India's Employability Gap and the IT industry

Last Saturday I was on a panel titled 'Plugging The Employability Gap', hosted by the two year startup NiceFit at the Centre for Organization Development. The topic is hot, with the economy grappling with shortage of skilled manpower as growth resumes. The focus was on the IT industry, as it is on of the largest sources of jobs in the organized sector. This industry has grown from $4b in 1998 (1% of GDP then) to 70b in 2010 (6% of GDP). It accounts for 16% of India's exports and exports 70% of its output. More than 2.3 million are directly employed (30% of them women) and another 9 million (4 x factor) are indirectly employed.

With growth kicking back in, the industry plans to hire 120,000 - 150,000 in the current fiscal year. If growth continues at the present rate of 20% per annum, the industry will employ a mind boggling 30 million by 2020! This year alone, AP's IT industry needs to hire 90,000 people to meet growth (20%) and attrition (10%). The obvious question is where will these future employees come from? India is witnessing a demographic dividend and will have several hundred million youth coming into the job market. But these statistics may not convey the true picture, as it is said that only 1 in 4 engineering graduates are actually employable today.

A closer look at the numbers in the Hyderabad region (AP state) show that there are 650 colleges graduating 250,000 engineers - 25% of India's output. AP also accounts for 30% of India's overall 3.5 million graduate output across streams. Of the engineering output, 25% get into campus jobs (yes, 1 in 4). Another 10-15% go for higher studies and 8 - 9% end up being self employed (some voluntarily, others due to lack of 'options'). That leaves a whopping more than 50% having nothing to do!

To sum, in the state of AP alone, there are 125,000 engineers (50% of the college output) without jobs while the local IT industry needs 90,000 people but can only hire 62,000 from colleges (25% of the output). This is a net shortfall of 30,000. If supply of talent cannot meet up with the demand, then the rosy growth story will not materialise.

The industry will be forced to ramp up in other geographies (China, Eastern Europe, Philippines etc). There will be more backward integration ie, industry will build its own education infrastructure. Infosys' Global Education Center is an example, 'graduating' 50000 people through its intense six month boot-camp over the last three years.

More in a subsequent post on what it takes to plug this 'Employability Gap'.

Computing on Cloud 9

I happened to run into two live events on a technology topic this week. The topic is Cloud Computing, something that promises to stop companies from worrying about technology infrastructure and scaling it up. The first event involved an Amazon guy who made a strong pitch to IT Services companies to help them take this trend to their customers. The second event (held today) was a technology barcamp at Hyderabad. Two guys from Google talked about the Google App Engine (GAE), but I was more impressed by an unassuming entrepreneur who demoed Amazon Web Services (AWS) in action. Unfortunately his map making product is likely to be eclipsed by Google's Map Maker even before it hits the market. But he showed how AWS was far more flexible and powerful than GAE.

This trend is particularly relevant in Indian context as it has a potential create vast economies of scale in computing thereby making Information Technology accessible at low price points. IT adoption in India is at a world class level in the big corporates, but SMEs have not embraced it yet due to price and maintenance issues. Cloud Comupting could free up all of that and jumpstart the productivity of the Indian economy.

What next in IT Services?

The blog post here by Basab in 6ampacific captures well what is going on (wrong) with the Indian IT Services industry. The stock prices of Indian IT biggies have taken a massive drubbing while the Sensex in general has been going from strength to strength in 2007. The recent market meltdown impacted IT stocks the least, partly because they were already beaten up black and blue.

With the rupee appreciation, larger volumes and the expected recession in the US the future is certainly not so rosy. What could turn around the futures of these companies? One or more of the following:

• Some bold and aggressive acquisitions in the global market place taking their reach to new markets. Indian companies in general (not just IT ones) have a huge potential to acquire inefficient operations overseas and use their low cost models to deliver significant improvements in gross margins.
  
• The rupee reaching a level of Rs 40 again on the back of a potentially deeper stock market correction, could mark a psychological threshold. With elections in India round the corner and the global recession there will be enough volatility around to make that possibe if not probable.
  
• Launch of some bold IT products may still take some time, but that could kick in big time non linear revenue streams and not on mere head counts. TCS is already more than 100k heads, a humongous number and I clearly don't see them replacing the Indian Railways as the world's largest employer.

SEZ Land Travails & Opportunity Cost

There is a heated debate going on in India about securing land for industry. There are those who really need land for setting up an industry, and there are also allegations that some are grabbing land in the name of industry. Business Today had a good piece on this in their latest issue. I have no comments yet on how much land an industry really needs. However I will hold as in an earlier post that we need to kick start large scale manufacturing that can employ millions. If a 50 sq km patch of land with no red tape and hassles lets us have it, then so be it!

What is more important is to understand the massive opportunity cost involved in these humongous delays the government is creating in closing the SEZ decision. We are losing crores of rupees by the hour and I am not exaggerating. Taking an example, Times of India reports that Infosys is being shown an alternate site for a new campus at Hyderabad; this is an year after they were originally allotted land at a site near the new International airport, but the government bungled big time and did not close the decision quickly. It is also reported that this new campus will accommodate 25,000 employees. Now a typical IT Services major can generate at least Rs 2500 crores revenues on such a base (being conservative). Take into account the multiplier effects, that is 100,000 more downstream jobs in the economy delayed by an year! Sheer profits wise that is at least Rs 500 crores in an year. The opportunity cost is criminal, which our politicians will not understand. They will be only too happy to take small time bribes to facilitate decision of much lesser consequence.

One Trillion Finally

Indian economy hits the one trillion mark finally! Yes that is a huge landmark and how did we get there? Part of it is the searing growth the economy has seen in the last 3-4 years but some of it is also due to the big jump the rupee has had in the last 3-4 weeks. That should do good for our import bill but our exporters are not too happy.

IT Services Biggies have just announced another round of stellar results but the rupee movement must be throwing a spanner in the works. In the long run a strong rupee is good for the economy. IT Service exporters will need to get used (and overcome) the impact of an appreciating rupee and dwindling tax concessions as the Software Technology Park tax holidays come to an end.

IT Services Or IT Products Or Something Else?

There is an interesting debate going on a couple of blogs about what India needs most today to power economic growth. Is it IT Services Or IT Products? Which one should the enlightened pursue harder and which has the potential to contribute better to economic growth? Sramana argues for products while Basab defends the IT Services story.

It is now a well established fact that the downstream impact of the IT-ITES industry on the Indian economy is manifold. NASSCOM recently released the results of its study on the multiplier effects. Here is a quote from the indianeconomy blog:

* For 1 job created in IT-ITES, 4 jobs are created in rest of the economy
* Re 1 spent on OPEX generates additional output of Rs 0.9 (Multiplier 1.9x). Re 1 spent on CAPEX generated additional output Re 1 (Multiplier 2x)
* Re 1 spent by IT-ITES professionals generates additional output of Rs 1.1 (Multiplier 2.1x)
* In terms of potential impact on the economy by 2010, total economic output could be as high as $120 billion, while jobs created (direct+indirect) could cross 115 million

While the case for IT products is also undeniable, India first needs more of labor intensive industries, preferably the manufacturing types that employ low skilled labor more than it needs IT products. That alone will establish a large industry base that when maturing will generate demand for IT products - yes, you need to first serve local markets before taking on global ones like every successful product major. Look at who the successful Indian companies are buying IT products from? If you take the case of India's incredibly successful telecom sector as an example, most of the top players (Bharti Airtel, Idea, Hutch Essar) have engaged IBM for its products and platforms (services too).

In addition to the direct contribution to GDP a manufacturing base will also generate demand for Indian IT products. Most companies often cited (the likes of Microsoft, Nokia) catered to local markets first before going global and increasing their revenues per employee (Microsoft is more than half a million per employee and Nokia is closer to a million per employee). A solid manufacturing industry base will also guarantee that more low skilled people will get lifted out of poverty and thus ensure political stability leading to continued reform which will in turn create the right ecosystem for generating Intellectual Property. Today's well known constraints that inhibit this include a hamstrung archaic labour laws, VC ecosystem, overloaded judiciary etc.

Once you have sufficient milk in the vessel, churn will automatically happen to produce cream! As Indian industry matures, IT product companies that cater to them will mushroom and then blossom to take on the world! So let us first help by pushing the Indian establishment to organise reforms that spur low skill intensive manufacturing. Products will take care of themselves.

HYSEA's Technology Day

Today at the Hyderabad Software Exporter Association's Technology Day, there were a few interesting talks.

IT Services
Sudin Apte of Forrester opined about the rapidly polarising IT Service's industry. The Top 3 players are growing rapidly (40-50% CAGR) while the smaller companies are getting left behind. The rest of Top20 grew at half the Top3 rate and have profit margins in the 18-19% range compared to 24-25% of Top3. The rest outside the Top20 had margins in the 12-13% range. Three years ago the Top3 were 26% of the industry but now they are 41%. The ABN Amro deal made big news last year with TCS and Infosys winning huge chunks but it is a less known fact that six smaller Indian firms got kicked out ABN at the same time. The smaller companies look set to be vaporised by the bigger ones without even too many acquisitions owing to trends on the demand side and supply side!

The so called 'Billion Dollar babies' - companies which recently grossed $1B in annual revenues - HCL, Satyam, Cognizant will have an year ot two before they either graduate to bigger league or stagnate and lose industry position. A Tier-2 player just cannot aim to succeed by attempting to be a mini-TCS or a mini-Infosys, offering all kinds of services to a small set of clients. The IT services industry has just gotten tougher to enter and a startup cannot achieve unless it executes to a carefully nurtured niche.

Web 2.0
Ramesh Loganathan of Pramati gave an excellent post-lunch talk on Web 2.0 and later ended up giving a pitch on his companies new Web-Desktop integration offering Dekoh ('look' in Hindi). The product sounded cool but there was nether a live demo nor a canned demo. Later I checked Pramati's website and they actually have some cool Web 2.0 demos but no mention of Dekoh.

'Let a Million Markets Bloom'

IBM in collaboration with the Economic Times organised a session titled "Let a million markets bloom: How Innovation is Fuelling India’s Growth Engine” last week in Hyderabad. It was ostensibly aimed at CEOs and CIOs but the audience had just a few of them. However it was impressive to see first hand IBM continue its juggernaut in India, reinforcing its branding around the Innovation theme. No wonder IBM is snapping up huge billion dollar plus deals with Indian Telecom Companies (Bharti Airtel, Idea and now even Hutch). All this while the Indian IT service players still struggle to strike large ($100+ million dollar) deals in the global arena. And did you know that IBM shares revenues with Airtel? It is accountable for its client's business outcomes! Something that the Indian IT players are only now talking about for their Fortune 1000 customers. IBM is coming into India in a big way, building a huge Indian work force and winning Indian business.

IBM showcased its recent study on innovation trends across the globe and a speaker shared the findings which were threefold:

1. Business model innovation matters (focus on products, services, markets & operational innovation). CIOs should plan for scalability of IT to match and promote business growth.
2. External collaboration is indispensable. CIOs should plan for applications which facilitate internal and external collaboration.
3. Business & Technology integration is imperative.

I was surprised to see the distribution of priorities assigned by Global CEO/CIOs between various kinds of innovation to be exactly as the Indian counterparts voted. One would think that in an fast emerging market like India, a CEO would be focused on building scale and market presence; whereas in a developed market the focus would be on optimising the business model and wringing out cost efficiencies.

The subsequent panel discussion was a very good one. Sivaram Tadepalli (IT Lead for the GMR International Airport at Hyderabad) did a good job explaining how technology integrates with their business. He later explained how the new airport is rapidly getting built and was excited about the outcomes. Sangeetha Reddy of Apollo Hospitals made some good comments and IBM's India Head Nipun Mehrotra provided a good summary. So in all a good event despite the live cricket telecast they briefly showed of the India vs Srilanka match which India ultimately lost and got kicked out of the Cricket World Cup.

Pushing Startups To The Fringes

In his latest Budget the Indian Finance Minister has proposed Fringe Benefit Tax on stock options that employees exercise starting April 1, 2007. Now it may appear a great way to collect additional taxes (assuming FBT = Marginal Tax of 33%), but the long term impact will be stifling innovation and increasing employee churn in the Indian economy. Startups will find it even more difficult to attract/retain talent with ESOPs as the net gains post exercise are diminished.

Employees with vested options are now forced to exercise them which means no more exit (quit) barriers. Though an option grant typically takes 4-5 years to vest, the total lifecycle is much longer. Vested options take another 5 years to expire which means a manager conserving cashflows will tend to stick around that much longer, almost a decade. Now a decade is a long time, and often committed managers is all that separates a stunted SME to one that really grows wings to become a bluechip. Just look at the number of 'major' IT Services companies in the early nineties, that have now fallen by the wayside.

For now, look for increased attrition at mid and senior levels across industries, rising wage inflation (employers will have to compensate for unattractive esops) and one more setback to the nascent startup-ecosystem in India. Unless the government realises the total impact and pegs FBT at a reasonable 10-12% range.

10x For A BlueChip Service Company

Last evening after a dinner at an upscale restaurant (part of a blue chip, publicly listed firm), I was surprised to see a line item in the final bill. Now I rarely visit a five star hotel for a personal appointment, but this was one of those rare occasions. So the matter of surprise was this - a plain bottle of mineral water, normally available in the market for Rs 10 was being charged almost Rs 100 tax included. The rest of the food was fine and I can make myself to understand value pricing and all that stuff. But 10x times for a bottle of mineral water?

Extend the argument to IT Services industry: new hires at entry level get paid an average of Rs 200,000 p.a. and given the offshore rates basically are billable at about Rs 2,000,000 (typical Tier-1 provider). So we have another 10x formula going!

Now I am not comparing fresh software engineers with mineral water bottles (some would argue both are commodities), but from a pricing standpoint we really have something going here. When you as a company, are able to charge customers 10 x times the input cost (thanks to all those intangibles), you have truly arrived as a Blue Chip!

SaaS And The Future of Bloated Enterprise IT

How many times have Businesses complained that they are not getting the worth for Technology spend? IT departments have bloated in size over the decades and with the ensuing bureaucracy and entropy, have often failed in providing nimble and economical solutions to the business. Nicholas Carr famously said on this: "Does IT matter?" implying it doesn't. Jeff Nolan now CEO of Teqlo and previously with SAP, also writes..

IT is no longer going to be the sole provider of these within the enterprise. In fact, my bet is that IT becomes a utility provider responsible for infrastructure services while business units take responsibility for business solutions. In this scenario SAP and Oracle are ill-equipped to win on their terms because for their entire history they have been solving CIO and IT problems, not user problems. "

Now Software as a Service (SaaS) is one disruptive trend that promises to offer Business Applications to end users without the hand holding of an IT department. So for a business user the vision is: 'I need an app, I go buy it off the Net from someone who hosts it and takes care of all the IT stuff (security, privacy, disaster recovery etc). Basically, I get the app on the tap.'

The handicap that Jeff articulated about SAP/Oracle is bound to impact the Indian services players too unless they evolve rather dramatically. So far they also have been solving CIO and IT problems, and attempts to connect to the business have not been very successful. To cite two reasons: IT feels threatened when they talk to the business, and Indian service players do not yet have the sales/engagement skills to talk to the business about their problems, leave alone solving them.

Now, Indian companies moves into SaaS have so far been revolving around either building the IP themselves (organic) or acquiring niche companies (inorganic). Basab Pradhan, a veteran IT Services Sales guy, in this latest post avers that it will be more of the latter.

But it is much more than just the product or IP involved, the desi companies will have to integrate different sales and product managment culutures into the services setup, compensate the product thinkers differently, allow for a different gross/operating margin play, invest in product lines much more aggressively etc. Ultimately the first S in 'SaaS' matters much more than the second which is increasingly a commodity.