Tag Archives: Offshore Services

Where are All the Senior Developers in India?

I hope you got a chance to play around with the spreadsheet that I posted last week. I finally got the embedded spreadsheet to work, so you can make changes and see the outcomes right there on the blog post. Isn’t that just a thing of beauty?

The model in the spreadsheet is quite simple, but it can explain a few things – for example, why in India ‘experienced developer’ has become an oxymoron. You simply don’t find developers with more than 5 years of experience. The Valley stands on the broad shoulders of seasoned developers who can weave magic with their keyboards and relish being individual contributors. Try finding these guys in Bangalore.

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Model for Indian IT Services

The Indian IT Service industry has seen some phenomenal growth numbers. This year, some of the bigger companies like Infosys and TCS continue to post gravity-defying growth figures. Growth has many implications for the industry – most of them positive. A not-so-positive fallout of growth is its impact on the staffing model.

Growth has a pretty direct relationship with two variables:

– Average experience of Project Managers
– Span of control in projects

To illustrate these relationships, I have created a staffing model for the IT Services industry. The model vastly simplifies the dynamics but is nevertheless a close approximation of reality.

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Hiring in India

Our startup Gridstone Research is now about 140 strong in Mumbai. So far hiring in India has been a mixed bag. Some hard work that has paid off. And some frustration.

We have broadly two streams in India. Research and Technology. The Research Operations carry out the analysis which goes as content in our product. The software for the product is developed by Technology.

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Tech Blowback

Heard this really interesting anecdote from friends at Infosys.

Infosys’ Enterprise Solutions group implements ERP and other packaged software for their clients. Infosys also does ongoing maintenance for software companies on their packaged software. Sometimes ongoing maintenance involves what is called Level 3 support where a software developer needs to take the call from a user because it goes into detailed technical stuff.

So the story goes like this. Infosys ES while implementing a package for some client in the US encountered a problem with the software that they needed help with before they could proceed. They talked to the client who told them to call the software vendor’s help line. The Infosys consultant in Pune then calls the vendor’s toll-free number. He starts talking to the guy at the other end. He’s getting this echo on the phone. He walks towards the voice and lo and behold, the guy on the other end of the phone is right there in Infosys Pune on the same floor!

IT industry bashing – the wrong reasons

I write this in response to Giridhar Rao’s comment. He brought a scholarly paper to my attention that in a section on the Indian IT sector claims that the sole basis on which India is competing is wages. (You can find the paper here. You can directly scroll down to the section on The IT sector if you like). It also claims that India should not be called a ‘knowledge economy’ but a ‘low wage economy’. The article seems to be well researched but reaches odd conclusions at least for the IT industry.

My response to the thrust of the entire paper, if it has one, is ‘So what?’

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Gimme a break – a tax break

Are there industries in India more profitable than the IT industry? If there is one, it must have an awesome business model. Companies like Infosys make 25% net margins after taxes. At $20B in revenues, the industry is no longer a small industry needing encouragement.

So why does the IT industry not pay corporate income tax? Not just that, under the SEZ act, that tax holiday will now be extended, indefinitely.

In the late 80s, early 90s, the STPI Act was used to incentivize the then fledgling IT industry. It was needed. The Software Technology Parks were needed. The cost of a telecom link to the US was high. Many small companies in the STP could share a telecom link. Custom duties were very high on computer hardware, software and networking equipment which could make IT company uncompetitive. So there was the duty-drawback. Last but not least, there was a 10 year tax holiday on export revenue out of the STP. For all this the companies within the STP had to be 100% export oriented.

So far so good. I might have an issue with the tax holiday, but the incentives were timely and well directed. The industry, led by a few major companies like Infosys, TCS and Wipro grabbed the opportunity. Later their ranks swelled with many other smaller companies. Soon the BPO industry (also called ITES or IT enabled services, I think to justify their need for special treatment) also swung into action.

Fast forward to 2006. We now have a large and still rapidly growing IT and BPO industry entirely focused on offshore services to developed markets. Most of the larger firms are very profitable. The custom duties are way down. Telecom bandwidth is dirt cheap. So why in the world would the industry need more tax breaks?

That it doesn’t is very clear. Not just because of the reasons I give. But because industry leaders like Nandan Nilekani say that they don’t. However, if the SEZ provision is available, it would be irresponsible for them to not secure the best tax status for their shareholders.

The income tax lost to the IT industry, by my calculations came to $1.3 B last year. That would be a pretty significant % of the Indian govt. budget. Why would the Indian govt. run a deficit budget, skimp on investment in infrastructure yet spare the wealthy shareholders in Indian IT companies? One could argue that since deficit financing causes inflation, the government is taking from the common man and giving to the wealthy shareholders of IT companies. It is no wonder that the Finance ministry does not support this loss of revenue.

You could also argue that a tax holiday has no impact in the IT industry. If you make profits, you get the benefit of the tax break. But if you make profits, why do you need the tax break? The IT industry is not a capital intensive industry like say the steel industry, where a certain RoI must be met, beyond just being profitable.

The SEZ Act might make sense for many, especially manufacturing industries. For the IT industry it does not. But, profitable industries have wealthy industrialists. Some of them know how to lobby the government. Then there are the real estate developers, who too stand to gain by getting the right to develop the SEZ parks. They too have deep pockets and political connections.

In 10 years when we need to take a relook at the SEZ act, the IT industry will be even bigger. The industrialists will be wealthier. If I were a betting man, I’d say, this ain’t going away.

Infosys getting the attention of class-action lawyers

In another development it seems like my old employer Infosys,
like TCS, has also caught the attention of the class-action trial lawyers. Some
law firm seems to be soliciting interest on the internet from Infosys employees
who, in the past have worked overtime in California and have not been paid
overtime. Interestingly, if you search for ‘Infosys’ on Google, the top-most
sponsored link is from this web-site. Someone obviously thinks this is worth
the trouble.

 

Interestingly, IBM has a similar overtime class-action
lawsuit brewing. Many law firms are behind this one, including Lieff Cabraser,
the firm suing TCS. So Infosys is in good company on this one, with IBM.
Unfortunately, that is the only good thing you can say about the situation. A
lawsuit like this, if indeed it materializes, can be expensive, distracting for
management and can damage the company’s reputation.

 

The claim itself, that the company’s employees were asked to
work overtime without payment, is not going to get more than a shrug, at least
in the Bay Area. Silicon Valley runs on Jolt Cola and other higher forms of
caffeine that allow IT workers to minimize sleep and maximize work. Whether its
IBM, Infosys or the latest start-up, IT workers in general put in more than 8
hours of work a day. Before we start feeling sorry for them, we should remember
that an IT worker is well paid and in-demand. His skills are highly
transferable in a huge global market for IT workers. I don’t believe he needs
the kind of protection a unionized auto worker has (and see what that’s done to
Detroit) – neither in the US, nor in India.

 

I do hope the Infosys overtime ‘fishing expedition’ fails.
Otherwise, it will be bad news all around – for IT services companies, for
clients and yes, for employees as well.

Class action lawsuit against TCS

Last week was a pretty interesting week for the business of global business
– our focus in this blog. Google, Microsoft, Yahoo and Cisco were raked over
the coals in a congressional hearing for aiding censorship in China. More on
this later. First let’s look at the class action lawsuit against TCS in
California.

An Indian employee of TCS America sued TCS for ‘unjustly
enriching itself by requiring all of its employees in the U.S. who are not U.S.
citizens to endorse and sign over their federal and state tax refund checks to
Tata’. The law firm involved, Lieff Cabraser is a well-known plaintiff’s law
firm that pursues class-action lawsuits and has quite a track record doing it.
It regularly features on the National Law Journal’s ‘Plaintiffs’ Hot List’.

A law firm specializing in class-action lawsuits takes no
upfront fees from its clients (the plaintiffs – in this case the TCS
employees). It works for a cut of the settlement that the plaintiffs get. Since
they are dealing with individuals, they could get as high as 30% of the
settlement. Since this is an all or nothing game, the law firm will be very
careful in picking their lawsuits – the target should have deep pockets and
there should be a reasonably good chance of winning the case. Once they sink
their teeth into something they are very hard to shake loose. All of this is
bad news for TCS.

The news on the lawsuit has few details. It seems like TCS
had contracts with Indian employees working in the US that allowed TCS to take
the tax refunds from the IRS (US tax authorities) back from the employees. To
the American public this will sound totally egregious. So why would TCS do
this?

My guess is that TCS had good intentions. They probably
wanted to guarantee a certain post-tax income to their Indian employees in the
US. The amount of tax one pays in the US can vary widely depending upon not
just your monthly income but also the duration of your stay (if it is less than
a year), which state you are resident in and dozens of other federal and state
tax rules. The employee’s tax can vary widely depending upon which client they
are assigned to and the duration of their engagement. So (TCS perhaps thought)
why not relieve the employee from worrying about all this? Why not guarantee a
post tax income to every employee? To do that TCS would have to be able to take
employee tax refunds back from employees if the refunds pushed the employee’s
income including the refund over the promised post-tax income.

Noble intentions, but they seem to have had unintended
consequences. I hope TCS resolves the matter quickly and satisfactorily. PR is
a major weapon for trial lawyers. If this thing goes all the way, they will
drag the Tata name through the American press. There will be collateral damage
to everyone in the Indian offshore industry. I hope it doesn’t come to that.