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Day One, Chennai

I come to India many times a year. Yet the moment I set foot here, the mind starts racing with ideas, thoughts and sometimes rants. It is either because one is bombarded with new stimuli, or its the jet lag (today up at 330am. Groan…)

The day before I left the US, I called T-Mobile to see if I could activate data roaming. I have a prepaid Airtel number for phone calls in India. When I go to India, I just use data on my Blackberry or Android – using the phone within India for calls is not practical. They informed me that they could not since I had what is called a FlexPay account (which is anything but flexible. Don’t you just love the guys in Marketing). I have a FlexPay account because apparently my credit isn’t good enough. Go figure. And since I have what is essentially a prepaid account, I couldn’t have data roaming. I was hopping mad but in retrospect they did me a favor.

The thought of being without data on my phone was making me desperate. I posted a question on Facebook and sure enough, got the answer within minutes – get an Airtel GPRS monthly prepaid plan. So that’s what I set out to do on the morning of Aug 5th.

By 830 pm, well after closing time at the Airtel store, the Airtel CSR and I finally, through a series of random changes to the settings, were able to get data access on the phone activated. Neither of us will be able to reproduce the steps that led to success. Which means that I will have the privilege of repeating this exercise on my next trip.

It took me 3 hours at the Airtel store over two sessions to get it to work. While it was very frustrating, the irony is that over that period of time, the half a dozen Airtel reps I spoke to were all helpful and polite (although they would frequently lapse into Tamil when it got complicated.) The problem wasn’t that they didn’t know how to solve my problem. They didn’t know how to access that knowledge. Not knowing is OK. They probably don’t see too many Android phones looking for prepaid data plans. But not having access to a knowledge base or an expert is just not good business. They spent three hours, not including the time of the rep on the phone from their Mumbai office for what is a Rs. 98 per month plan! Yes, it is just Rs. 98 or about $2 for 2GB of data for a month.

I started thinking about this. In India today you have this confluence of high growth, low prices, low wages and low automation. High growth means that the number of transactions of any kind is growing rapidly, so the system is always stressed. Prices need to be low to compete and keep growing at that breakneck pace. Nowhere is this more evident than in telecom. But other sectors like banking and retail are similar. Low prices further fuel growth while reducing the ability of companies to invest in improving the quality or throughput of the transactions. Now, the conventional wisdom would be to use large doses of technology to automate stuff. Technology reduces human transactions, reduces errors, enables better exception handling and most of all helps a business scale. And I’m not even looking at other benefits like better customer sat etc. which aren’t germane to our current discussion. But the problem is that the cost of implementing and supporting technology is high and lumpy and the wages are low enough that most businesses (the one’s that aren’t that smart) will try and solve the problem of scaling by throwing more people at it.

I think India is a great future market for technology both software and services. But right now it is stuck in low gear because the cost of technology, which comes largely from developed economies and is priced to their benchmarks, and because of the low wages which make the productivity based RoI bar too high.

In the afternoon, I met a couple of analysts from a sell-side firm who cover IT Services. It was a delightful meeting with the conversation flowing. The two were not just well informed they had cogent viewpoints on the future of the industry. It was like a jam session. Thanks guys!

I walked around quite a bit yesterday in Shastri Nagar where I am camped with my in-laws. An important adjustment that you need to make quickly when you come to India and decide to walk the streets is to not assume that oncoming traffic will stop for a pedestrian. Or even slow down. Yesterday, I guess I took the adjusting process seriously. Towards the evening, my father-in-law who is 75 and has an artificial knee was taking my hand to guide me across the street.

Conference: The Future of Offshore

I am helping BRICS Securities organize a conference that we are calling “The Future of Offshore”. The mini-conference is on August 13 at the Grand Hyatt, Mumbai. More details here.

It all started when Anand Tandon, Head of Equities at BRICS said that he wanted to do an investor conference for the IT industry, but do something different. There are many investor conferences for the IT Services sector anyway, but they all have similar formats which revolve around presentations by public companies on their prospects. There was a need to do something that looked at the industry as a whole – issues, challenges – and peer into the not so immediate future. He asked if I could help and I jumped at the opportunity.

As a result we have a conference which will address, what I think are, the seminal issues facing the industry today. The speakers are leaders of companies that represent different segments of the industry. I am quite excited about it.

The conference is an investor conference but if you are a C-level executive at an IT-BPO company, or in the Pvt. Equity industry and would like to attend, please drop me a note or ping BRICS Securities.

Besides Mumbai I am visiting other cities as well to do some primary research for my forthcoming book on the Offshore industry. So if you have something that might be interesting for the book, I’d love to meet for coffee. My itinerary is:

Chennai Aug 5-8
Bangalore Aug 9-12
Mumbai Aug 13-16
Bhubaneswar Aug 17-21

By the way, the survey is going great guns. It’s just a few minutes. I hope you’ll take the time.

Time for a Reader Survey

Why is it time for a reader survey? I don’t know. But it sure has been a long time since I did one, which is never.

This is the 5th year of this blog. If you look at the archive, the first post dates back to January 2006. I have enjoyed it immensely and have found it very rewarding. I hope you have too.

I have always maintained that I write for myself. I write because I feel like writing. Consequently, the way I write and what I write about are entirely driven by what’s going on with me – what I am reading, my interests professionally and personally and whether I feel like writing or not.

But that is partly disingenuous. I also write because people read what I write. Just as it is important to a thespian that the theater be full for his performance, readers are important for a writer. A rant is not fun if nobody’s listening.

Which brings me to the survey. I have never tried to understand my readers better (other than what Google Analytics tells me). I’d like to know my readers better and get some feedback. Ergo, the survey.

It’s short. It’s sweet. And it’s here. I promise to share the results after I close the survey.

Be There or Be Square

I used to do a lot of theater in school and college. So much so that I remember a conversation I had with a Psychology professor at IIT (I also did every Humanities course I could!) about how I could combine my interest in active theater with a career.

Well, it never panned out. I never stepped on a stage after entering the work force. But recently, as I take a break from full-time work, an opportunity came my way via a friend and I jumped on it. On July 23rd, the curtain goes up on 30 Days in September. This play by Mahesh Dattani is easily the most intense, powerful play I have ever done. At 70 minutes it is compact. There are only four actors (though I play four roles!). The other three actors and the director Rooben Morgan, are all experienced pros (unlike me!)

If you live in the Bay Area or are visiting, please come see the play. There are seven shows in San Francisco. More details can be found here. Tickets are available here.

The Quest for Higher Bill Rates

Thanks for all your comments on last week’s post on Local Hiring. Here’s the outline of the key issues we want to tackle in another chapter of the book called The Quest for Higher Bill Rates.

The need for higher bill rates, or rather services/solutions that will yield higher bill rates, is a consequence of two things.

One, with commoditization of major services like Offshore outsourcing, Application Maintenance, Customer service call centers and others (the list gets longer all the time), there is downward pressure on rates. Customers understand the service well and feel that they can manage the vendor to reduce risk. Deal consultants like TPI drive the commoditization even further.

Secondly, with strong growth comes competition for talent. Which leads to wage increases well above the rate increases that can be reasonably expected from clients.

Put together, the pressure on margins is tremendous. It helps that vendor switching costs are high, which mitigates the downward pressure somewhat with existing clients. But the need to do something to protect margins is going to become crucial in the future.

Increasing bill rates can be achieved in two ways. One, by differentiating core services to be able to command a premium over competition. Some services like large scale Offshore Outsourcing deals come with a fair amount of risk. Clients are often willing to pay a premium to a vendor who has a great track record and a solution that meets their needs. Within limits this can work well.

But what really pays dividends is investing in new services. New services are less competitive and the ability to make really high margins is great. For example, in the early days of ERP related services, we weren’t doing end-to-end implementations at Infosys, but revenue growth was strong and the margins were terrific. Why? because there weren’t too many service providers who could do offshore ERP work. The only alternative for clients was to have one of the Big 5 consultants do it for them at exorbitant rates, which left a lot of headroom for offshore service providers.

New services have always made good money. Until of course commoditization sets in. The trick therefore is to be a service innovator. Start early and stay ahead of competition. As the market expands, the early pain pays off in the form of high margin, high growth revenues.

But we are now at a stage in the industry where service innovation by itself is not good enough. The addressable space in new services that are being launched now is much smaller than the markets already being addressed. The impact that the new services can make on the company’s margin is therefore smaller. We may still not be there yet, but within five years, services that are new today will also have seen commoditization and there won’t be enough potential in introducing new services at that time.

This is not to say that the potential for innovation will go away. Quite the contrary. The action will shift from services to solutions – bundled services and IP that tackle a specific business problem. The IP included could be a platform that accompanies the service, or just a deep understanding of the business problem and the experience of having solved similar ones many times before.

By its very nature, each solution will have a smaller addressable space, but in aggregate could offer great potential. Pricing could be traditional time based pricing or it could be by transaction. The key thing is that competition will low and so there will be more freedom in pricing. The client is likely to look at the cost of the solution vis a vis the value it brings to his business.

This is a very profound change for the Indian offshore industry. Their approach to business thus far has been ‘build it and they will come’ – which works fine for services. But for solutions, you have to be out there, in the flow of what’s happening in your clients’ businesses. Identify pain points that can be solved by the combination of technology and services. And then invest the time and money to build a solution. You go from being an expert in delivering a service to becoming an expert on a business problem or process.

It also means that services companies will have to make many ‘bets’. Solutions require investment. How do you decide where to put your money? Or how much. Because of this difficult transition, I think that services companies will largely acquire technology or IP for their first solutions, instead of building it themselves.

How else will this transition from services to solutions affect companies?

What’s the Size of the Offshore Industry?

I thought I knew the answer to this one. Turns out, the correct answer is “it depends”.

The GoI puts out a number which is called “Miscellaneous- of which Software Services” or Software Services in short. This data is available on the RBI website. The number for 2008-09 is $46.3 B (yes, the RBI does give data in both Rs. and USD).

This number comes from the Balance of Payments report. Software Services is actually not clubbed with Exports. It is part of Invisibles, along with Travel, Financial Services etc. – services that can be sold to parties outside the country but are never “shipped”.

This Software Services number includes both IT Services and BPO (and all other variants of XXS and XXO) but includes only revenue from billing done by Indian companies or Indian subsidiaries to their foreign clients or foreign parent companies. The problem with this number is that for an Indian company like Mindtree with no subsidiaries it will be pretty close to actual revenue, but for a company like Cognizant it will be what the Indian sub bills the parent for services provided. In all likelihood this number will be cost plus something like 15%, which is well below the typical mark up on offshore services of more than 100%. Additionally, for Cognizant the entire onsite revenue will be excluded.

I actually didn’t really check if Mindtree has foreign subs or not, but if it did then the RBI number would exclude the subsidiaries’ revenues, including only the Indian parents billing on the subs.

So, as you can see, the $46.3 B number is well under what you would consider the true revenue of the Offshore industry, which includes onsite operations related to the offshore business.

NASSCOM tries to correct for this revenue by including the revenue of foreign subs, but I don’t believe it does anything about the Cognizant situation where a foreign company has a sub in India. In truth, that is a slippery slope and it shouldn’t even attempt it. To figure out the onsite revenue associated purely with the offshore business is impossible to orchestrate over all companies. Imagine trying to do that at Accenture or Keane.

Also, included in the RBI number as also in the NASSCOM number are exports from Captives where onsite operations may not even be meaningful.

Anyway, that answers the question that used to puzzle me for the longest time – why are all the charts for software exports and not the Industry revenue? Sometimes you measure what’s measurable and leave the rest as an exercise for the reader.

By the way, I had been tearing my hair out trying to get the net Exports data for the IT-BPO industry. Finally found it when I came upon the RBI database dbie.rbi.org.in/ which is quite comprehensive and easy to use, though difficult to find. I sent some feedback. They fixed the data and sent me an email in one day! On the other hand, I sent an email to NASSCOM’s research department. No reply after a week. Go figure.

Why is Local Hiring in Offshore Services so Sparse?

For some parts of the book that I feel the need to reach out to my blog readers. Your feedback will make a better product.

One of the chapters in the book is on Local Hiring – why Indian services companies haven’t hired in greater numbers and why it might become more important to do so in the future.

The percentage of employees in Indian IT Services companies who are Indian (born and brought up in India) is definitely over 95%. If you leave out the employees acquired through acquisitions, local hires (Americans in the US, Germans in Germany) are a rounding off error. Why is this so low?

Over 95% of the revenues of Indian services companies comes from outside India. 20 to 30% of billable employees are onsite. Shouldn’t you expect a higher proportion of employees to be hired locally? After all, IT Services is a high-touch business. If you are onsite, you are constantly working with client personnel. Cultural proximity, common backgrounds, networks from college and prior jobs must be of great value. Yet, local hiring is still very slim.

There are some good reasons why this might be so.

One, Offshore services is a very unstructured business. Every project is different – client needs, business processes, size of project – can all differ greatly from one project to another. The use of templates is limited to a few project processes only. Most of the project requires “new work” every time which in turn requires a fair bit of collaboration among the project team members – both offshore and onsite. This need for intense collaboration makes it much easier if the onsite team members are actually offshore team members who have moved onsite temporarily.

Then there are cost reasons as well. Not so much compensation which for most companies is within range of what it would cost them to hire locally. But there are other reasons why the costs are higher to hire locally. Like the fact that a local employee would likely need travel and living since the project can’t always be in the metro area in which she lives. Also, for local hires, bench costs are at onsite wages.

Outside of Delivery – in Sales and Consulting – the cost reasons above don’t apply. At one time, there was a salary difference. But now, Enterprise IT Sales and Consulting are both in decline and Indian Services companies have upped compensation substantially. So that isn’t a reason either.

But even here, I feel that companies feel torn between the need to hire folks who could be more effective in forming relationships with clients and the need for them to work effectively with offshore teams. Anyone who has worked in the industry knows that a salesperson’s effectiveness can often depend upon how good his access is to expertise and resources in the company.

The only place where there really are no barriers to hire are in senior positions in Sales and Consulting. Where you get the value of their experience in a certain industry and their networks but on the ground the proposals and staffing of projects is handled by other people. But here too there is a mismatch in expectations.

While Indian companies haven’t shown much urgency in hiring locally, it’s not as if potential employees are trying to break down the door either. Perceptions in the marketplace about Indian services companies are that you are generally “thrown into the pool to sink or swim” with very little support. Also, that policies aren’t as employee friendly as their current employers. You don’t have a life any more and work takes up every waking hour. Although, I think this is the nature of the offshore business, and if they are still working regular hours, it will change soon.

Going forward, local hiring will become more important. Winning business is now less about technical expertise, which is assumed. It is about domain expertise – do you understand my business process well enough? It is going to be pretty tough to build domain expertise organically – through the work the company does for clients. Hiring industry expertise into the company either from industry or from other consulting companies will become necessary to compete.

Also, there is the issue of optics. Can you do X billion dollars of business in a country, with tens of thousands of employees in the country and hire just a handful from the local market? The law may allow it, but you have to do much more in the court of public opinion.

Take Toyota for example. When they started putting up manufacturing plants in the US in the 80s, it was probably much easier to just expand in Japan. But they knew that if they were going to be a significant player in the huge US market, they had to do some local manufacturing. Today, Toyota has manufacturing facilities in many states in the US. When they ran into trouble earlier this year because of their quality problems, their American employees and politicians from the states that have the factories, supported them.

In a few years US or Europe based competitors who are rapidly adopting the offshore model will have a truly global workforce with a (largely) India delivery model. If nothing changes, Indian companies will be almost entirely Indian. The lack of diversity will lead to a lack of diversity of thinking. And exposed to political games.

For Budding Social Entrepreneurs

Many friends and people I know have been taking up responsibilities or causes that have a social objective. Education is a particularly good field where the needs are great in India and where people like us have been beneficiaries of a good education and all that comes with it.

Friend and former colleagues P R Ganapathy and Sandeep Shroff are both involved with non-profits. Guns, who is going back to India will spend part of his time with Teach for India. Sandeep has been involved with the Indian Literacy Project here in the Bay Area for many years. I do my little bit through my father’s trust Digjyoti Trust that supports higher education for orphaned and disadvantaged children.

Aside from the non-profit route, others are succeeding with a commercial model, but with a social objective embedded within it. Samhita Academy is one such educational institution. Their flagship school in Bangalore is doing quite well even though it is in just its third year.

The school is backed by the family of S. D. Shibulal, a friend, former colleague and founder of Infosys. Asha Thomas, Exec Director and her team have done a fantastic job in laying a solid foundation of the school. The infrastructure, staff, teaching methods – everything points to an excellent school in the making.

25% of the student population of Samhita Academy comprises of disadvantaged children whose costs are borne by the school. As Samhita Academy sets up more schools this objective will carry into the other schools as well. However, and this is the interesting thing, Samhita Academy is a commercially run enterprise. The fees must cover all costs. Why? because Shibu believes that this is a better model. If the schools are run like a commercial enterprise, the model becomes much more scalable. Ultimately, the social objective too is served better if the schools succeed commercially and expand to many more cities.

Samhita wants to now expand with more schools in other cities. They are looking for a leadership team. If you or anyone you know has climbed all the mountains you wanted to in your corporate job, and wanted to do something different and more meaningful, please contact Samhita. Or drop me a note and I’ll pass it on.

You Are the Technology Choices You Make

I finally dumped my HTC Hero on Sprint. I just couldn’t take it anymore – missing calls and the “click lag” on the HTC Hero. In the bargain, I learnt a few things:

Tech reviewers are biased. If they were truly honest in their reviews they would end up trashing the odd deserving candidate. Which would cut off their access to deliberately leaked official rumours and pre-release device units. So their praise is fulsome and the tear downs are gentle to non-existent. The HTC Hero was praised to high heavens. And I got taken in.

The best way to decide on buying a new product is to trial the product or ask a friend who has similar proclivities when it comes to personal technology. Someone I know, strongly recommended the T-mobile G1 to me just about when I was in the market for a new phone – I should have at least given it a try. But no, I had to reach out for the new, shiny object.

I like physical keyboards. I used a blackberry for ever, before I got the touch screen only HTC Hero. It’s possible that a touch screen that performs better, like the iPhone’s, might have been a better experience, but I doubt that I would prefer it to something with a physical keyboard. I can touch type on a computer keyboard. I don’t know if that contributes to it, or its the way I am, but I just can’t stand typing on a touch screen. After just two days with the G1 I am already typing longer emails than I ever did with the Hero.

I like Google’s sense of design. The G1 is not a very good looking phone compared to the eyecandy you see out there nowadays. But it has everything I need, and very little that I don’t. For Google, functionality and performance trumps every thing else. But when it doesn’t get in the way, they do pay attention to the aesthetics. Which is very different from the idea of HTC Sense, which sits on top of Android and now T-mobile itself is adding on an additional layer. Blah! who needs all that crud.

I consider myself to be an early adopter of technology. Not bleeding edge, but definitely by the time version 2 rolls around (yes, that would still make me an early adopter, maybe not compared to you dear reader, but compared to the rest of humanity that includes my Dad).

Early adoption of technology involves two big sacrifices – switching costs of learning something new and the risk that all the pieces may not be working as well as they should. For me learning something new is not an investment – it is learning and even entertainment – a plus rather than a minus. But I would rather wait than take the frustration of something that has rickety performance. For a less important app, like say a utility for taking screen shots, its OK to have a few features missing. But if its your cell phone you don’t want to mess with it (although, I did). I expect, in this regard, I am not very different from a lot of folks who read this blog.

Like everyone else, I like a good deal. So I bought my G1 on eBay and got a no contract deal with T-mobile. Soon the Pradhan family will be moving over to T-mobile as well and we will save something like $100 a month.

The only problem – T-mobile wouldn’t give me a post-paid contract – it seems my credit isn’t good enough. Which left me scratching my head because there is no problem with my credit (I checked). I concluded that this must be because we don’t carry any debt, so we don’t have enough credit history. It is a sign of the times that you need to be indebted first to get more debt.

Which wouldn’t make any difference, except that for some reason Google Voice voice mail integration does not work with pre-paid T-mobile. Oh well, nothing’s perfect!

An Update

Some readers have asked for an update on the book. So I’ll start with that first.

Gaurav and I started out thinking of the book as a “How To” book on Offshore Services. But as we started writing it, it was turning out to be like writing a technical book – dry, precise and meant for the practitioner. In short, not a whole lot of fun.

I spoke to a well-known writer whose own book went through a little bit of a metamorphosis as well. Her advice was to write the book that you want to and will love to.

So we switched tracks and started thinking about a book that would be useful, widely read but also fun to write. A book about the Offshore industry that would go into all the issues and challenges facing it today and in the future. But it would be simply written so that even readers outside the industry could appreciate it.

That’s the book idea we took to Penguin. They liked it and they will publish the book in India in 2011. We plan to simultaneously self-publish with Amazon for markets outside the sub-continent.

On the personal front things have made a big U turn with my son Naren, who I wrote about a few months ago. In April the school district allowed him to attend regular school, but a different school. Yesterday was his last day at Hopkins Jr. High. We were confident that Naren would do well, but he exceeded all expectations. Not a single behavioural incident and every teacher had good things to say about him. In a new school, in just a short period of time, he made friends. The boy was determined to do well and he succeeded with flying colors. He also got a 4.0 for the last term. He now feels very confident that he can overcome his challenges and succeed in life.

There was good news outside of school too. Naren was accepted into the music composition summer program of the SF Conservatory. It is a prestigious program that’s hard to get into. He is absolutely thrilled about it. He now has a channel on YouTube where his compositions for the piano are posted. He also writes frequently on his blog at narenpradhan.wordpress.com about video games, scripts for TV shows and environmental issues.

Our battle with the school district to get Naren the right placement and services has been long and hard. It is not over yet but the worst is behind us. My wife and I can now start thinking about a future where life catches some kind of a groove.

A couple of other updates. I am doing a conference along with BRICS Securities which is slated for August in Mumbai. The conference will look at the long-term trends and issues in the Offshore Services industry. We are in the process of confirming the panelists for the panel discussions. I’ll post an update as we cover more ground.

In college I was very active in dramatics. Since graduating, I have wanted to, but have never had the time to commit to doing a play. Well, an opportunity came my way recently and I grabbed it. Who knows if I’ll ever have the time again.

The play [link is now updated] is a Mahesh Dattani play called “30 Days in September”. We will be doing eight shows in San Francisco in July. If you live here, I hope you’ll come.