Churn Times

9.11 is an innocuous fraction that’s now etched in this planet’s memory.

And nearly a year after the event, the world’s eyes remain riveted on America–and

on the American economy. The world’s flywheel which is now sputtering along–the

signals are confused, and the trends a see-saw. Up one month, down the next.

July 2002 was a slow month. Unemployment remained at 5.9% as per the US

Department of Labor data. Total employment increased–but a bare 6,000 numbers,

against job losses of nearly 1.8 million between March 2001 and April 2002. May

saw 28,000 jobs added. June reared up to 60,000. July dropped sharply to 6,000.

Companies are either not hiring or hiring only temporary workers–their total

numbers have increased by 145,000 in the four months ending on July 31, 2002.

The worst hit has been the technology sector.

And that has led to turbulent times for the Indian software dream–it has

turned into a nightmare, and the sheen is gone. In the wake of this downturn,

there’re fundamental long-term changes taking place and these have serious

implications for Indian companies.

That there’s a lack of business is obvious. For the biggies, that has meant

slower growth. For the middle and small players, it is a lot worse. The H1B

visas–the lifeline for many–issued in the nine months ended June 2002 was

65,000 (159,000 applications were filed), against 130,700 (270,000 applications)

for the same period in the previous year. A drop of almost 50% in applications

and visas issued. Indian companies were the most hit by this drop.

And as US companies scrambled to cut costs, they have resorted to layoffs–among

them many Indians, who had to return to India or hang around in the hope of

change. The layoffs have led to a renewed debate about H1B workers. And the

longer the period of problems, the stronger will be the backlash. A poll in 2001

on Techies.com found 85% of respondents worrying about losing their jobs to

non-citizens. The Institute for Electrical and Electronics Engineers has now

asked the US Congress to take a closer look at the visa policy. Their anger is

directed at US companies, which, they feel, "treat US engineers as a

disposable labor commodity, rather than an essential investment in the nation’s

future". Data supports them. The number of computer scientists out of work

rose to 84,000 in the quarter of AMJ 2002, up from 52,000 in OND 2000. Even

without the present problems, the Indian workforce has gained an acceptance for

being technically excellent, but has often been overlooked for management jobs.

The end-result is that many companies are moving work offshore in order to

retain cost benefits–resulting in more layoffs. And more questions. Corporate

America is too steeped in the race for economic benefits, and will keep moving

work to where it gets cost advantages. Today, the rates for low-end ITeS type of

jobs range from $5-10 per hour, offshore rates (in India ) range from $10-20 and

onsite rates go up from there. As more jobs come off, this implies lower

revenues for Indian companies. They will now have to produce more to get the

same toplines due to lower rates.

Many have decided to set up and expand their own Indian operations–that

revenue will not go to Indian companies. Also, Indian industry will not see this

work reflected in its achievements, not unless transfer-pricing norms are set to

accurately reflect market rates. Today, these are set by individual companies

and often have no relation to market rates. As the norms evolve and get

implemented, accruals are bound to be lower than the rates Indian companies were

charging earlier. In the last year or so, MNC presence in India has increased

rapidly–with IBM, Oracle, Cognizant, EDS and many others emerging as hot

rivals to TCS, Infosys, Wipro and others in their search for Indian manpower.

Today, all MNCs put together employ at least 25,000-30,000 Indians in India. And

many of them are looking at increasing this manifold. Among the plans, EDS will



increase numbers five- to eight-fold over the next five years, Oracle plans to
add 1,800 people, Xansa will recruit 10,000 professionals in the next five

years.

This will lead to widespread cultural changes, pressures to find new ways to

hire and retain talent. And in some cases, pressure on prices.

No doubt there are positives. The fact that there are Indian operations in

which investments have been made, makes the bonds with the country stronger.

Companies that invest here will not find it as easy to shift to some other

geography, as they would have it they were mere purchasers of services.

Therefore, the country becomes indispensable to them. And, in turn, they become

indispensable to India. As was found out recently, when the US government’s

warnings on travel to India were enough to send up panic balloons–and fear of

business losses.

There are other benefits too. The need to keep growing has hastened the entry

of all top players into the ITeS arena. That is the growth area expected to

clock CAGRs of opver 50% in the next few years. No wonder then, erstwhile

software exporters are moving in–even if it is not an up-the-value-chain job.

In parallel, they are looking at going beyond development into BPO and

consulting. And many companies are now also focusing more on the domestic market–something

that had got neglected in the last few years. Good signs for the industry, but

one that will bring in very different ways of working in the future.

There will be an economic turnaround–there’s no doubt about that. The

boom-time of the late nineties will not happen again in a hurry–there’s no

doubt about that either. Let there also be no doubt that the present churn will

change the structure of the Indian software and services industry in a much more

fundamental way–the time to ponder over these and take steps to counter the

new challenges and use the new opportunities is now.

Shyam Malhotra



The author is Editor-in-Chief of Cyber Media (India) Ltd, the publishers of

DATAQUEST