Has India Peaked?

On my flight back to US, I ran into Partha Iyengar, Gartner’s resident analyst in India following the offshore market. Great guy who has done several jobs at Gartner over his career. He was headed to Gartner’s Sourcing Summit in Orlando which starts Monday. Offshoring will be a hot topic there and Gartner is not ready to say what I am about to say here.

I believe India IT offshoring growth in the US will slow down considerably over the next couple of years. Not die, just flatten after a decade of phenomenonal growth. While European and Asian markets will continue to grow, they will not offset the US slowdown.

Major factors for my reasoning:

 a) The India “hassle factor” continues to grow

Physical infrastructure continues to be a major turnoff for a number of prospects and existing clients. I have been to several major Indian cities in the last year or so - same everywhere. Staff turnover is rampant. Getting named resources is increasingly chancy.  There are still not sufficient local US staff (or Americanized Indians) to manage client relations or program management. I have written about these for years.  The last point is increasingly acute as the domestic mood changes (see d)

b) Mile wide, inch deep

As Indian firms bid for increasingly diverse IT development, maintenance and infrastructure projects their citations and skill sets are often superficial. Historically, loyal clients have given then opportunities to learn on the job. But as they compete more against western firms, competence more than loyalty will factor in decisions

c) Unsustainable economics 

I have seen some on-site rates proposed by Indian firms in excess of $ 100 an hour. That is way more than what companies pay for local staff supplementation. Even blended on-site/offshore rates cannot compete with internal staff rates. Which makes Indian vendors competitive only against firms like IBM, Accenture and Deloitte – and they are growing their own sizable Indian operations and can compete at lower price points than they could 2-3 years ago.

d) The domestic US mood is increasingly negative

The Dubai Ports controversy. The strident immigration debate. Growing trade deficits. Likely loud debate in Congress (and likely India politician threats in return) about the India nuclear deal, especially given President Bush’s low ratings. All this makes considering pure India models very difficult for CFOs and CIOs to support, even if they are personally far more open minded.

The Indian tiger has not used up all its cat's lives - but it is increasingly on slippery ground. And the monsoons are coming.

Update :  April 14 - Infosys disagrees with my assessment per this NY Times article. Infosys has done more than other Indian firms to hire US talent, but it is also more guilty than other Indian firms in push rates much higher - my point c.

Comments

[sr]

Right you are....also just IT does not make a country a super power...we have seen a tad bit too much focus on IT..as Azim Premji once said...IT is not India's silver bullet..India needs to grow vastly in other areas and that includes winning (a) Olympic medal...i have worked with the likes of infosys and tcs in various projects and must say that most of the kids coming out nowadays from college are pretty shallow and come to IT since it is what they and their peers have known to be the only career..i hope this changes and that other options open up...

[greg]

Vinnie,

There is this blog on the housing bubble where all the bears of the real estate market convene and criticise how agents talk up the prices in the popular press. Maybe, we should have an equivalent of it for Chindia. There are still many articles extolling the benefits of offshoring, but we all know how euphorias end...crashing

[Sandeep Kumar]

Your reasonsing for Indian offshoring flat future is valid, almost, while I agree with poor infrastructure, long ROI period, attrition, shallow, high rates - I am not concerned about backlash in US. We have see 9/11 - so current events are not something to worry about.

[viinnie mirchandani]

Sandeep, the differemce is after 9/11 there was genuine concern in Indian firms ...now there is a little too much confidence...

[Cow]

I think you are correct on all points, especially the unsustainable growth, along with other emerging markets that can undercut costs. At some point, large enterprises are goign to have to consider these issues, and not look short term to bump up their stock option values.