It is true that during a boom, industrial growth often happens haphazardly, at the cost of streamlined processes that minimize waste. Fact is - as long as the going is good, an industry can afford to be a little lax and just focus on growth. But as soon as the tide turns, and a slowdown of the economy as a whole or factors affecting a particular industry is felt, waste reduction and cost-cutting measures assume paramount importance. It is then that analysts are called in to audit processes, benched staff is offloaded and annual salary hikes take a beating.

If these measures sound a tad familiar, it's only because Indian business news is nowadays full of accounts of the impact of a rising rupee, falling dollar, meltdown of the US economy, US presidential election,  cut back on outsourcing to India and so on. But lets get this straight - while these reports detail a classical case of how economies in a global business world are interconnected or coupled, the factors involved stand to influence more than our IT and ITES industries.

As Shreerang Athalye, ex-CFO, director & promoter, Exatt Technologies Ltd., now turned telecom and M&A consultant observes, quite asides the services sector, many traditional manufacturing sectors have turned to exports (such as auto components). Obviously, the more the USD falls, the less Indian exporters earn.

IT/ITES: From off-shoring to on-site centres?

In the case of the IT / ITES sector, the fallout is not limited to the falling dollar having rendered the sector less competitive than ever before. The prospect of a new US president ushering in anti-outsourcing policies and the slump in the US economy have led certain Indian IT bigwigs to switch back to on-site services, albeit with a difference, observes a trader and investor in Indian equity on his blog (www.eclectic-investor.blogspot.com). For this time round, they're not employing a software programmer from Andhra Pradesh, but a local from Cincinnati, Ohio!

Apparently, Tata Consultancy Services has already established a 1000-seat capacity new software development and delivery centre in Connecticut to cater to US clients. In return for this relocation and the employment of local talent, TCS will receive a 90 percent property tax break and hope to gain from lucrative federal contracts. Undoubtedly, hiring local talent implies lower training costs of employees who are familiar with the cultural nuances of customers, but it still remains to be seen if this move will improve project implementation.

Undaunted, Indian talent will prevail

Nevertheless, Madhu Bhojwani, CEO, Emmay HR believes that Indian talent, especially at the lateral level, may be deployed to either set-up or stabilize such operations. Besides, he points out that back home in India, as the IT/ITES industry wakes up to the new competition, it is rapidly getting its house in order. "The current scenario has already started affecting the variable component of salaries including perks like ESOPS even though it has not yet affected the fixed component. However, having said that, it has been observed that the annual increments for this financial year have not been as good as the last 2 years," he observes.

In a sense, this corrective measure bodes well for an industry whose productivity was marred by very high attrition rates - employees will now have less opportunity to shop around for new opportunities. According to Bhojwani, "candidates who are [now] looking for a change are largely employees on bench, deputed employees and under-performers. Employees who have a good track record are seeking stability by staying put in their existing companies to avoid starting all over again and having to prove their credentials in a new company."

Athalye points out that increasing wages aren't the only factor responsible for the diminishing competitiveness of the IT/ITES industries, sky rocketing real estate prices are also holding back the sector. An analyst notes that India's high inflation rates are being driven by real estate, but sadly the government is focused on crude prices - wheat, sugar etc. Naturally, realty investors from the US who don't have the luxury of a strong dollar face a sorry scenario. Hence, he believes the Indian realty market will also see a massive correction in days to come.

Innovation: the key to keep ticking

Is correction then naught but another name for reform? And although correction makes for short term pain, does it ensure long term happiness and health? Alongside a renewed interest in corrective tightening measures, every industry, not only the IT/ITES is focusing on innovative measures to beat competition. Interestingly, decades ago, economist Schumpeter had contended that the level of scientific and technological activity is inversely related to economic growth cycles, thus suggesting that aggressive innovation is the surest means to swing back a period of recession.

No wonder that Athalye proposes that innovative measures should be adopted as top priority on every business agenda. "Every adversity provides an opportunity if you are innovative," he says. Innovation is not only a way to succeed amid competition, but also to survive. Hence, the meltdown of the US economy may also be perceived as an opportunity for it may actually open doors which were earlier tightly shut for Indian industry. How?

Athalye believes that as pressure mounts to reduce costs to face the meltdown, US companies will be forced to economize more - and who better than the Indian IT/ ITES industry to help in this endeavour? So the US meltdown may create a new opportunity for the Indian industry which was till now out of bounds for them.

IT/ITES: an outcome of innovation

Evidently then, companies who are ready working on innovation will be better off than the once stuck in to the conventional service models. If you still need to be convinced of this sure mantra to tide over recessionary times, consider that years ago,

Tata Consultancy Services launched its Global Network Delivery Model^TM which marked the start of what we perceive as India's ‘star' IT/ITES industries. This business model, slowly adopted by the entire Indian IT industry, facilitates the delivery of consulting, IT and IT-enabled services of the same standards and methodologies to clients across the globe from a service centre located miles away, across the Net. Simply speaking, the IT and ITES boom that we have witnessed in India would not have happened, if TCS (followed by Infosys and Wipro) had not shown that we can render services remotely.

Apparently, Clayton M Christensen, author of The Innovator's Dilemma was the first one to recognize the disruption caused by TCS's Global Network Delivery Model (GNDM). The GNDM scored not only by delivering services over the Net but also by de-constructing the IT services delivery process so that each process was performed by an employee of just the right skill level so as to cost the bare minimum.

Given the current increase in running Indian BPOs, should the ITES industry cut-costs further, or perhaps even turn towards delivering services to established clients from newer and cheaper processing bases outside India? In other words, is re-outsourcing an option?

Surviving a US meltdown

Time only will tell what methods the IT/ITES and other industries adopt to remain competitive in a global economy. It is noteworthy to mention Stephen King, managing director of economics at HSBC observation's in his article titled Can the world economy survive a US downturn? According to King, the world economy has perhaps already survived the current meltdown, simply because India and other emerging market economies like Argentina, Brazil, Chile, Poland, Russia, Turkey, Ukraine, Egypt, and the United Arab Emirates now account for a bigger proportion of global economic activity. HSBC calculates their share of global GDP to have risen from around 18 per cent in 1999 to about 22 per cent today [article dated Fall 2007]. The emerging market share of global capital spending (including everything from machinery through to house building) has jumped from about 20 per cent in 1999 to well over 30 per cent today.

Undoubtedly, this decoupling of sorts is in itself an economic revolution. Then perhaps it is time for the Indian IT/ITES industries and others to look and move inwards, towards setting up bases in Tier II and III towns - a move that will also help further economic development across the country. Including wannabe India in the outsourcing industry would create jobs in their hometowns, for many Indians who have so far had to relocate to cities to hop onto the ITES bandwagon. Insofar as IT applications are concerned, niche applications catering to the needs of vernacular India still represent a huge untapped market. Putting both together, it appears that ‘desi' may well spell the way forward.  

Charu Bahri is an author, freelance writer, columnist and [part-time] manager - projects and information systems at J Watumull Global Hospital & Research Centre. More about her at http://charubahri.googlepages.com

Issue BG85 Apr 08

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