The Trouble with India

Steve Hamm

The current issue of BusinessWeek has on its cover a story package by me called The Trouble with India. It's about how India's infrastructure deficit threatens to put the brakes on its growth and prevent the country from achieving status as one of the world's economic powerhouses. (Impossible without more opportunities and wealth flowing to the masses of poor people) I spent nearly a month in India late last year reporting for the story, and, I must say, I became emotionally wound up in the efforts by hundreds of Indians I interviewed to create what some of them called a New India. They weren't just talking about the economy, either. The country's sometimes disfunctional politics and widespead corruption are a heavy burden on its economy. To me, the most powerful force in India is hope. I believe the Indian people can throw off the shackles of bad government and corruption the way they did colonial rule. But it won't be easy.

Software to the Rescue

Steve Hamm

I got a ping over the weekend from Arijit Sengupta, the CEO of BeyondCore, a Foster City, CA, a startup with software that automatically measures the error rates in business process and identifies their root causes. The company's Web site says the technology is based on the Toyota Production System and Six Sigma, which is handy since a lot of BPO shops use those methodologies to improve quality.

Sengupta wrote to notify me that he had created a Web site on Ning to aggregate info about outsourcing, and he had linked to some of my recent posts.

He wrote: "I have been looking for a single site where I can get a quick update on outsourcing related news and opinion. I am trying to make this new site fulfill that role."

When I started Bangalore Tigers last fall, my original thought was to turn it into just such a catch-all location but quickly found that I wasn't willing to keep on top of things and didn't have the technical know-how to get it going and put it on partial auto pilot--which Sengupta apparently does.

When I prowled around on BeyondCore's Web sites I was impressed with the company's intellectual underpinnings. Clearly, Sengupta and his colleagues are determined to be thought leaders in the still-immature world of BPO and offshoring. They have created a new metric for the industry, Total Cost of Errors, and spell out its methodologies and concepts on their Total Cost of Errors Web site.

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India's Advantages over China

Steve Hamm

This came in overnight as a comment on an earlier post, but, because of its thoughfulness, I'm posting it up here so it gets more eyes.

From VJ:

In an article published in 2003 called “Can India overtake China?” Tarun Khanna of Harvard Business School and I argued that India’s domestic corporate sector – strengthened by the country’s rule of law, its democratic processes and relatively healthy financial system – was a source of substantial competitive advantage over China. At that time, the notion that India might be more competitive than China was greeted with wide derision.

Two years later, India appears to have permanently broken out of its leisurely “Hindu rate of growth”– an annual gross domestic product increase of around 2 to 3 per cent – and its performance is beginning to approach the east Asian level. From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment. While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.

The microeconomic evidence also casts India in a better light. While India’s stock market has soared in recent years, the opposite has happened in China. In 2001, the Shanghai Stock Market index reached 2,200 points; by 2005, half the wealth wiped out. In April 2005, the Shanghai index stood at 1,135 points. This sharp deterioration occurred against a backdrop of GDP growth exceeding 9 per cent a year. It is difficult to find another country that has this strange combination of superb macroeconomic performance and dismal microeconomic performance. It is a matter of time before the two patterns converge.

Why, then, is India gaining strength? Economists and analysts have habitually derided India’s inability to attract FDI. This single-minded obsession with FDI is as strange as it is harmful. Academic studies have not produced convincing evidence that FDI is the best path to economic development compared with responsible economic policies, investment in education and sound legal and financial institutions. In fact, one can easily think of counter examples. Brazil was a darling of foreign investors in the 1960s but ultimately let them down. Japan, Korea and Taiwan received little FDI in the 1960s and 1970s but became among the world’s most successful economies.

An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political intervention. In this regard, India has done a better job than China. From India emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident.

Although it has many flaws, India’s financial system did not discriminate against small private companies the way the Chinese financial system did. Infosys benefited from this system. It was founded by seven entrepreneurs with few political connections who nevertheless managed, without significant hard assets, to obtain capital from Indian banks and the stock ­market in the early 1990s. It is unimaginable that a Chinese bank would lend to a Chinese equivalent of an Infosys.

With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. Yes, “Made in China” labels are still more ubiquitous than “Made in India” ones; but what is made in China is not necessarily made by China. Soon, “Made in India” will be synonymous with “Made by India” and Indians will not just get the wage benefits of globalisation but will also keep the profits – unlike so many cases in China.

Pessimism about India has often been proved wrong. Take, for example, the view that India lacks Chinese-level infrastructure and therefore cannot compete with China. This is another “China myth” – that the country grew thanks largely to its heavy investment in infrastructure. This is a fundamentally flawed reading of its growth story. In the 1980s, China had poor infrastructure but turned in a superb economic performance. China built its infrastructure after – rather than before – many years of economic growth and accumulation of financial resources. The “China miracle” happened not because it had glittering skyscrapers and modern highways but because bold economic liberalisation and institutional reforms – especially agricultural reforms in the early 1980s – created competition and nurtured private entrepreneurship.

For both China and India, there is a hidden downside in the obsession with building world-class infrastructure. As developing countries, if they invest more in infrastructure, they invest less in other things. Typically, basic education, especially in rural areas, falls victim to massive investment projects, which produce tangible and immediate results. China made a costly mistake in the 1990s: it created many world-class facilities, but badly under-invested in education. Chinese researchers reveal that a staggering percentage of rural children could not finish secondary education. India, meanwhile, has quietly but persistently improved its ­educational provisions, especially in the rural areas. For sustainable ­economic development, the quality and quantity of human capital will matter far more than those of physical capital. India seems to have the right policy priorities and if China does not invest in rural education soon, it may lose its true competitive edge over India – a well-educated and skilled work-force that drives manufacturing success.

Unless China embarks on bold institutional reforms, India may very well outperform it in the next 20 years. But, hopefully, the biggest beneficiary of the rise of India will be China itself. It will be forced to examine the imperfections of its own economic model and to abandon its sense of complacency acquired in the 1990s. China was light years ahead of India in economic liberalisation in the 1980s. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector. The time to act is now.

Surprising findings on off-shoring

Steve Hamm

I got an early look this week at a new study from A.T. Kearney: "Execution is Everything: The Keys to Offshore Success." It's only 21 pages but is one of the most cogent pieces of analysis I have read in quite a while--and, for me, full of surprises. Late last year they company conducted an online survey of leaders of America's top 500 companies. About 50 of the companies provided detailed responses. Here are some of the most interesting findings:

--The companies are consolidating their offshore activities to fewer countries, with the leading candidates being India, China, and Eastern Europe. I thought companies were hedging their bets and parceling out their jobs to even more countries.

--As a group, the 35 surveyed companies that had completed offshore program implementations had succeeded very well. Combined, they saved 49 percent of baseline costs and had net improvements across all six of the study's operational performance measures, including organizational capacity, flexibility, and process maturity. I had been hearing all sorts of stories about off-shoring disappointments.

--In spite of the fact that they succeeded as a group, 60 percent failed to meet their operational performance expectations and 34%filed to meet their savings expectations. So a few of them did so well that they brought up the average.

--The best-performing companies focused on execution. And their primary target was operational performance improvements, rather than savings per se.

--Another key to success was adopting an "ownership mindset"--which means a high degree of focus, of commitment from executives, and persistence.

--Surveyed companies that chose the captive model rather than the third-party model averaged better savings. But those who used third parties and adopted the ownership mindset did well, too.

For people considering off-shoring work to India, China, and elsewhere, I highly recommend this report.

A new business model for China off-shoring

Steve Hamm

People have been talking up China as an IT off-shoring location for years, but, so far, not much has happened. I'm not sure why. The shortage of English language skills is probably a factor. Also, the fact that India is so advanced and so well known makes it harder for another location to grow rapidly. Ultimately, though, I believe China will become an outsourcing powerhouse. The talent pool is just too attractive to pass up. China's education system produces 350,000 engineering grads per year. When China blossoms, it's possible that the successful approach will be the one pioneered by Achievo, a four-year-old outsourcing firm with its headquarters in Silicon Valley and most of its programmers in China.

Even though Achievo is only four years old, it already has a global footprint. It has offices in 14 cities in the US, Canada, Germany, China, Taiwan, and Japan. About 1,000 service delivery people are in China--not just in the big cities but in second-tier burgs such as Jinan and Dalian. "We say we're a US corporation, a global company, and a China back end," says Robert Lee, the chief executive, who has 30 years of experience in the software industry.

The other thing that's notable about Achievo is what it calls its "local front end." While most Indian outsourcers have a ratio of 20% of their service delivery people on site in customers' offices and most of the rest off-shore, Achievo puts 30% to 35% of its delivery people close to the customer. It also hires local people in the countries where it serves clients rather than sending employees from low-cost countries on temporary assignments to work directly with clients.

That means Achievo can't match the top Indians' operating margins of 25% to 35%. But Lee figures the investment will pay off longer term by gaining the trust and confidence of clients.

Over the long haul, Lee believes China will become more and more attractive to clients because it has a vast pool of engineering talent in its second- and third-tier cities, so it will be able to keep a lid on salaries and turnover rates. "We can maintain a quality service at a sustainable cost. India won't be able to do that," he says.

I wouldn't bet on that. India also has second- and third-tier cities and tech services outfits are quickly expanding there to take the pressure off of Bangalore and Gurgaon. It seems to me the crucial factor will be the abilities of these countries to educate a large number of people with excellent software skills. India already has a viable software economy. China, by tolerating software piracy, has stifled the development of a home-grown software industry. Until China deals with its piracy problem, I don't believe it will become a major factor in tech services.

Indian innovation attacks the corruption problem

Steve Hamm

So far, most of the labor and ingenuity of the Indian tech services industry has been directed toward serving clients, most of whom are in the United States and Europe. But industry leaders are socially conscious, and they're beginning to use their tech know-how to help solve some of their country's persistent social and economic problems. Corruption, for instance, has been an unpleasant fact of life since independence. Now Tata Consultancy Services has come up with a software package designed to make it more difficult for government officials and citizens to cheat the system.

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Has the tech services industry become overcompetitive?

Steve Hamm

Morton Meyerson has been in and around the tech outsourcing industry every since it emerged on the scene in the 1970s. He was an early employee at Ross Perot's EDS. (In fact, he takes credit for structuring the first outsourcing contract, in 1969, for Pennsylvania Blue Shield.) And later he ran Perot Systems. Now he's a grandfather, runs a family foundation, and he's an investor in tech startups and real estate. I got a chance to talk to him recently because he's backing a two-year-old outsourcing advisory firm called Alsbridge. He has watched this industry through all of the stages of its life cycle, and he thinks its on the wrong track now.

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Open source meets off-shoring

Steve Hamm

I've written about this topic a couple of times before, and it's really starting to heat up. It's the mashup of two of the most disruptive forces in the tech industry--open source software and off-shore outsourcing. Today, Ingres Corp., the American open-source database company, announced a strategic alliance with Satyam, one of the top Indian outsourcing companies. The plan is for Satyam to build its first open source database practice on the Ingres platform, focusing initially on retail, pharmaceutical, and government sectors.

I think this is a significant announcement. It will make other players take heed--both on the open source software side and within the Indian tech industry. Ingres lost out to Oracle in the database wars of the 1990s but has come back as an open source company. Its new leaders are focusing right now on shoring up their installed base and eventually hope to take a chunk out of Oracle's database business. Satyam, I understand, is also working on a hookup with Redhat Software, the leading distributor of Linux. Satyam is a really well run company, but until now has offered about the same portfolio of services as the other top Indian services outfits. Open source offers it a chance to distinguish itself. I'll be watching closely to see how this works out.

Political showdown coming for India's techies

Steve Hamm

One of the interesting undercurrents at the NASSCOM conference in Mumbai this week was whether the central government will extend its program of special tax breaks for tech industry companies. Until fiscal 2009, any tech company anywhere can register to be considered part of a government-sanctioned technology park--and get tax breaks. A new law creates so-called Special Economic Zones, which must be large operations (25 acres or more) in specially approved locations. It looks like most large companies will be able to qualify, but not the startups that the country needs to provide the next generation of disruptive innovations.

There were all sorts of conflicting signals about whether the old tax break scheme will be extended. During a speech to 1,500 of India's top techies on Wednesday, telecom minister Dayanidhi Maran said he supported the extension because small and medium companies need it. But he said, "The industry seems to be divided. If you're not united, I can't take it on." Moments later Kiran Karnik, president of NASSCOM, went to the podium to tell him, "I assure you, the IT industry is totally united on this."

I've been told by some Indian tech leaders that Maran is a bag of wind who likes to hold press conferences announcing new initiatives but rarely delivers.

The moment of truth promised to come today when The Prime Minister Manmohan Singh addressed the group and made what seemed to me an eloquent and sincere pledge of allegiance to the tech industry. He said "Your sector has altered forever the nation's global reputation. You have raised the expectations of our people." And he pledged that the government will work hard to improve the country's inadequate physical infrastructure, e-enable itself, and improve the quality of education. What I didn't hear him say is that he would extend the old tax break program.

Afterwards, when I sat down to chat with Ravi Pandit, chairman of KPIT Cummins Infosystems, an R&D; outsourcing company, Pandit assured me that for folks in the know and reading between the lines, the prime minister had signaled that he would support the extension. The central government is to issue its annual budget report in two weeks, so the PM can't say what is going to be in it until then, said Pandit--and that explains why the PM didn't directly address the tax issue. "We didn't expect him to make a categorical statement. But he said the industry has done well and the government will do nothing to hinder its progress. This is the most explicit statement he can make about this under the circumstances," said Pandit.

He may well be right. If so, the PM is a very subtle politician.

New worries for the Indian tech industry

Steve Hamm

This is a group of people that never relaxes and never takes anything for granted. Maybe it's because of all of the bitter disappointments since independence. That kind of cultural shaping tends to keep large numbers of people on their toes. There has been plenty of talk at the NASSCOM conference about India's infrastructure challenges, soaring salaries, and too-rapid staff turnover. But when I ran into NASSCOM president Kiran Karnik, he laid a couple of new ones on me.

1) The problem of getting and keeping enough engineering professors in the colleges to educate the software programmers and hardware designers of the future. With the tech industry booming, newly minted PHDs are being lured directly into industry. Those who chose an academic career are looked down upon--as if they're only doing it because they couldn't get an industry job. Karnik says first-year faculty members make only about $500 per month in salaries, about one-third of their classmates who go into industry. Companies are trying to help out by offering fellowships to young professors, but it's not enough. Wouldn't that be a killer for the Indian industry? Smothered by its own success.

2) The special tax breaks for the tech industry are due to expire in 2009. Karnik says the new Special Economic Zones help the larger companies but don't do much for the startups that could produce the next wave of innovation and job creation. He's lobbying for the tax breaks to be renewed. This is a toughie. The Indian government is saddled with a ton of debt, and the tech industry would be a bountiful source of tax revenues. But would the tax burden kill the goose that laid the golden egg?

The Changing Rules of Global Competition

Steve Hamm

I delivered a provocative little speech (If I say so myself) and chaired a panel today at the NASSCOM conference on The Changing Rules of Global Competition. My goal going in was to shake things up and have a lively debate and it happened. I said that when you look at a handful of capabilities that will separate out the good companies from the best, the top Western firms have the lead in most of them.

After I gave my presentation, one of the panelists, Vineet Nayar, president of HCL Technologies, got up to give his 7-minute bit and said he disagreed with some of what I had said. Then he amended that. On second thought, he said, he disagreed with a lot of what I had said.

The core issue of debate for the whole panel was: Who has the advantage when it comes to the higher-order capabilities that IT services firms will need to differentiate themselves and win in the future--the Indians or the Western incumbents? There was a lively debate involving me, Nayar, TPI Chairman Dennis McGuire, and Genpact CEO Pramod Bhasin. Bhasin said he hears a lot of marketing hype from the big Western outfits about how they "transform" their clients' businesses, but sees very little evidence that they're actually doing it. He pointed out that some 40% of outsourcing engagements are counted as failures in surveys of IT purchasers.

There was nobody on the panel from Accenture or IBM to give their side of the story, but at one point I spotted Accenture PR man Allen Valahu in the audience and planned on calling on him to get an Accenture exec to the microphone to make their case, but he slipped out before I had a chance.

I'm appending the text of my opening remarks on the next page:

Continue reading "The Changing Rules of Global Competition"

My trip to Mumbai and NASSCOM

Steve Hamm

I'm heading off to Mumbai next week to participate in the annual NASSCOM technology leadership conference and do some reporting for BW stories. This is my second time at NASSCOM. I spoke there in February of 2001, just after India's version of the dot-com bubble burst. What I sensed then was a lot of disappointment and frustration. The Indian tech industry seemed always to be on the verge of greatness, but never reaching it. What a difference six years makes! The industry has grown up and is changing the rules of global competition in the tech services business.

I did a Q&A; in advance of the conference that appears on the NASSCOM site, which I have pasted on the next page:

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A new opp for Indian outsourcers--if they take it

Steve Hamm

I had breakfast yesterday with Zach Nelson, CEO of NetSuite, one of the up-and-coming on-demand software outfits. NetSuite, which sells run-the-business software delivered over the Net as a service for small to medium-sized companies, has 7,000 customers and is growing at about 60% a year. As Nelson contemplates the company's next wave of growth and maturity, he has begun talking to Indian tech services outfits about getting into the business of offering configuration services for NetSuite clients. This would help NetSuite expand faster. While the several weeks that it takes to set up a business on NetSuite is nothing compared to the months or years it takes in install big traditional software packages from SAP and Oracle, there is some complexity in the job.

So far, Nelson isn't getting a lot of traction. The Indian firms are still focused on large enterprise and implementing those traditional applications. And no wonder. Their sales forces and marketing are all built around addressing large companies, and they have plenty of growth potential there. But I think the Indians would be smart to put their toes into these on-demand waters. They could set up configuration factories and handle a steady stream of customers that NetSuite sends their way--and do things with the scale and efficiency that are their strengths. Plus, over time, as the on-demand model continues to gain popularity with corporations, even big ones, they'll have the skills and capabilities to take on what could be a rapidly growing business.

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Party time for India in Davos.....but hold on a minute.

Steve Hamm

Once again, the world's business and political thought leaders have gathered in the Swiss resort town of Davos, and, once again, India is being toasted and is toasting itself. I'm watching from afar, in NYC, but avidly reading the coverage in news stories and blogs. My strongest impression is that there is a lot of happy talk about India and its prospects, which is appropriate, but not much talk about its challenges. People seem to be papering over the country's infrastructure deficit, which, by some measures, is slowing GDP growth by 2%. And, coupled with that is the problem of the haves and the have nots. The vast majority of Indians have been left behind as the tech economy takes off. And they vote. Signs of trouble are already showing up. Pro-business and pro-reform politicians are being defeated at the polls, replaced by people who promise voters free TV sets, free water, and free electricity. Wrapped together, the infrastructure problem and the country's unruly politics constitute a serious challenge to India's aspirations to become one of the world's top economies. So, sure, Indians should party at Davos. But unless they make huge amounts of progress back home, the hangover could be quite painful.

India software outsourcing: One unhappy customer

Steve Hamm

When you hear complaints about offshoring to India, usually it's about call centers. The hard-to-understand accents, high turnover, etc. make this a tough business to satisfy in. But, from time to time, I hear pointed complaints about India's software programming work. I got one today from Chris Stone, CEO of StreamServe, a US-based enterprise document presentation software company. (And former vice-chairman of Novell) Usually, when I hear negative comments about Indian programming, it's in situations like this: An American firm is trying to manage a small captive shop in India. The top Indian software services outfits say companies would be better off dealing with them because they manage the projects, assure quality, and can scale up and down quickly. That pitch makes sense. But do things really work that way? I'd like to hear from people in corporations who have contracted out relatively small projects to Indian outsourcers. Did you get what you expected?

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