I read today that Tata Consulting Services (TCS) bought Citigroup’s offshore business processing unit for $505M. TCS also negotiated a deal whereby Citigroup and its affiliates will use TCS for their business process outsourcing needs. Smart move on the part of TCS?

Similar to TCS, Indian companies like Infosys, HCL, Satyam, and Wipro are sitting on piles of cash which I’m sure they’ll also be putting to good use by acquiring companies that aren’t quite able to remain viable. (But I wonder how spending $505M in such an economic downturn situation makes sense for any company, no matter how cash rich they are. I mean haven’t we heard the saying “saving for a rainy day”?)

The flip side of the acquisitions story is that there is a visible downturn in the outsourcing industry due to the economic crisis in the US and across the world. 
 
While talking to friends in India, I know that they are holding on tight to their jobs, when as recently as six months ago, they were all talking about jumping ship to get more money and bigger titles. 

As a business owner, I am however not seeing any drastic or even small reductions in resource rates in India. So although the outsourcing industry in India has slowed down due to spending cuts in the US, resource rates don’t seem to be falling.

Why is that I wonder! I mean, isn’t it a simple supply and demand equation? Since demand is falling, and supply is high, shouldn’t the rates fall?
 
Because only if rates fall will the outsourcing industry once again see a boom. That’s cause US companies will go offshore and outsource work if lower cost labor can result in tangible operational savings.

(Yeah, yeah, I’ve heard the arguments about “cost” not being the only driver for going offshore. I for one remain unconvinced that a company would go offshore and pay $50 per hour for a resource when they can get a resource for $50 per hour locally.)

I don’t want to talk about the financial crisis or whether that and the new President will cause a growth or a failure of the outsourcing market in India. It’s all been discussed and dissected every which way possible and all we can do is wait until the 1st quarter of next year to see what actually happens.

But, what continues to be a great topic for discussions amongst friends and colleagues is the eroding offshore advantage of India. I recently chatted with a friend who said “so what if the prices are going up in India, if a US business is paying $60 an hour locally and can still get the work done for $40 dollars offshore, it’s still a winning argument for offshoring the work”.

I tried to explain to her the folly of that argument. I pointed out to her that although an experienced resource may be retained at $60 per hour, that a recent graduate may not demand a $60 per hour rate and that if a company were to get a local resource for $40 or even $45 per hour, they would be less likely to explore offshore options.

We had a long heated debate because my friend felt that businesses should be thinking about saving every dollar and if costs could be lowered by even $5, that’s an argument for going offshore.

What do you think? 
  
I think that although cost reduction is one of the primary reasons for offshoring work, as the gap between the resource rates of the two countries shrinks, the offshoring advantage is also diminished. If a company cannot find significant reduction of operational costs, why should they bother to go offshore.

I wonder how India will manage the wage hikes and inflation in India and still be a strong contender for offshore work in the future? 

The news in the US is bleak, bank after bank is in trouble, an $800B bailout package is awaiting approval. And everyone is feeling the crunch in the US.

And so are the companies in India, feeling the crunch that is.  Tata Consultancy has begun making changes to save money. The changes include simple things like restricted travel and  surprisingly strange changes like potentially removing Microsoft office from PC’s, according to this report. Other companies are seeing their revenues shrink.  People are worried and rightly so.

But experts differ in their opinion (no surprise there) of whether outsourcing will grow or shrink after the crisis passes.
 
My two cents?

I think that the outsourcing market will see a short slowdown until the first quarter of next year. Then it will see an increase until either legislation changes are made (assuming Obama comes into office) whereby companies are rewarded for keeping jobs in the US or rate hikes in India makes outsourcing not as viable for US companies.

However if McCain comes into office (which seems unlikely right now), offshoring of jobs will continue and even grow, until rate hikes make it impossible for US companies to outsource.

Either way, times are going to be tough until the first quarter of next year, when companies and countries await the results of the elections.   
 
And that means that the ones that survive will be those who have enough cash flow to ride out the storm. Tata, Satyam, Wipro, Infosys won’t have to worry but the smaller players may begin closing show faster than you can say boo!

A friend who had been eagerly looking to change jobs a few weeks ago told me on Friday that he plans to remain in his boring but secure job until the economic turmoil in India subsides. That was a bit surprising to me because I kept hearing that India is still fat and happy (figuratively speaking only) with all the offshoring dollars coming its way.

Every other news article I read is contradictory; outsourcing to India will grow, outsourcing to India will slow down, US will need to outsource more, US cuts outsourcing spending. But apparently things are not quite as hunky dory in India anymore either.

We all know that US companies have made a lot of investments in India, from infrastructure to people, the investments are in billions. And we also know that the economy in the US is the worse people have ever seen in the past 2 or more decades. (To hear some say it, this economic crisis is almost as bad as when the Great Depression hit.)

But even though the economy is in such a tough crisis, the US dollars is holding strong against the Indian Rupee. Not only that, wages in India continue to rise and more and more small companies are going bust due to loss of large clients or contracts from overseas. This is creating enough havoc in the minds of small and large companies depending on US work.

Also, companies like Lehman Brothers and others who are in a financial crisis are closing shop and creating job losses in the thousands. (Lehman Brothers employs more than 2500 in Mumbai, those people will be in the job market soon if not already there.)

So what will happen?

Well…. we in the US are a month and a few days from electing a new President. I think that offshoring will slow down significantly after December 2008 as the new US President tries to revive and resurrect the US economy. Regardless of who wins, and regardless of what the candidates’ state they plan to do about outsourcing, once they are elected, they will have no choice but to make some tough decisions regarding offshoring. Whether through incentives or through other means, the government will have to create local jobs. That means that the offshoring strategy employed by companies in the US is poised for some major change once we have elected a new President.

And when that happens, India will need to brace itself for a major restructuring as well…. This is of course only MY opinion and can be 100% off the mark

Almost regularly, you read of one news paper article or some report that mentions the growth of outsourcing activity because companies must reduce more costs. On the heels of that we find a report that is completely contradictory to the first we read, saying outsourcing will be hurt as companies cut IT spending.

Today, I read a Mckinsey report titled “Time to rethink Outsourcing”. The report was just as contradictory (in my mind) as the reports I read day in and day out. It states that given the “falling dollar value, rising oil prices, and rising wages in offshore countries”, companies may want to bring back their manufacturing operations to the US. But that companies may not be able to do so that easily due to “availability of skilled talent, potential for productivity gains, importance of speed, local import and tax implications, etc.”.

I disagree with the comment about “the lack of availability of talent” but yes, rising oil prices are a pain, the devaluation of the dollar is not easy to swallow, and the wage increases in offshore countries like India are a reality.

But do we really think that companies will begin moving work to the US anytime soon?

There have been millions of dollars invested in offshore setups and the person looking at the bottom-line numbers is probably still seeing savings from their offshore activities, regardless of the other costs are associated with managing the offshoring activities.

I doubt it. If, and it’s a big if, if there is any movement of work coming back to the US in any significant volume, it won’t be evident for a few more years.

We looked at misunderstood or under-understood requirements yesterday and so enough said on that. Now on to the 2nd reason for the lack of quality in outsourcing; lower skilled resources.
 
Let me start by saying that there are many, many, many (see, I can’t emphasize that enough) skilled resources in India and other offshore countries. No question about it.  However, there are also many, many, many not so skilled resources. 
 
I know for a fact that in India, anyone who knows anything about IT has hung a shingle and opened an IT company. Similarly other companies have sprung up offering everything from financial consultation to helpdesk support at “low cost”. And that’s where the dilution of the talent pool has happened. 
 
Having been a Corporate America slave for more than two decades, the best thing I achieved was acquiring skills that are hard to come by if you have never worked in Corporate America (let me just say that General Motors is a training ground of the highest order).
 
In India, given the need for employees due to the demand from the West, it is no wonder that anyone who has taken even a three month crash course in technology is considered a viable employee at a technology firm.
 
High attrition rates and equally high demand for offshore services have forced offshore vendors to not be as discriminatory when hiring people.  Here’s a great example of what I’m talking about:

And that is why problems arise when the first complexity arises. Since no one wants to share their inexperience or lack of skill, many times these problems are not easily diagnosed until the project reaches a critical point, and boom, the project is dead in the water or delayed.

So you as a client, how would you be able to prevent this from happening to you? Make sure you let your suppliers know, in no uncertain terms, the minimum skill and experience level required for the people who will need to be assigned to your work. OR if you want to not worry about the people but want the supplier to take that responsibility and all you care about is the end product, make sure you have good Service Level Agreements (SLA’s) in place; with penalty and termination clauses clearly spelled out.  And be willing to execute the penalty or termination when it becomes necessary.  Of couse daily communication, spot checks, visits to supplier facilities, and other measures are always recommended to ensure that you are getting what you paid for.

And for suppliers, it’s simple. Know that if you do bring in a “fresher”, that it will take them a good year to be effective in their role when dealing with an offshore company.  That means that training, job shadowing, mentoring, and incentives to retain an employee are important strategies to implement in your work force. Long-term benefit and increased work will come from focusing on the “quality” of your resources.

Tomorrow, we look at lack of “depth of experience”…..

The news is bleak as the US economy continues to struggle.  Companies are cutting IT spend but outsourcing may continue to grow so that companies can save more money, blah, blah.
 
Ok, so we know all that already and a recent Forrester report validates this.  The same report states that the firms that are not outsourcing (and there are many who haven’t even thought about outsourcing) are most concerned about quality, or lack there of. The report also states that a second reason is that the savings weren’t as high as expected.

So lets analyze the quality issue a bit today. I’ve found from experience that lower quality from offshored suppliers is caused by three major areas: misunderstood or not adequately understood requirements, lower skilled resources, and a lack of “depth” of experience.

The underlying problem regarding misunderstood or under-understood (is that even a word?) requirements is cultural to a great extent. 

It’s the attitude of “ho jayega” or “it’ll be done” that is inherent to most Indians and is very admirable for the requestor until things just don’t get done.  In India, “it’ll be done” is a common assurance so be sure to ask “that’s great, but when will it be?”
 
Another reason for the misunderstood or under-understood requirement is that in an effort to win the project, many suppliers are willing to provide a price and a timeline without fully comprehending the complexity of the project.  Or in the case of a project scope change, many times the customer may say it’s a small change and the supplier will agree so as to appear cooperative. 
 
They find out later on that what they agreed to wasn’t quite that simple to do and would require more time or more skills or more resources. 
 
Don’t get me wrong, scope misunderstandings happen in the US too. But having worked with suppliers from India for over nine years, I have found that scope misunderstandings are even more prevalent with them and are very difficult to get a handle.  Unless I was able and willing to review the entire project to the nth level of detail at the onset (and even then) we found it impossible to ensure that the final project we tested was fully functional, wasn’t missing a major component, or was thoroughly tested before being handed off to us for user acceptance testing.

I could go on and on and on but it’s getting late (3:00 am EST) and I should be in bed, more on this and the other two challenges tomorrow…..

I know, here we go with doom and gloom news but this is unfortunately reality, at least in the US.  A friend called today and told me that he has been sitting on the “bench” for almost three months because his projects at the client site are all on hold or in the process of being cancelled. 

This story is the same across the board for many of my friends who work for IT suppliers around here and across the US. They told me that most of their clients have put all discretionary spending on hold and that situation may not change until next year.
 
This means that IT companies in the US will continue to lay off local people which will result in further slowdown of the US economy and a saturated job market.
 
When will this end?

We all heard Senator Obama’s message to reduce Offshoring by incentivizing companies who will create local jobs and we also heard Senator McCain’s promises of reviving the economy.
 
But I just can’t see it. How will they do this? How long will it take? People are hurting as more and more jobs are being eliminated, how will we turn this around?

Nice story in Forbes about senior citizens, health care, and offshore living. Two Indian companies, Apollo Healthcare and Impact Senior Living have built (and continue to build more) senior living communities that include “health care backup” for approximately $85K one-time and a $250 per month cost.  (Although I don’t quite understand what they mean by “full healthcare backup”! I assume it means “health care” is included somewhere in the $85K cost.)
 
These senior living communities come equipped with all the amenities you can imagine, including pools, game rooms, exercise facilities, and much, much more.

For immigrant Indians in the US, even after living in the US for three or four decades, there is still a burning desire to ”go home” to India at some point in their life. 

Well, with these senior living communities that appear to be more like resorts, if I were of retirement age (alas! no such luck), I think I would be very tempted to move back “home” immediately.
 
Also, why would this be limited to Indians? I think that non Indians may be tempted to move to India to take advantage of these senior living opportunities. 

I’m not getting paid by Apollo or Impact Senior Living or any of the companies that are building these senior living facilities in India.  But I think I should be! After all, I forwarded this link to enough friends in the US that at least one or two of them will become customers for these companies.

(Hmmm….I wonder if the health care crisis in the US can be solved by moving people to offshore, low cost countries?)

Boeing machinists are on strike after the union and Boeing management were unable to come to terms while renegotiating a three year contract.  

The disagreement between union and corporate is nothing new, the issues are similar to those seen with other unions; wages and health care costs.

But there’s more to the strike than that. Nowadays most union workers are demanding job security besides wages and benefits.  Boeing union wants the same but Boeing, like other companies across the US, wants flexibility to outsource work and that is the root cause of the strike by Boeing machinists. 
 
But wait, Boeing does have the flexibility to outsource work and has been doing so for the past few years. 
 
But outsourcing comes with it’s pains and Boeing is facing the two most common problems faced by most companies who outsource; project delay and lack of quality or completeness of project.

Boeing’s 787 program, building a fuel-efficient jet was supposed to be primarily built offshore by suppliers in Japan, Italy, and elsewhere. These suppliers were to do most of the work and Boeing was only going to do the final assembly of these planes in house.
 
But unfortunately for Boeing, the 787 program is more than a year behind schedule, the first few planes arrived with missing pieces, and the union had to be tapped on to help put these planes together.

But what I don’t understand is how this can happen? How can a company outsourcing work worth hundreds of millions of dollars not have a good handle on managing their offshore suppliers? 
 
Don’t these people follow project management practices? Doesn’t a company like Boeing have a full-time staff that is monitoring and managing the program?  Don’t they have project schedules and escalation procedures to understand and help put the project back on track?
 
But Boeing’s story is not new.  In outsourcing, we all know that delays do happen. Scope changes, cultural issues, communication issues, and sometimes suppliers biting off more than they can chew are all reasons for why delays happen.
 
But if I were Boeing’s management team, I’d ask the onshore team managing the offshore suppliers to explain why these delays have happened and how can planes arrive with missing parts.  
 
This is where I feel that companies outsourcing work miss the boat. They outsource work thinking of the immediate labor cost, better skills, or faster throughput advantages. What they don’t understand is that besides an oversight team made up of people who know how to run a program of this nature, they need offshore experts who know that particular country’s culture and languages.  These experts can help a company and it’s people navigate through the cultural, communication, and other issues that cause delays and poor quality work output.

Coming back to Boeing, I hope that they are able to reach a settlement with their union soon. They are already more than a year late and the sooner they settle with their union, the sooner they can get planes ready for the 900 or so orders they’ve already received from customers wanting that 787 fuel-efficient jet.