Introduction-to-OffshoringIndia has a large outsourcing revenue stream powered by dozens of large companies that carry out work for offshore companies. It was all the rage after the financial crash and rumours of it’s demise pop up every few years. Now some very large companies are moving to Cloud and as a consequence, the amount of work that is carried out by hands on is dropping substantively. As well as that, in the last few weeks legal suits in the U.S. have popped up targeting companies that offshore their IT in preference to employing local workers.

Mid 2000’s, I’m working for a large corporation and it’s just gone 1pm. Suddenly, all the core applications, for some three thousand staff, start dropping out. They’ve all gone off line and the clock is ticking at a burn rate of over $1m per hour. In India, engineers are patching the systems, having worked out the time difference incorrectly. Rather than patching in our change window, they’ve got the clock wrong and have dropped our systems in the middle of the day.

Such were the horror stories a decade ago when it came to outsourcing offshore. However the trend to move away from directly employing IT staff and to outsourcing was on a run.

Every arbitrage contains the seeds of its own destruction, and the outsourcing of IT work from developed countries to lower-priced workers in India follows that rule. The rise of cloud computing has opened up new ways in which companies can make their IT operations more efficient, and the cloud is starting to bite into the revenue, profits and employment levels in India’s critical outsourcing industry. – Source

Everything cycles as we know, and what we are starting to see is the potential lag of the Indian outsource product in deference of rapidly developing new products and business models. Indian outsourcers having being buying up companies, however it tends to be in the market expansion area rather than product. In other words, they’ve bought footprint in markets to drive an existing outsource product as opposed to new functions for customers.

Indian IT outsourcing companies’ acquisitions have largely been driven by the desire to enter new markets and industry segments or quickly expand business. At times, the acquisitions are fuelled by large, multi-billion dollar contracts that allow them to buy the in-house software divisions of their clients.

But, they aren’t tending to buy companies that will propel what they can do in terms of tech. – Source

These are not small amounts of money at stake here. AstraZeneca has signalled it will be chopping it’s own IT staff in half and reducing it’s current $750m USD spend on outsourcing by 50% over the next two years. Largely thanks to Cloud. Other large companies are moving in the same direction. The days of hands on outsourcing being relatively inexpensive, delivered from Asia, are now waning as Cloud services cut the price further.

Couple that with India’s significant infrastructure challenges in power and other areas and a Cloud service running from a well-serviced country with large robust datacentres is also more compelling.

Meanwhile, in California, lawyers are taking on offshore outsourcing as well as use of immigrant labour, which they claim is bought in at much lower costs, impacting national IT workers.

California lawmakers have taken steps to attack the use of foreign labor to replace U.S. workers. One effort seeks to use the state’s regulatory powers to prohibit utilities from shifting jobs overseas. Another legislative attack calls on federal agencies to investigate the H-1B visa program. – Source

It’s being driven by these kinds of examples:

SCE (Southern Californian Edison) cut about 500 IT workers over the past year after hiring two India-based IT service providers. Some of the laid-off workers said that they had to train their temporary visa-holding replacements as a condition of their severance packages.

It appears that the Indian outsource model will fall foul of this action as well as immigrant workers.

The California legislation could hurt offshore IT service providers.

“The public utilities market is an important and growing market for a number of the Indian service providers,” said Peter Bendor-Samuel, founder and CEO of Everest Group, an outsourcing consultancy and research group.

For IT service providers Tata Consultancy Services and Wipro, the public utilities market “has been consistently one of their fastest growing segments over the last two years,” said Bendor-Samuel. The importance of this segment is growing as activity in other markets slows, he added.

“This bill and the protectionist sentiment underlying it is concerning for the industry,” said Bendor-Samuel.

The subtext of the legal action is that it is being linked directly to other bills that look at protecting U.S. infrastructure. If the lawyers can prove those laws are being breached by the offshoring of services and hiring of migrants, they may have a case.

One bill prohibits state-regulated utilities from outsourcing any work associated with the “design, engineering and operation” of nuclear, electrical and gas infrastructure, unless they first obtain the approval of the state utility regulator.

Tata Consultancy Services, one of the super-companies that is based in Mumbai, is facing legal action in the U.S. from an ex-employee.

An IT worker is accusing Tata Consultancy Services (TCS) of discriminating against American workers and favoring “South Asians” in hiring and promotion. His complaint is being backed up, in part, with numbers.

The lawsuit, filed this week in federal court in San Francisco, claims that 95% of the 14,000 people Tata employs in the U.S. are South Asian or mostly Indian. It says this practice has created a “grossly disproportionate workforce.”

India-based Tata achieves its “discriminatory goals” in at least three ways, the lawsuit alleges. First, the company hires large numbers of people who hold H-1B visas. From 2011 to 2013, Tata sponsored nearly 21,000 new H-1B visas, all primarily for people from India, according to the lawsuit’s count. Second, when Tata hires domestically in the U.S., “such persons are still disproportionately South Asian.” And third, Tata disfavors the “relatively few non-South Asians workers that it hires” in placement, promotion and termination decisions. – Source

It follows similar action against Infosys.

Between the movement to Cloud and beginnings of a movement to protect U.S. IT workers rights, there is a real possibility that Indian outsource providers are going to fall onto bad times.

Interestingly, under the proposed Trans Pacific Partnership (TPP), it is likely that IT workers in the U.S. will have to forgo these kinds of lawsuits as any movement to introduce what could be seen as trade barriers would be illegal. In other words, the power would swing from the workers back to the corporations.

The New Zealand Perspective

New Zealand has largely moved away from the offshoring services of a decade ago to more traditional outsource models using local providers. Datacom, a New Zealand company heavily dominate the government and private sector with Spark trailing, again, a local provider. Both have with varying degrees of success tried to break into the Australian market.

However, as Cloud matures in New Zealand, we see the move from engineering and systems automation to software itself. I.e. A good Software as a Service does not require Infrastructure or Platform as a Services. As that move progresses, hands on IT and outsourcing will slowly fall away in deference of the software and data megaliths of the future.

New Zealand also has a high proportion of insourced IT, something that is increasingly coming under pressure in the face of the innovation that SaaS brings, not so much cost saving driven, the capability for a government agency or private company to innovate and product cycle fast, means that having a legacy of internal IT will no longer be acceptable.

2 comments

  1. Well, I feel the trends highlighted in your article are not enough to cause serious fall of Indian IT outsourcing. Nonetheless, in medium to long term, the outcome will be in line with what you said. Bigger reason for the fall lies in short sighted, quarter in quarter revenue growth of Indian IT companies and as a result poor workforce good for nothing better than BPO.

  2. Biggest company TCS is a perfect example of hollow capabilities due to single minded focus on Q-o-Q growth focus and comprising on all other parameters of business. Fact remains -/they do not win business. West is giving them work. This has resulted in a complacency that is dangerous for them. Bogus focus and articles on Digital Reimagination and automation is being floated to fool the western companies. However, it can not work for long.

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