Another Trip to the Cookie Jar

In August Congress passed a bill to fund enhanced border security which is now Public Law 111-230. The funding for this bill was achieved by increasing the visa fees for H-1B and L-1 visas by $2,000. The fees apply selectively to companies who employ more than 50 employees in the US and if 50% or more of those employees are not US citizens or permanent residents.

The bill was weird and wicked in multiple ways. It increased fees for companies conducting legitimate business for purposes completely unconnected with their business. And it was constructed cleverly so that American businesses would not be affected. Which meant that not only would Microsoft and Intel not pay the higher fees, IBM and Accenture, who are in the same business of offshore services that Infosys and Cognizant are in, would also not pay them. Indian companies had been surgically targeted.

As if that wasn’t enough, in the 9/11 Health Care Bill (scrolls to fees) the same fees, which were imposed for 4 years in PL 111-230 have been extended another year. It was easy. Like taking candy from a child.

When I wrote about the Borders Bill, I made light of it. Financially, it is not a big burden for companies. An extra $2,000 paid a couple of times over a six year work permit is less than a 1% uptick in costs. It is not going to even affect margins, leave alone changing the value prop. But the precedent this sets is wrong and dangerous to both India and the US. It needs to be called out.

While the bill doesn’t talk about Indian offshore services companies explicitly, there is no doubt that they were the target. American lawmakers regularly beat up American businesses that “outsource American jobs to India and China”. In these hard times, they are tapping into the angst that high unemployment creates. But they should know better.

Offshore outsourcing is trade. When Ricardo talked about the law of Comparative Advantage, he did not exclude outsourcing from it. Trade brings benefits to the both countries. It may be harder to picture the benefits that the US gets from outsourcing but it does nonetheless. It lowers the costs of goods and services to consumers. It makes American businesses more efficient and more competitive in the global market. As outsourcing creates prosperity in India and China, they consume more American goods. And so on.

Which is why when the US has constantly preached to developing countries like India to open their markets, it has received the support of economists everywhere. Trade is good for the world. All of it, including outsourcing.

But if it is too much to ask lawmakers to guide their actions based upon sound economic principles, then I’d ask them to do it in their own interest. There are very few US companies who would support legislators that targeted Indian companies. Not just because they like how Indian services companies make them more efficient. But because India is one of the few large growth markets in the world today. No company wants their own government to hobble their attempts to get the best access to this market.

So far, both bills put together don’t amount to much. But as in many of these things, its the optics that matter. Right now the optics are all bad – anti-outsourcing and by extension anti-India. One hopes that it stops right here.

Meanwhile, what of Indian companies? Every major company I have talked to recently has aggressive plans to increase hiring in the markets. It won’t happen overnight, but the direction is right.

The Problem with the Human Cloud

Last month I vented about why IT Services companies weren’t taking the lead on the Human Cloud.

I met an executive at a leading offshore company recently who explained why this was so. In the past few years, clients have become paranoid about information security. Well publicized leaks of customer data and a growing share of BPO is driving some of this. Cross company collaboration requires easier access to tools for sharing. Services companies are going the other way on information security. Employees’ internet access is heavily curtailed. Computers don’t have USB ports. And so on.

Not all clients are equally paranoid. But the service provider’s internal policy and infrastructure must support the most paranoid customer. Therein lies the problem.

This Could be the Future of the Print Media

Richard Branson launched Project, a digital magazine just for the iPad. The monthly magazine will cost $2.99 a month.

Meanwhile, Rupert Murdoch is working on an iPad only daily (newspaper) called The Daily.

In related developments, the New York Times online, which has been free thus far, will be going behind a paid wall, at least for some content in Jan 2011.

The print media has had a torrid time, the last few years. Could this be the light at the end of the tunnel?

A paid-subscription magazine on the iPad has a few things going for it. One, it looks really nice. The user experience is better than both print and the internet. A glossy should be glossy, even if it is electronic. A website can’t manage that as well. Paper magazines, on the other hand don’t use rich media – audio and video. The iPad has all of the advantages of online but none of its disadvantages. People, just might pay for it, like they pay for paper subscriptions.

If it’s a new magazine or daily and there isn’t a paper product, or a website, there are a couple of other advantages. One, you can’t get the content elsewhere through any other means, so if you want it, you pay for it. The other advantage is that you don’t have the costs of printing and distribution. And a probable third advantage is that you have a lot more control over the advertising (I think).

But there are disadvantages as well. If your magazine is electronic but is not on the internet, nobody links to your stories. Your stories don’t appear in Google News or any search results. The only way to market your magazine or news daily is the old fashioned way – advertising, PR and sampling., and presumably are going to take an in-between position. They aren’t or won’t be completely walled gardens or free. As an unregistered reader, registered reader or paid reader you will get to read a graded number of stories per month. And Google will index the sites. And they all have or will have iPad apps as well for paid subscribers.

The print media is being deconstructed and put back together in front of our eyes. It is fascinating. I believe we will end up having a whole spectrum of models that will co-exist. Higher quality journalism will go behind pay walls in some fashion. And that is how it should be. If you want to read stuff written by smart people, you have to pay for it. Also, if you want investigative journalism to offer some checks and balances in our democracies.

IT Services Should be Setting Agenda on Human Cloud

GigaOm’s conference NetWork 2010 next month is about the future of work. Mathew Ingram describes the collaboration in distributed teams as the Human Cloud

The biggest change, for both workers and companies, is a move toward what we call “the human cloud.” In the same way that high-speed Internet access disrupted the corporate IT market, creating a “cloud” of web-enabled infrastructure, the human cloud is shorthand for how the web has disrupted the way we work. Companies rely on dispersed teams to get the best talent available regardless of location (or price) and many are using crowdsourcing and other innovative means to achieve their goals.

If you look at the speaker list for Network 2010 there is not a single speaker from the IT Services industry. Isn’t that disappointing. Offshore is the dominant template for the IT Services industry today. And Offshore is the Human Cloud. Distributed teams around the world plugging in to collaborate to build or troubleshoot systems or carry out business activities. The industry should be defining the future of work. But it is not even at the table.

How are offshore projects run today from a collaboration standpoint? Fifteen years ago the tools for collaboration were email, phone calls and weekly status reports in MS Word. Aside from desktop sharing is it much different than that today? The quality of the phone lines are much better now and occasionally you’ll have a video conference for a sales meeting. But that’s it, isn’t it? Companies try to get clients to log in to their extranet collaboration apps and then when they don’t they quietly bury them. Design is still done by flying people over. And application support is all based on email. Please tell me if it’s any different.

I know a lot of this inertia is because of the resistance to change of corporate clients. But IT Services companies must take the lead. This is your business. Better collaboration leads to better outcomes for both you and your client. Its gotta be worth a better effort than what we’ve seen so far.

Investment Hates Uncertainty, Especially in the Law

A couple of unconnected things are throwing dark shadows over this dream run that Foreign Direct Investment into the Indian economy has been having. One, the Income Tax department’s claim on Vodafone for $2.5 B related to its acquisition of a controlling stake in Hutchison Essar. Two, the Andhra government’s crusade against the microfinance industry.

In both cases, the governments (central and Andhra) have good reason to act as they are. In the Vodafone case, there are grey areas when it comes to one offshore entity selling off a stake in an Indian company to another offshore entity. The microfinance industry has been charging rates on loans which become debt traps for poor villagers. Perhaps some regulation is in order.

But the way this is being done creates problems. When you change the rules of the game after investments have been made, future investors worry about making investments. FDI is the good sort of investment. It doesn’t turn tail and run when the markets are down. But if we are to encourage it, we have to take the regulatory uncertainty out.

Chart of the Day

This chart plots the trend line for Trade in Services as a percent of GDP. Trade in Services includes both imports and exports. The data is from the World Bank’s excellent databank.

Till the mid 90s India’s Trade in Services was growing at about the same pace as the rest of the world. Then suddenly it took off. We know why that happened.

That is a structural shift in the composition of Indian trade, BoP and GDP itself. And the Offshore services sector is still growing.

Comparing Chinese Manufacturing and Indian Services

I was doing some number crunching for the book and came up with this chart.

When you hear the phrase “outsourcing of jobs to India and China”, which you do often in American politics today, there is going to be a tendency to put them both on an equal footing. But the scale is enormously different. The gap is probably even wider than the chart indicates because the data is for Chinese goods exports to the US and Indian IT-BPO exports worldwide. Assuming that productivity ($/worker) in Chinese manufacturing is below productivity in Indian services, the Chinese jobs that depend on exports to the US have got to be more than 10x the corresponding Indian jobs. And yet, India plays nice with its exchange rate while China has an effective peg to the US dollar. Go figure.

The data is from OECD and RBI.

Keane and Sonata

Last week NTT announced the acquisition of Keane. With roughly a billion dollars in revenue, this was a major acquisition, just a few months after their acquisition of Intelligroup, a $126 million IT Services company. Now, the ET reports that HCL and Ingram Micro are competing to acquire Sonata.

Earlier this year I was half complaining about why we weren’t seeing consolidation happening in the industry that is very fragmented. Well, that changed soon enough. This will only pick up speed from here on out. Investment bankers are going to quite busy for a year or two.

In a post about the reasons why companies will acquire in the Offshore industry I had laid out four key reasons (and discounted one). To summarize they were:

  1. Acquire Offshore Capability
  2. Market Footprint Expansion (Geo or Vertical)
  3. Capability Footprint Expansion (Service or Solution)
  4. Aggregate to Scale Up

NTT-Keane is actually about #4. NTT is aggregating offshore services companies to build a large offshore company which will have customer relationships through which they can sell other products and services. This is not an IBM-Daksh or an EDS-Mphasis type deal, which is what #1 is.

HCL-Sonata, if it were to happen would again be a Type 4 deal. It is interesting to speculate as to why small and mid-sized companies are open to selling right now. My hypothesis is that the recent recession shook them up. They realized that their companies didn’t have what it took to compete, when the market got competitive as it did when demand shrank. But they couldn’t have sold when valuations were low. Now that valuations are back, they see this as a good time to exit.

The future of the industry lies with the big and the innovative. The companies that are already in the big league are having a good time (except, for some reason, Wipro, at least this quarter.) Mid sized companies with low differentiation, will need to either acquire and bulk up themselves or hope that someone will acquire and rescue them.

The Cloud and Services

Reflection of clouds on Soap Lake
Yesterday, IBM put its cloud services under its Services arm. It will be sold by IBM Global Services. From the FT:

In its latest revamp, IBM said it would sell cloud computing through its services division, which generates nearly 60 per cent of its revenues.

This could be a defensive move to shore up IBM Global Services. IBM’s latest quarter was a good one with the sole exception of contract signings, which were down. IBM waved it away as something caused once in a while by lumpy contracts. But the fact is that customers aren’t doing big, long-term contracts the way they used to. They like smaller, flexible contracts. Applications outsourcing is definitely going that way. Ask TPI.

On the other hand, this doesn’t have to be a defensive move. It could be a brilliant, strategic move that gives them the edge in selling cloud services in a rapidly commoditizing market.

From offshore services companies, I hear a similar equivocation about cloud services. Some think that it is a threat, some think its an opportunity.

Cloud services are a long-term threat to ERP implementation revenues. Compare the implementation revenues from a implementation with a Siebel implementation. Revenues from implementation and ongoing support (what’s that?) are tiny in comparison. Companies are willing to greatly simplify their own processes to fit the box that gives them. If that happened to all ERP implementations and support services, that won’t be good news for IT Services companies. This may take a decade to play out, but the trend has begun.

On the other hand moving a company’s infrastructure to the cloud, public and private, is a pretty interesting services opportunity.

But this threat/opportunity picture misses the woods for the trees. In the long-term, the cloud is going to be the biggest thing that happens to Services. Not IT Services specifically but outsourcing of services in general.

Outsourcing of services was enabled by enterprise IT and the internet. Before that, you couldn’t take the accounts payable guy away from the accounts payable office where he would cut checks based on paper invoices. Accounts payable and workflow systems and then networking and the internet allowed someone to perform the same function remotely. Today broadband is cheap and ubiquitous and the same job can be done offshore. In a way, enterprise IT systems and the internet started loosening internal services performed by employees from their moorings within the company.

The shift to the cloud is going to wrench them loose and finish the job. If companies can put their accounts payable system on multi-tenant SaaS, what reason could they have for performing the accounts payable function themselves?

The opportunity for Services companies will move from IT Services to business process platforms – a system and the service on top to perform a business function with standardized, well defined inputs and outputs. Much like how payroll services work today. The process will be fairly standardized, and the reason why companies will “settle” for a standardized process will be that the cycle time and cost of doing so will be so, so low that they would be stupid not to.

Why will the cost be so, so low? Because of multi-tenant SaaS, efficient, standardized processes and offshore wages.

The opportunity is massive, but business as usual won’t deliver the goods for services companies. Not this time, because they will face a new competitor – software companies. Today SaaS companies are essentially software companies, that rent software instead of selling it. Soon they’ll wise up and see the opportunity in providing a full solution. Or they’ll create an ecosystem of small service providers around them like Intuit has done in the small business market.

It’s going to be a brave new world for Services companies. But only the innovative will thrive.