One of my friends forwarded this link to me. I have posted articles here. http://shrikant.emergic.org/
Infosys gets Desperate
I have previously written on my blog about the Infosys bubble. Last week there was a rumor that Infosys may bid for Cap Gemini a French services company. This act is nothing but an act of desperation based on exactly what I had predicted. I love blogs because they document lose talk.
Why is Infosys getting desperate? high expectations from the market. For a company with revenue of approximately 3.X billion, profits 1.3 billion and a market cap of 27 billion. Compare with Cap Gemini?s revenue 10.X billion, profits 400 million and a market cap approximately equal to revenue. Cap Gemini has a strong presence of 12,000 employees in India, many of them in Mumbai, where Infosys has minimal presence.
So what does Infosys get from this deal. Mainly revenue to maintain growth from Cap Gemini customers, convert the high Euro salaries to Rupee and Dollar salaries. At the same time, the Indian environment is catching up fast, rising salaries, ability to continuously add quality manpower, lousy Indian infrastructure that takes a toll on the quality of living and life of Infosys employees. The politicians in India are trying to figure out how to make money from the next land deal rather provide world class infrastructure to the tax paying employees.
I had a chance to visit the Infosys campus in Pune last week. The facilities are five star, but all these add to the cost of doing business. The lower salaries also make the Indian employee unproductive, productivity improvement has not kept pace with rising salaries, customers are not paying more, and dollar seems to be getting weaker.
For those who have had a nice Infosys ride, it time to sit back and think. Infosys is just an example, but the story remains the same for TCS, Wipro, and Satyam etc. Those that believe the IT boom is forever, revisit it.
The Infosys Bubble
Everybody was excited at the bonus issue and revenue results from Infosys, currently celebrating their silver jubilee. I do not agree with this herd, prescribe ?cautious optimism? moving forward for the challenges outweigh the opportunities moving forward. The story continues to get bleaker, for the whole software services industry as a well, where just adding bodies to get incremental revenue and no differentiation, is the strategy of the day, as TCS, Wipro and Infosys market their services to the world. Lets review some facts.
Infosys needed 52,000 employees to generate revenue of approximately US$2 Billion that averages to US$40,000 per employee. Assuming perfect linearity, they will need another 25,000 employees to add the next billion. In comparison NVIDIA a producer of graphic chips has a revenue of 2.38 Billion with 3,000 employees. Another data point, Intel does US$36 Billion with about 100,000 employess. So the maximum Infosys can generate with 100,000 employees is US$4 Billion.
Infosys, 5 years back, along with other Indian software majors, had a huge advantage against IBM Global Service, Accenture because they had a minimal India presence. This allowed Infosys, to compete more effectively on the dollar arbitrage. Since then, all have beefed up their India presence, IBM now has 40,000 employees and overtake Infosys very shortly. Accenture now has 16,000 employees in India. So premium billing, to raise the upward revenue per employee is a tough task, as Accenture and IBM have competitive billing rates with their Indian presence and better global consulting brands. There will be additional pressure, to retain the best employees employees and maintain healthy margins. Some MNCs are taking presence via acquisitions, EDS in one stroke, has bought a India presence, with a majority stake in Mphasis-BFL.
Also Infosys gets a major break with no corporate taxes on profits. Its matter of time when IBM and Accenture will put pressure on WTO to fix this issue. As a tax payer, this is a big drain to the national exchequer and weaker global competitors.
My dear friends, think a bit, pretty easy to conclude that Infosys has tough times ahead. A model where you add more bodies to add incremental revenue, should not excite anyone. Does Infosys deserve a PE of 35 and market cap of 10X sales. Lets paint a scenario, Infosys doubles their revenue in the next 4 years. What should their price be ? assign a PE of 12, assume no corporate taxes, no change in revenue per employee, more people to manage. Have a great silver jubilee, Infosys, because looking forward, it does not look too exciting. Let me end with a quote by Oscaar Wilde, ?Everything popular is wrong
Future of Infosys/TCS/Wipro
Future of Infosys/TCS/Wipro
The thing about rat race is even if you win, you are still a rat.:rolleyes:
Since humans came from surviving rats/their cousins after the last extinction phase, even if you win the 'human' race, you still came from a rat :p
Since humans came from surviving rats/their cousins after the last extinction phase, even if you win the 'human' race, you still came from a rat :p
Future of Infosys/TCS/Wipro
Infosys, TCS, Wipro, Patni & other Indian companies will ensure in future that they will work for minimum hourly wage of $5.50 and will get almost all the projects from here...Folks from here will be jobless.....Since India has huge supply of manpower available at cheap cost this is going to happen.
Sorry, If I have offended anyone. I am seeing right through my eyes in my area where 10 years back, my expertise hourly rate was $110 to $125/hr. Right now, Indian companies are charging $18/hr to $25/hr for the high-end work. I am just projecting in future based on experience and probably in another 3 to 5 years, they will beg with their white counterparts to give them project at $5.50/hr.
Sorry, If I have offended anyone. I am seeing right through my eyes in my area where 10 years back, my expertise hourly rate was $110 to $125/hr. Right now, Indian companies are charging $18/hr to $25/hr for the high-end work. I am just projecting in future based on experience and probably in another 3 to 5 years, they will beg with their white counterparts to give them project at $5.50/hr.
Future of Infosys/TCS/Wipro
I would be very apprehensive of all these articles predicting either a "rosy outcome or a doom and gloom scenario" for Indian software companies.
All those scare stories about Japan taking over in the 1980's never came to fruition. Now, Japanese car companies have manufacturing plants peppered all over the US to manufacture cars for the domestic market.
Here's a link to the Japan Automobile Manufacturing Association
- http://www.jama.org/
An excerpt is pasted below -
" Japanese automakers have invested $28 billion building 12 assembly plants and 13 parts plants in the U.S. Today 67 percent of Japanese vehicles sold in America are produced in North America, mostly in the U.S. and largely with U.S. produced parts. In 2004 JAMA members purchased $45.24 billion of U.S. parts. "
I expect Indian offshoring companies to follow the same path. As they get bigger, they would have to setup operations here in the US and pay US WAGES to curry favor with the senators and congressmen in the US. Its is inevitable and all this gloom and doom scenario will also never come to fruition.
All those scare stories about Japan taking over in the 1980's never came to fruition. Now, Japanese car companies have manufacturing plants peppered all over the US to manufacture cars for the domestic market.
Here's a link to the Japan Automobile Manufacturing Association
- http://www.jama.org/
An excerpt is pasted below -
" Japanese automakers have invested $28 billion building 12 assembly plants and 13 parts plants in the U.S. Today 67 percent of Japanese vehicles sold in America are produced in North America, mostly in the U.S. and largely with U.S. produced parts. In 2004 JAMA members purchased $45.24 billion of U.S. parts. "
I expect Indian offshoring companies to follow the same path. As they get bigger, they would have to setup operations here in the US and pay US WAGES to curry favor with the senators and congressmen in the US. Its is inevitable and all this gloom and doom scenario will also never come to fruition.
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desihometown
- Posts: 314
- Joined: Sat Feb 10, 2007 4:38 am
Future of Infosys/TCS/Wipro
They can always move to second or third tier Indian cities and hire local
talent for cheaper.
In other words outsource within India to cheaper & cheaper places. I'm sure there wont be dearth for talent anywhere in India, considering we will be 1.5 billion people in 40 years.
One of my cousins who is a Sr.VP at Wipro is being pressured to get more business from Korea, Japan etc.
They will innovative and get more business. As Nandan Nilekani once mentioned, Indian companies are a tight knit part of a global supply chain. Even if one link collapses, there will be a huge impact on the global economy/supply chain.
talent for cheaper.
In other words outsource within India to cheaper & cheaper places. I'm sure there wont be dearth for talent anywhere in India, considering we will be 1.5 billion people in 40 years.
One of my cousins who is a Sr.VP at Wipro is being pressured to get more business from Korea, Japan etc.
They will innovative and get more business. As Nandan Nilekani once mentioned, Indian companies are a tight knit part of a global supply chain. Even if one link collapses, there will be a huge impact on the global economy/supply chain.
Future of Infosys/TCS/Wipro
There were similar doomsday scenarios for the desi consulting cos in the past:
1. No more growth after the end of Y2K projects.
2. No outsourcing after the decline due to 9/11.
They all have attained critical mass long time back and will have to continue to adapt to the new evolving scenarios.
1. No more growth after the end of Y2K projects.
2. No outsourcing after the decline due to 9/11.
They all have attained critical mass long time back and will have to continue to adapt to the new evolving scenarios.
Future of Infosys/TCS/Wipro
Desihometown says " In other words outsource within India to cheaper & cheaper places. I'm sure there wont be dearth for talent anywhere in India, considering we will be 1.5 billion people in 40 years."
I wish things were that easy. If they were, you would find software operations in North Dakota, Montana and Manitoba.
People are as usual over-estimating the talent levels in India. There is already a severe talent crunch in Bangalore and articles have appeared in the Wall Street Journal as well as Gartner about this issue. For high end work, good computer scientists cost almost $75,000 in India. When you can get the same talent here in the US for $85,000 to $90,000, I don't see a large competitive advantage. Someone posted the WSJ article about this exact issue.
Moreover, micro-management and other overhead related costs are high in India. Managers are more like facilitators in the US but in most companies in India Managers have to crack the whip very often to get things done.
I wish things were that easy. If they were, you would find software operations in North Dakota, Montana and Manitoba.
People are as usual over-estimating the talent levels in India. There is already a severe talent crunch in Bangalore and articles have appeared in the Wall Street Journal as well as Gartner about this issue. For high end work, good computer scientists cost almost $75,000 in India. When you can get the same talent here in the US for $85,000 to $90,000, I don't see a large competitive advantage. Someone posted the WSJ article about this exact issue.
Moreover, micro-management and other overhead related costs are high in India. Managers are more like facilitators in the US but in most companies in India Managers have to crack the whip very often to get things done.
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desihometown
- Posts: 314
- Joined: Sat Feb 10, 2007 4:38 am
Future of Infosys/TCS/Wipro
techiemba;34041Desihometown says " In other words outsource within India to cheaper & cheaper places. I'm sure there wont be dearth for talent anywhere in India, considering we will be 1.5 billion people in 40 years."
I wish things were that easy. If they were, you would find software operations in North Dakota, Montana and Manitoba.
People are as usual over-estimating the talent levels in India. There is already a severe talent crunch in Bangalore and articles have appeared in the Wall Street Journal as well as Gartner about this issue. For high end work, good computer scientists cost almost $75,000 in India. When you can get the same talent here in the US for $85,000 to $90,000, I don't see a large competitive advantage. Someone posted the WSJ article about this exact issue.
Moreover, micro-management and other overhead related costs are high in India. Managers are more like facilitators in the US but in most companies in India Managers have to crack the whip very often to get things done.[/quote]
Inefficiencies in management or operations does not mean annihilation of a well entrenched industry. That is what I'm trying to say. Look, the Bay Area is one of the most expensive both in terms of salaries and cost of living. But salaries continue to grow here and RE continues to hold on despite busts.
That is because, there are a few ways to achieve growth. One is innovation in product development, which is what the valley does. A new iPhone comes about generating billions in sales and new software products and creating jobs.
Indian companies can similarly innovate in operations and managing costs.
To give you an example, a friend of mine runs a software company in Mysore. He pays around 1/5 the salary of what a similar job/position would cost him in Bangalore. The way he manages to do this is that he looked for alternate pool of talent and groomed them. He hired Diploma in CompSc, BsC COmpSc etc, and trained them to work on the projects (database software) and continues to grow his business in US, Middle-east etc.
So, it is definitely possible to look for low-cost/alternative sources of talent and resources. Infosys/Wipro etc. can open centers in Vietnam, Easter Europe etc., and tap into the pool there. The jobs dont necessarily HAVE to be executed in India. They can thrive as global businesses.
I'm really sceptical of these doomsday predictions. Granted salaries might raise in Bangalore. But, salaries are high in Europe too. Arent there jobs there ? Britain, Switzerland, France all have high paying software jobs. Have jobs disappeared from there ?
And salaries can always go down. Ask anyone at HP and they will tell you that the salaries for the same position post-bust (2002) are 20% less than boom-time(90s) salaries for new hires. I can see all kinds of corrections/adjustments happening. But I'm not convinced Infy/Wipro will wind down and say," hey. Indian engineer salaries are equal to US salaries.
We are no more profitable. Bye bye everyone. All the best China."
Before they do that, dont u think these companies will try whatever they can to survive ? It can/will be brutal, like the US in 2002. But, it can recover and survive like most companies did in the US.
Future of Infosys/TCS/Wipro
People are as usual over-estimating the talent levels in India.
I personally think that only way to solve talent problem in India is to create technical career path. Pay equal or higher salaries to Technical Team Leads/ Architects and it will make huge change. Most of the IT talent is stuck into management and some of those even hate project management. There is no concept of ?Mentoring? and due to current job scenario; things are becoming more and more difficult.
Decades back, I worked in engineering consultancy firm in India which pioneered new management processes. Mitsubishi corporation bough this Indian firm and later adopted most of the processes in their Japan operations also.
The one big change was management created separate technical career path. Technical team leads were paid more salary. There were no project managers, but project engineers.
Any engineer with 1-2 years experience who has very good people and coordination skills were trained in company specific project management methodologies, they assisted technical team for all project management activities. Usually I used to have 2-3 project engineers reporting to me and assisting me for all project management related activities.
This helped everyone to concentrate on technical activities and become expert in lot of areas. There was separate Project Management Department with some senior management helping those project engineers if there is any issue.
Company consistently completed first its kind of projects in various fields. Most of the Reliance projects were handled by this company. Dhirubhai Ambani was very interested in buying this company, but due to legal conditions put in various contracts prevented him buying this company.
The recognition for any exceptional technical work and unique way of management prevented so many people to leave this company even with high salary offer. It created glamour around most of the technical activities and even turned some mediocre people into best technical professionals. It forces everyone to raise their standard.
In recently I have been involved in working some Irish IT companies and I found that they also follow similar model. Most of these companies have small staff but they have invented some of the high revenue generated software products.
And that is one of the reason that Indian IT companies have found it very difficult to penetrate into high end consulting where the real money is. They simply do not have enough senior technical people. (This particular observation was made by one of our senior gora manager while dealing with Infosys)
It will not be easy to follow this model, but I have seen some of Indian companies have started changing, but those are minorities.
I personally think that only way to solve talent problem in India is to create technical career path. Pay equal or higher salaries to Technical Team Leads/ Architects and it will make huge change. Most of the IT talent is stuck into management and some of those even hate project management. There is no concept of ?Mentoring? and due to current job scenario; things are becoming more and more difficult.
Decades back, I worked in engineering consultancy firm in India which pioneered new management processes. Mitsubishi corporation bough this Indian firm and later adopted most of the processes in their Japan operations also.
The one big change was management created separate technical career path. Technical team leads were paid more salary. There were no project managers, but project engineers.
Any engineer with 1-2 years experience who has very good people and coordination skills were trained in company specific project management methodologies, they assisted technical team for all project management activities. Usually I used to have 2-3 project engineers reporting to me and assisting me for all project management related activities.
This helped everyone to concentrate on technical activities and become expert in lot of areas. There was separate Project Management Department with some senior management helping those project engineers if there is any issue.
Company consistently completed first its kind of projects in various fields. Most of the Reliance projects were handled by this company. Dhirubhai Ambani was very interested in buying this company, but due to legal conditions put in various contracts prevented him buying this company.
The recognition for any exceptional technical work and unique way of management prevented so many people to leave this company even with high salary offer. It created glamour around most of the technical activities and even turned some mediocre people into best technical professionals. It forces everyone to raise their standard.
In recently I have been involved in working some Irish IT companies and I found that they also follow similar model. Most of these companies have small staff but they have invented some of the high revenue generated software products.
And that is one of the reason that Indian IT companies have found it very difficult to penetrate into high end consulting where the real money is. They simply do not have enough senior technical people. (This particular observation was made by one of our senior gora manager while dealing with Infosys)
It will not be easy to follow this model, but I have seen some of Indian companies have started changing, but those are minorities.
Future of Infosys/TCS/Wipro
Desihometown,
Your arguments are valid when to comes to off shoring lower end work. I think that it is not beneficial from a cost perspective to offshore new product development work to India especially in industries where you have to be close to the end customer.
And moving up to innovation is not as easy as it is made out to be. You don't hear of companies like Deloitte or Accenture innovating and introducing new products in the marketplace. This is because of the ingrained process oriented culture that prevents innovation. IBM and HP still innovate because they have the advantage of having a innovation based culture that comes from their previous avatars as product development companies. Moreover, once a company becomes large innovation dies and hence you have the notion of startups. Even companies like Oracle and Cisco are now expanding using a strategy of acquisition. They buy smaller startups to augment their already existing product lines.
It will be extremely difficult for companies like Infosys and Wipro to move up the value chain and become product based companies in the future. It is next to impossible to get rid of the process oriented nature of service outsourcing and move up the ladder. They may be able to squeeze more costs out of regular offshoring projects and grow via acquisition but I don't see them becoming the next Oracle or Microsoft.
Regarding offshoring of maintainance related work - I think those jobs are already in India. You won't find many US workers aspiring for those jobs either.
When I mention cost - I refer to workers with advanced degrees, Masters and PHds, who form the lifeline of product oriented companies like 3M, Oracle, Microsoft, Google, etc. These workers are already expensive in India and will continue to be expensive in India. Without a doubt, the "English" major from the US who knows HTML and database scripting will be replaced by the comp science diploma graduate in Mysore - but can this Comp Science diploma graduate compete with a Master's/MBA/Phd from either India or the US???
Your arguments are valid when to comes to off shoring lower end work. I think that it is not beneficial from a cost perspective to offshore new product development work to India especially in industries where you have to be close to the end customer.
And moving up to innovation is not as easy as it is made out to be. You don't hear of companies like Deloitte or Accenture innovating and introducing new products in the marketplace. This is because of the ingrained process oriented culture that prevents innovation. IBM and HP still innovate because they have the advantage of having a innovation based culture that comes from their previous avatars as product development companies. Moreover, once a company becomes large innovation dies and hence you have the notion of startups. Even companies like Oracle and Cisco are now expanding using a strategy of acquisition. They buy smaller startups to augment their already existing product lines.
It will be extremely difficult for companies like Infosys and Wipro to move up the value chain and become product based companies in the future. It is next to impossible to get rid of the process oriented nature of service outsourcing and move up the ladder. They may be able to squeeze more costs out of regular offshoring projects and grow via acquisition but I don't see them becoming the next Oracle or Microsoft.
Regarding offshoring of maintainance related work - I think those jobs are already in India. You won't find many US workers aspiring for those jobs either.
When I mention cost - I refer to workers with advanced degrees, Masters and PHds, who form the lifeline of product oriented companies like 3M, Oracle, Microsoft, Google, etc. These workers are already expensive in India and will continue to be expensive in India. Without a doubt, the "English" major from the US who knows HTML and database scripting will be replaced by the comp science diploma graduate in Mysore - but can this Comp Science diploma graduate compete with a Master's/MBA/Phd from either India or the US???