IT Outsourcing
Cidek Abrahim, a visiting professor from Turkey asked me: “I know that the key driver of economic growth in India were software companies like the TCS, Infosys, Wipro, and Mahindra. I also know that their success is based lower costs What I do not know is how can a poor country like India compete in a high tech sector and succeed? How did a country, with so many poor people can produce so many software engineers? And why other countries like The Philippines, China, and Russia are unable to replicate what India did?
I told him: “It began in 1985 when companies like Motorola, Texas Instrument, HP and Intel etc. went to India to open their factories to take advantage of low cost labor in India. At that time, India had a number of highly skilled engineers graduated from the Indian Institute of Technology (IIT). U.S companies recognized their talents and hired them. When the software Y2K became a major issue that needed to be fixed, most U.S and European software engineers did not want to work on obsolete mainframe technology. Some Indian engineers were willing to learn and supported this activity and it encouraged more Indian students to study software for better jobs, better wages and the chance to go to work in the U.S. Of course, after the Y2K, many U.S and European companies realized the potential of the high skilled and lower wages of these engineers and the IT outsourcing trends began. Many Indian entrepreneurs saw the opportunity and seized it and it started the IT outsourcing industry. Within few short years, software industry became a catalyst for economic growth in India. The advantage of India over other countries was India can connect to western countries through a common language: English.”
Cidek asked: “But the Philippines also have a large number of people who speak English well. Why India was so successful when the Philippines was not?
I told him: “The difference could be attributed to the education system. Although Indian education system was under the direction of the central government but local government do have their own control at local area. In the state of Karnataka, whose capitol is Bangalore, local government allowed private universities to operate. These private universities did not have to follow government guideline on training programs. Many had licenses with U.S and U.K universities to use their IT training programs which resulted in highly skilled IT graduates. The prospect of earning a good salary through an IT degrees attracted more students to this sector. During the early day of IT outsourcing, many graduates came to western countries like the U.S, and UK to work. They had no problem of fitting in. What they learned in their schools were the same with what software developers in Microsoft, Oracles, Google learned. They were using the same techniques, the same methods, the same tools, and the same technology so they built a good impression with western companies. This good reputation spread quickly triggered more companies outsourced their works to India.
Cidek asked: “But Indian government also issued special policy to stimulate innovation. They passed laws to created high tech parks, giving tax break to IT companies, subsidizing research, encourage specific areas for growth too.”
I explained: “Yes, these things are necessary to sustain their economic growth. However, other countries also did that too. China has better technology parks, better tax incentives, better transportation and more government supports but still not be able to compete with India. Based on my research, what really matter are four basic factors: A good supply of highly skilled workforce, the good broadband connection to the outside world, the use of English as the main language, and local government support entrepreneurs to start their own companies. Many Indian friends told me that for the first time in India, wealth is created in an honest way. IT business is created by talents and skills, not by connection or corruption. IT industry have created several million jobs, it is a clean industry, it helps so many people with “almost nothing” became millionaire and billionaire. It allows poor Indian students to know that with a good education, they can change their lives and other people lives too. These successes bring a lot of excitement and confident to a very poor country and encourage more people to study software. That is why Indian has so many software engineer and software job is admired by many Indian as a noble profession and as the best way to achieve economic prosperity.”
Cidek asked: “Why countries like Russia, China that also have a good education system cannot replicate the success of India? What hold them back?
I answered: “Russia have very good education system and good engineers but their cost is much higher. China is focusing more on manufacturing. Both of these countries did not seriously look at software as a highly profitable business and economic driver until recently. It allows India to capture the market and positioned itself as the destination for all IT outsourcing.”
Cidek asked: “ So is it too late or impossible for another country to enter this market?
I told him: “No it is not too late. With globalization, things change very fast if you know how to seize the opportunity. Today as global business begins to recover, Indian IT companies are battling to retain their employees because they do not have enough skilled workers to meet high global demand. As more Indian companies are hiring, more employees are leaving for better jobs and better pay. The attrition have reached a critical point over 32% in the past few months. Higher attrition rate means that companies have to spend more money to keep their employees, preventing them from going to work for competitors. The only way to keep them is to give them raise and it makes doing business in India more costly. The higher cost of doing business in India opens doors for other countries to take advantages of their lower cost. The interesting fact is not only software developers are changing jobs but this attrition has spread to managers too. Indian success has deplete most of its skilled workers. This is a good opportunity for other country to compete with India. If they have good supply of skilled workers, if their cost is reasonable, if their engineer can communicate well in English, if they have good infrastructure such as broadband connection, and if their government encourage entrepreneur by supporting them with incentive, tax break and ease of import and export. I do not see why not. The main issue is not about enter the market and compete with India but how do you sustain the growth after entering. It requires a continuation of developing skilled workers to keep up with the demand. Most global countries do not outsourcing IT to any country if they do not see that it can sustain it and grow it for at least five or ten more years. The key factors is the education system, how well it perform, what kind of training programs it follows, the number of students enroll per year and the number of graduates that the country can provided. Investment in IT outsourcing is a strategy not just a short term so both sides must be prepared carefully. To enter is not difficult but if you cannot keep up with demand, if your quality is not good enough, if you do not have enough skilled workers, you will not be successful.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
