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Indian outsourcing industry punctured
By Jermy Kahn New York Times
Bangalore, India after years of being blamed for job losses in America
and elsewhere, Indias high-tech companies and outsourcing firms are
going through a downturn of their own. The global slowdown is forcing
them to reduce hiring, freeze salaries, postpone new investments and
lay off thousands of software programmers and call center operators.

While some industry insiders insist the global crisis will actually
benefit companies here, as western businesses seek to cut costs by
moving jobs overseas, right now the sector is gripped by an unfamiliar
sense of uncertainty.
"It's certainly not irrational exuberance," said Nandan Nilekani,
co-chairman of Infosys, one of India's best-known technology
outsourcing firms. "There is a lot of introspection about what does
this mean and when does it end."
The downturn is exposing a deeper concern: India has become the
world's front office, handling customer service calls, and its back
office, helping to process payments and run accounting and other
computer systems. But it has not yet become the head office -- making
major new products, pioneering marketing techniques or helping to
shape corporate strategy.

Rather than drowning the American technology firms or work forces with
a vast supply of cheap engineering talent, as some had feared, India –
and Bangalore, its Silicon Valley – have continued to largely serve as
the information economy's version of manual labor.

"Historically, when it comes to innovation, Indian companies are
relatively weak compared to the IBMs and Accentures of the world,"
said Partha Iyengar, the head of research in India for the Gartner
Group, which analyses trends in the technology sector. "It has been
their chronic Achilles' heel."

The recent coordinated terrorist attacks brought Mumbai, India's
commercial capital, to a virtual halt. But long before that brutal
shock, the country had been suffering the effects of the global slump,
losing capital as Western investors fled to the security of American
Treasuries, undermining Indian banks and company balance sheets.
Infosys recently scaled back its earnings projections for the year,
telling investors that it now expects revenue to expand 13 to 15 per
cent, instead of the 19 to 21 percent it had forecast and far below
the 30 per cent annual expansion the company had been used to.

Like many of India's outsourcing companies, Infosys is heavily
dependent on the financial sector, deriving a third of its revenue
from banks like Citigroup and Bank of America and other financial
clients. Its fate is also closely tied to the American economy:
Two-thirds of its business comes from the US. Neither factor bodes
well for the company's prospects.

Technology Partners International, a consulting firm that publishes a
widely watched index of global outsourcing deals, says its index is at
a 10-year low. "People think that outsourcing is a recession-proof
industry. It is not," said Siddharth Pai, a partner at the firm.

That realisation has changed the atmosphere of this city. Young
workers still flock to a rooftop terrace on Residency Road every
Wednesday night to grind to house and hip-hop music. But lately, the
crowds at NYKS, an upscale nightclub, are a little thinner. They drink
a little bit less. They talk a little less loudly. "Now they are
thinking twice before spending money," said Supreeth Chandrasekhar, a
25-year-old disc jockey at NYKS.
Mr Chandrasekhar also said that he used to perform at numerous
corporate events but that this business had largely disappeared.

In a country where most marriages are arranged by parents, the
downturn has even taken a toll on the matrimonial prospects of those
in technology outsourcing. "Because there is no job guarantees for IT
people, for the last six months brides' families have not been
accepting grooms from this background," said Jagadeesh Angadi, a
matchmaker in Bangalore.

The Indian National Association of Software and Service Companies
estimates that the country's technology sector will have created
50,000 fewer jobs in 2008 than last year, although it predicts the
sector will still have added 200,000 workers by year's end. India's
technology outsourcing companies have laid off about 10,000 employees
since September, according to the Union for Information Technology
Enabled Services, a labor group that represents technology workers.
Among the major players that have announced significant cutbacks in
hiring is Satyam Computer Services, which slashed its recruitment
plans to fewer than 10,000 from 15,000. Infosys, by contrast, has
almost $2 billion in cash on its balance sheet, a significant amount
that can help it weather the downturn. It said it intended to follow
through on plans to hire 25,000 workers this year.
"We made offers to people, and we need to stand by them," Mr Nilekani said.

But some companies that have hired recruits are postponing their start
dates. The deferrals allow companies, which once hired in anticipation
of future business, to better manage overhead by adding staff only
when they have confirmed projects.

A few so-called captive outsourcing operations – those that serve only
their parent company in Europe or the US – have also cut back.
American Express laid off some 200 of its 6,000 workers in India, and
Goldman Sachs announced last month that it would dismiss a similar
number, or about 10 per cent of its Indian work force.
For the moment, the industry has escaped large-scale job losses.
Indian labor laws make it difficult for companies to drop workers, and
mass firings can draw a political outcry. Yet outsourcing companies
have begun pruning workers, citing poor job performance, a way to
quietly reduce labor costs without attracting much public scrutiny.
The large outsourcing company Wipro dismissed 2.5 per cent of its work
force in the second quarter. Outsourcing companies are also shelving
expansion plans. Wipro, for instance, announced it was postponing the
opening of a major new software development center in Atlanta.

But India's business leaders see opportunity in the downturn. "Once
things settle down, people will start looking at their business
operations and how to make them more efficient, and that is where we
play," Mr Nilekani said.
Even consolidation on Wall Street, which may eliminate some Indian
companies' clients, could help Indian workers, outsourcing executives
say. Mergers require technical skills to integrate disparate systems,
and there is a potential for profitable outsourcing work in areas like
regulatory compliance. Banks are likely to be under stricter
government scrutiny given the sense that lax oversight contributed to
the financial crisis.
Quatrro BPO Solutions Chairman Raman Roy, says he has 300 employees
reviewing legal documents as part of bank mergers.

Copal Partners, a company that uses employees in India to help
investment banks do the sort of deal-based research normally performed
by the bank's junior analysts, has continued to expand even during the
downturn.
Critics say that will not change the local industry's basic
competitive disadvantage: a creativity gap with western competitors.

Indian technology companies are too focused on increasing the
efficiency of their internal systems, not improving their clients' own
industry-specific processes, according to Navi Radjou, an analyst with
Forrester Research. "They are having trouble tailoring a technical
application to a particular business need," he said.
But India's biggest tech outsourcing companies want to do as much as
their European and American rivals, including expanding in Europe and
the US. And the downturn may allow them to acquire talent – and even
whole businesses – on the cheap.

In August, for example, Infosys acquired the British consulting firm
Axon for $753 million. Wipro is said to be shopping for a similar
acquisition.

The changes may come too late for workers like Vikram Hathwar.
In July, Hathwar, a 22-year-old engineer, graduated from a technical
college with a job offer from a software developer.

But instead of starting his job -- paying nearly $6,000 a year, a good
starting salary in this country -- he has been waiting in vain for a
letter from the company telling him when to report for work.

"I called them and they said they would be calling two or three months
later, but still they have not informed me anything about when I
should start," Mr Hathwar said.

In the meantime, he has begun looking for a temporary job. But he said
most tech businesses were no longer hiring recent graduates. The few
that are have begun asking applicants to intern for several months
without pay and with no guarantee of a permanent position. "The
recession has made for all these pressures on us," Mr Hathwar said.
"It is very confusing to know what to do."
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