consultancy and Infosys can climb up the value chain, the wage spiral will hurt the latter group.

Indian policy makers must obtain the maximum mileage for the economy from this contest. To do that, they must focus their attention on the supply-side bottlenecks.

Total employment in India's information-technology businesses has risen 43 percent over two years to reach about 900,000. And this doesn't include back-office work. Clearly, the combination of growing job opportunities and stellar wage increases is influencing the career choices of youngsters by luring more of them into engineering and computer- science courses.

That doesn't mean that such jobs are open to everyone. "Only those individuals have been able to gain entry into this industry whose parents are both quite highly educated,'' says Anirudh Krishna, a professor of public policy at Duke University in Durham, North Carolina.

Krishna's research on three Bangalore-based software companies shows that undereducated parents, unaware of the potential in the software industry, fail to prepare their children for the available opportunities. Parental ignorance constrains the size of the talent pool.

...At the same time, the government should free higher education from state controls and allow the private sector to produce many more engineers annually than it currently does. That will contain the "Bangalore bug,'' the term that International Monetary Fund Chief Economist Raghuram Rajan uses for the challenge India will face as rising software wages make engineers so expensive that other sectors of the economy, especially labor-intensive manufacturing, can't afford them.

There's a third dimension to the supply bottleneck: quality. Improving the standards of engineering education will boost the productivity of entry-level software professionals. "Wages are going up at the rate of 10 to 15 percent year after year, which is still manageable,'' says Lakshmi Narayanan, chief executive officer of Cognizant Technology Solutions Corp., a Teaneck, New Jersey-based software company that has 70 percent of its employees in India. "More importantly, for the longer-term sustenance of this industry, we would be concerned about the quality of the supply that comes out of educational institutions.''

Comments

[me]

IBM will get their head handed to them. When IBM first moved to India I said that it would not be long before Indians would say why do we need to charge IBM overhead for India labor. That is happening and Indian firms are winning business in the US, without IBM, and they are beginning to hire US employees.

Once IBM starts treating their Indian employees like their US counterparts they will be complaining about a skilled shortage in India also. The problem for IBM isn't a skills shortage, the problem is IBM, anyone with a brain doesn't want to work there or has been fired.

All you need to do is take a look at IBM under Palmisanno. Not only is the stock down big on his watch, but that includes $17 Billion in buybacks, stealing the pension fund? Top line growth - non-existent. The only sure bet at IBM is Palmisallno's $10,000 a day pension while everyone else at IBM loses theirs.

[A. PERLA]

"The problem for IBM isn't a skills shortage, the problem is IBM, anyone with a brain doesn't want to work there or has been fired."

Hmmmn, the company must have changed greatly since I worked there - in the 80s.

If so, a shame really. It was (then) a good company to work for, with lots of growth, lots of personal responsibility and, as I recall, a good number of very competent Indians (managers and software analysts) who could not find work back in India.

How times have changed ...

[me_ann]

I agree with me...the situation of ibm india is very very grim.If u cannot perform but can sit...u can expect to grow here.Whereas if u have brains and u want to prove urself...forget it, u will be crushed by one and all.

[A. PERLA]

me_ann: "Whereas if u have brains and u want to prove urself...forget it, u will be crushed by one and all."

Yes, well, it's back to the rice paddy, then?

What is it that you want, finally? Sock it to IBM because it is an exploitive multinational or obtain outsourced contract work from the world's largest market for it?

Make up "ur" mind. Cuz ya caint hav both.

[Ram]

Kind of dichotomy in IBM's approach in India. Talk about aggressive expansion plans in India, on the other hand hiring executives with rather dubious credentials at top positions ( maybe a desparation to fill those roles ). recently found out that IBM India had hired couple of Country Manager level people in areas like Financial Sector, even those kind of people ( Bankers etc ) with know unethical reputations in the Industry..

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