John C. McCarthy , vice-president of information technology services research at tech forecaster Forrester Research Inc., was swept into the limelight in 2003 when he predicted that 3.3 million US service jobs would move to lower-cost destinations such as India by 2015. A year later, McCarthy raised that forecast to 3.4 million.
In a recent telephonic interview from Cambridge, Massachusetts, McCarthy spoke to Mint about outsourcing trends, the challenges before the Indian tech services industry and stressed on the need for Indian tech vendors to increase their foreign presence as also get more into consulting work. Edited excerpts:
With salaries rising at over 15% every year, is offshoring to India much more costly than it ever was?
While offshore billing rates are slowly creeping up, they are not exactly in line with the wage inflation. Wage inflation and attrition issues will have more impact for tier-two Indian (tech) suppliers and the captive operations of MNCs. These captives along with smaller players are getting squeezed because of (wage) pressure. Tier one players such as TCS are able to use various productivity tools effectively in order to meet these challenges.
And remember, the captives in India started overpaying their employees for luring new talent. This is now driving the whole pressure around salary levels in the industry. Unfortunately, since these captives could not leverage India well, they are bad-mouthing India as a destination and are talking about their challenges in retaining and hiring staff.
Many Indian companies today are eyeing the consulting space in order to match up with IBM and Accenture. Do you think they are doing a fair job?
If you look at what Wipro tried to achieve with its Nervewire (a tech consulting company serving financial clients) acquisition, there was nothing wrong with strategy—only the entire execution was horrifying because the company could not retain the talent.
The reality is that when these Indian companies say consulting, 69% of their work is technology consulting, around 30% business process re-engineering and only 1% management consulting. You need to offer consulting because most of the large customers are asking for it. I believe that the Indian companies should start building more expertise in business process consulting, and gradually move up. Consulting practice will help these Indian companies with broader access and visibility in client organizations and also lend more credibility.
Becoming an Accenture or an IBM will be a big challenge for these Indian companies, but ideally, they should rather focus on building more offshore competency. While pursuing large deals, they should bite only what then can chew.
We have not seen many mega deals, those in excess of $1 billion (Rs4100 crore), signed in the past quarter. Do you think clients are moving away from big contracts?
The number of mega deals is actually dropping. TPI (Technology Partners International, an outsourcing services advisory firm that tracks customer deals) reported only two of them in the last quarter. Players such as IBM, Accenture and EDS may not agree with that, especially because they have been thriving on these mega deals. But, customers are dissatisfied because such engagements are very complex to manage. Besides, clients have yet not seen the cost savings to the magnitude expected.
In future, we will see more deals that are structured around achieving specific business benefits around business processes. Outsourcing deals are becoming more pure-focused around infrastructure, application or BPO. In the past five years, customers have been moving to smaller deals. The ABN Amro outsourcing deal is a good example, wherein the bank partnered with Patni Computer Systems for application development, along with large players such as Infosys and TCS (Tata Consultancy Services).
How long can India-based companies such as TCS and Infosys keep hiring at such a pace? Will this ever slow down?
You have to understand that this is still a people business—even now you can pay around $20-$30 per man per hour in India as against $40-$60 rates in the US. The bigger challenge for these companies lies in managing the fresh graduates they have been hiring.
They do have project managers, but really good senior managers are not many. Lack of such managers is in fact killing emerging offshore geographies such as China.
What is your take on the H1-B visa allocation issue?
Indian companies need to become more global by hiring the locals in geographic markets they serve and address these issues. TCS is showing a lot of maturity by hiring locals—they today have around 5,000 professionals in Latin America alone. However, I do believe that globalization will be a lot tougher proposition to sell now than it ever was in the past 20 years.
You had predicted that around 3.4 million jobs from the US would move to offshore locations such as India. Does that still hold?
We are definitely on course to see that happening, even when the captive centres in offshore locations continue to struggle.