Tuesday, May 30, 2006

Costs and The Software Outsourcing Scenario in India

In a previous post on KPO, BPO and IT, I had wondered whether this Outsourcing thing is really beneficial for India. Let us look at a few recent developments:
-The US Government announced a hike in the H1B visa cap.
-SAP CEO: India is getting expensive

All this makes me wonder. If the visa cap is hiked, more and more software professionals from India will be able to work in the US. Assuming the same talent pool (or a part of it) migrates from India to the US, I would think that they would cost more in the US than what it would cost to hire them in India. Accounting for the fact that a company will prefer to have most of its RnD (research and development) folks close to each other, it simply implies higher personnel costs in the US in hiring and retaining. At the same time, SAP (and I am sure many others) feels that the costs in India are getting high to the limit that it makes it an unattractive destination for outsourcing. Now look at this (source here):

We have a couple thousand open technical spots that we cannot find people to fill," said Jack Krumholtz, managing director of government affairs for Microsoft, the world's largest software maker. If that situation persists, he added, "we're going to have to do more of our development work abroad.".....U.S. Companies are now limited to hiring 65,000 skilled immigrant workers annually under the H-1B program.Because of the visa cap, Intel has begun placing some foreign engineers in countries with more lenient immigration rules, like Canada, Ireland and Israel...

Is cost the only thing under play here? I mean if Microsoft is willing to shell out more bucks and have the folks come to the US rather than hire them in India, why are some Companies worrying about rising costs? If Intel is worried about not getting quality manpower, it is willing to hire the best folks from all over the world, and put them in Canada and Israel, bear higher costs and still be happy. SAP Labs India has more than 1000 personnel "engaged in collaborative software engineering that facilitates the delivery of innovative business solutions." I presume this is SAP's equivalent to RnD for Microsoft or Intel, but its still worried. Any guesses (unless you want to hear mine)?


Rupak Rathore said...

While I agree largely with you here, there are certain factors that should be considered. For the sake of counter-arguments, here they are:

1. US wants to remain at forefront and not willing to loose its edge. (Geo-Political)

2. Certain kind of software and hardware development is controlled by US laws (Geo-Political). Examples are encryption and various military related projects

3. Hiking visa means more people and majority may not be from India. I believe majority of H1B are from China.

4. Increasing overall costs due shortage (thus rising salaries). If more workers are added, salaries will go down on average and people will take lesser hikes. Thus overall costs will remain same with increased workers.

5. Outsourcing has its colors in US. H1B does not cause PR headaches.

6. Certain states have laws that does not allow majority of projects to go offshore. Worker shortage translates into loses.

7. Key reasearch teams depend largely on existing resources and they like to remain co-located. Its highly unlikely that anybody from US will want to move India to head the research team. Unless we demonstrate indepedent research strengths, this bottleneck remains.

Though, I completely agree that work being outsourced is of much lower quality, hence SAP is finding it difficult. I should also mention that quality has taken a big hit due to huge surge in demand. Average IT worker now is of poor quality and demands exorbitant salaries.

Nitin said...

Leaving aside the geopolitical factors which were not within the purview of my post, let me post some thoughts on your comment:

3. Majority visas may not be from India - agreed. However imagine a scenario in which visas are increased by 30000 - and only 10% of these - 3000 are Indians. I will still say that SAP (or others) would have surely been able to hire them at lower costs in India itself for the RnD centres in India.

7. SAP Labs in India says that this is a full fledged high end research centre:
SAP Labs are role models for globally distributed development organizations, contributing effectively to the goals of SAP's business units. Bridging the gap between local market demands and SAP's development organization, SAP Labs set standards for excellence in innovation, efficiency, and reliability. They are recognized centers of local talent and expertise, establishing a strong foundation for SAP development in the future.

I would assume the above means its a key research facility. Rupak: Do you believe otherwise?

Harsha Raghavan said...

1) First of all, majority of H1-Bs are from India.

2) 70%+ of India is it's villages and poor - outsourcing does not help them directly or otherwise.

3) India is content with serving US interests. I have a Worldcard (or something like that) from Citi India and it HAS BEEN A FREAKING HEADACHE to work with their website or get anything done www.citibank.co.in.

4) Indian outsourcing rides the way of US software volatility: If the US economy tanks or demand reduces, think about the results in India.

5) Don't get me wrong: o/s got India on the map but just a few of us. We're capitalizing on one strength, which also means all our eggs are in one basket.

सुरेश शुक्ला said...

The post and comments are from 2006. You would have realized the amount of truth in

"They are recognized centers of local talent and expertise, establishing a strong foundation for SAP development in the future."

I am not sure if it is a research facility.
- Suresh