India's Outsourcing Problems

December 11, 2006 4:31 AM

India's Outsourcing Problems One of the most controversial aspects of the global economy has been the newfound freedom of companies from physical location and the subsequent spread of outsourcing jobs. No country had embraced tech outsourcing with the passion of India. Of late, problems there are beginning to rise: engineers start a project, get a few months' experience, and then bolt for greener pastures, bringing a level of attrition that replaces entire staffs within the course of a year. Combine that with salaries in Bangalore that are rising at 12% to 14% per year and it is no surprise that companies are leaving India for a slew of emerging hot spots for IT outsourcing such as the old Soviet Bloc, China, and Vietnam. This comes as companies such as Microsoft continue to laud outsourcing and proudly proclaim that it is here to stay, and it looks as if Ho Chi Minh City will be the next Bangalore.
posted by PreacherTom (19 comments total)

It's not peers' pressure, it's poors' pressure

Competition below, collaboration above

Freedom among many, Free-dom among few

Socialization in cost, privatization in profits

All my problems are yours, you are my only problem.
posted by elpapacito at 5:34 AM on December 11, 2006

Interesting set of articles, thanks.

There was a theory a while back that the size of India would stop IT salaries from rising there, since there would always be a huge labour pool to draw on. Looks like that's being proven false, partly because of the limited number of qualified people, partly because of the difficulties of expanding out of the high-tech areas.

This article the outsourcing bogeyman is a little dated now, but still interesting.
posted by TheophileEscargot at 5:39 AM on December 11, 2006

Thanks for sharing, Theophile. I enjoyed that article.
posted by PreacherTom at 5:43 AM on December 11, 2006

I'd prefer a Russian accent to an Indian one for my tech support, not sure why.
posted by StickyCarpet at 5:54 AM on December 11, 2006

Since it is usually crap work that is outsourced, it should come as no surprise that talent will want to get out from under it as soon as possible. Hopefully we'll start to see some kickass Web 2.0 startups come out of India soon.

Also, please note that there is no such place as Bangalore anymore. It is called Bengaluru now.
posted by jimfl at 6:20 AM on December 11, 2006

Huh? How are those "bad things" for the tech workers? Sounds like they have it great, so great they're able to switch jobs for higher salaries every few months. If the jobs are then leaving for even more places then that's just spreading more wealth around the world.

Also, regardless of how good the programmers are, your average company isn't going to just hire someone from podunkistan until they have a reputation for being as good as the Indians.

Another interesting thing is all the venture capital flowing into India now, to start new companies and soforth.
posted by delmoi at 6:20 AM on December 11, 2006

I've been hit by the attrition issue with Indian engineers a lot. There's this constant cycle of training new people, assigning them to projects and then having them quit after six months and then having to start over again.
posted by octothorpe at 6:32 AM on December 11, 2006

assigning them to projects and then having them quit after six months and then having to start over again.

I don't know indian law enough to understand if it's a trick to keep employing similar people at reduced rates, firing people that one should promote or pay more and replace them with fresh, but skilled enough labour. And engineering is labour, high skilled, less easy to replace, but still.
posted by elpapacito at 6:46 AM on December 11, 2006

I've also worked in a few projects that were partially or wholly outsourced. I think this is a mainly Indian issue: apparently the labor pool is very limited and the opportunity (i.e. the potential profit that can be made) is large, so companies keep poaching each other for talent. This is a problem for most projects that require a bit more esoteric skills or just simply an organizational memory. I don't think that say the Central or Southern European outsourcers face this issue to such an extent: their labor pools are (comparatively) larger, and their profit margins smaller, so there's less appetitie for cannibalization.
posted by costas at 7:37 AM on December 11, 2006

Indian labor laws are extremely pro-worker (this may be different in some of the Special Economic Zones, that they set up to attract FDI, but I suspect that those are primarily set for tax breaks), and make firing workers extremely difficult.

These workers are getting reputational/sorting benefits from the first IT jobs that they competitively acquire, which they can parlay into much better jobs much quicker. The irony of having so many workers trained as engineers, programmers, etc. in India, is that you can't know which of them are the actual skilled good ones. The companies that hire them are taking big risks (primarily because of the aforementioned strict labor laws) in hiring them. Those workers who are hired, are quickly given a signal to other companies that they are worth it, and they jump ship ASAP.

Rinse Cycle, Repeat. Its probably a mix of both the sheer numbers of workers with engineering degrees of varying qualities, and super strict labor laws that create this cycle
posted by stratastar at 7:43 AM on December 11, 2006

elpapacito
Would you care to explain the point you're trying to make? delmoi et al seem to have a point: if the workers are able to constantly jump to better-paying jobs, and job opportunities are now spreading to places that didn't have them before, how is this bad? It seems like the people who get hurt by this are the companies and engineers/programmers who have to deal with the hassle of training new staff every few months.
posted by Sangermaine at 7:53 AM on December 11, 2006

I've just returned from India, and I'll say this: those days of 15% raises are long gone. It's boom-boom-boom time in India now, especially if you're an IT professional; developers and their project managers are on top of the pecking order. Know someone in Wipro who got a 50% raise year-on-year, and she's sure that she'll get a 100% raise if she switches jobs. HP India, I'm told, gave an across-the-board 30% raise to everyone. Reason: an entire team moved en masse to a competitor company.

My estimate is that Indian salaries will reach at least South East Asian/ Australian levels in another six months to one year, especially for those with experience. There are loads of folks freshly minted from (south) India's numerous engineering colleges, but they lack the professional finesse to handle large projects.

Besides, a bigger problem, as I see it, is that India's geek culture isn't as developed as we'd (I'd?) wish it to be; most of those freshly-minted folk are in the field for the money, not because they're excited by solving hard problems. Additionally, as I see it, most of the newly IT-literate crowd in India still tackles code as mathematical equations; they lack a certain end-user perspective, and therefore, seem to miss a few things most of us take for granted. (We've had a few folks imported from India at my workplace; comments arising from interacting with them.)

Microsoft, technically, isn't outsourcing (or offshoring) projects to its India Development Center; it manages entire projects.

I don't think Ho Chi Minh City is a real threat to India's IT cities. Vietnamese might be competition to Indians, but Ho Chi Minh City is miles away from Bangalore in developing its innovation networks. (Intel was advertising for openings in Cambodia last year, but the HR lady at the job fair there couldn't tell me what operations they had there). Manila, on the other hand, is significantly closer, and has better bars and a nightlife. In short, it has a critical mass closer to that of Bangalore, and for sure, has seen its share of projects coming towards it.

Additionally, land is probably cheaper in Manila than it is in urban India; land in about _every city_, Tier 1 and Tier 2, has shot up through the roof. Currently, it is cheaper to rent a decent two-bedroom flat in a middle-class neighbourhood in Singapore, than it is to rent an upper-middle flat in Hyderabad, with significantly lesser amenities. A friend was shopping for a decent flat in downtown Delhi, and found that even 30 lakh rupees (that's Rs 3 million) wasn't enough for a two-bedroom flat in South Delhi. In comparison, a four-bedroom flat in a fairly expensive location in Singapore was valued at SGD 1 million, which, you're right, is slightly lesser than INR 3 million.

The question naturally, is this: if you can lease land for a cheaper price, and hire developers at virtually the same cost, and still bear with all that traffic and potholes and general chaos, why would you still go to India? Not as if Indian companies have moved up the value chain in any case; indeed, for reasons I've hinted at earlier, I would presume that it would be rather difficult for Indian IT to scale up.

New India scares me fundamentally for a different reason, as well; the hubris, the chaos, and the speed is something I'm not used to. It's like we're trying to be first-world while ignoring the third-world in front of us; my final few hours in India were, for instance, spent in a mall in Delhi where we were surreally chased by cows and dogs. Everyone wore Levis', Ray-Bans, and threw half-emptied cans of fruit juice into the same filth that they were standing on. Nobody cared.

Somewhere down, couldnt help but feel nostalgic for the old, middle-class India that I grew up in; while we didn't have malls, and saw multiplexes only in bootlegged videos, we were more sociable, people were more friendly, caring even. You get the impression that the social structure in urban India has now completely shaken itself up. It's a staggering thought; while replacing our old mohallas with McDonald's, we seem to have become zombie-fied consumerists thinking about nothing but ourselves.

May be it's just me.

jimfl: Check back on Mefi Projects in a few weeks' time. One, hopefully kickass, India-oriented Web 2.0 project in the works, depending on how quiet my weekends are. :-) Ruby-on-rails, AJAX (of course!) and a 1500 year old enigma. Bad luck to say anything more.
posted by the cydonian at 8:17 AM on December 11, 2006 [5 favorites]

Also, regardless of how good the programmers are, your average company isn't going to just hire someone from podunkistan until they have a reputation for being as good as the Indians.

Respectfully don't entirely agree. Execs at large companies get bonus through directives, often multi-year directives, that look cost effective in the short run but long term show real problems. Consider Dell outsourcing tech support to India then backtracking in the face of consumer annoyance. Don't know whose idea it was, but in cases I am familiar with, the guys who made the decisions got their bonuses, often subtstantial, parleyed their achievements to other jobs elsewhere, and left it to others to clean up the mess.

Which usually means a brand new exec, a brand new directive, and so on ad infinitum.

Not uniform, of course, but never assume that business, especially big business, does things for entirely rational reasons. Or rather, reasons that will benefit the company.
posted by IndigoJones at 8:50 AM on December 11, 2006

Would you care to explain the point you're trying to make?

Why don't you explain it to me ? Let' see what I wrote

to understand if it's a trick to keep employing similar people at reduced rates, firing people that one should promote or pay more and replace them with fresh, but skilled enough labour.

Stratastar got it and offered that indian laws are pretty much pro worker. Good, so they also were in italy and they quickly were turned into a mess in which many people get hired for short periods of time , again and again, so as to increase the uncertainity in their future making them more prone to accept whatever is thrown at them, because at the end of the month they still have to pay bills.

In practice the laws there were supposed to fluidify the labor market are being exploited to increase insecurity ; on top of this every loophole is being exploited, such as creating a job position that doesn't require unique skills (and very few positons are like that) hiring labour and firing them before the time limit imposed by law, after which the employer must give a better contract to the employee as he already proved his worth (reasoning being the employeer has an interest in trying the worth of the employee, but you can't try it indefinitely, it's a scam)

Another kind of contract gets you hired as if you were a professional , with minimal or no pension plan contribution, for the duration of a project. So a project is made to fit a job position, it is made so that is basically describes a generic work , so that the employer can fire the employee almost at will declaring the project to be finished. I am not talking about IT professionals (who get such contracts anyway, unless you are among the few not replaceable) but about ordinary clerical workers. For "blue collar" is almost as bad , but the retribution is usually slightly lower.

Guess the next on train is India, exactly for the good pro worker laws, so I guess the apparent boom is pretty much a short lived one as it doesn't make sense NOT to exploit workers if they don't resist.
posted by elpapacito at 8:51 AM on December 11, 2006

Well I'll say this: I'm glad for the Indians who made the investment. Visiting years back, before "outsourcing" was really heard of, I saw all these tech schools in dusty little towns and figured them to be scams. "Like Microsoft is going to come in here and hire all these programmers."

Heh.
posted by dreamsign at 11:13 AM on December 11, 2006 [1 favorite]

Poor people are getting richer. This is great news. Remember this next time rich people ask you to ban outsourcing to protect their overpaid, privileged first-world jobs.
posted by hoverboards don't work on water at 2:18 PM on December 11, 2006

Yeah, people are getting richer, which is great, but it's really weird and unstable, kind of like bubbles we've seen here in the US. If India can maintain, strike some kind of equilibrium the there's little to worry bout, but it's starting to look like "irrational exuberance" all over again. And what happens to Bangalore when another country undercuts their outsourcing bids?
posted by lekvar at 2:28 PM on December 11, 2006

Yeah, people are getting richer, which is great, but it's really weird and unstable, kind of like bubbles we've seen here in the US.

Any functioning economy will look weird and unstable on a small scale as the natural back-and-forth of supply and demand, competition, innovation, churn, and all that interacts with the chaotic real world. Only managed economies are, well... managed.

And what happens to Bangalore when another country undercuts their outsourcing bids?

Beats me. You can't plan these kind of things.
posted by hoverboards don't work on water at 3:19 PM on December 11, 2006 [1 favorite]

But what we're seeing here is capital inflow and outflow similar to the short-duration currency speculation that brought chaos to South America during the late '90s.

When Bangalore is no longer the hotspot there's going to be some upgly economic repercussions.
posted by lekvar at 4:08 PM on December 11, 2006