Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

Well we’ve all guessed that the question in the title of this post was coming. It seems that the answer is obvious. As wages increase for the software engineers in India’s silicon valleys of Bangalore and New Delhi, what self-respecting cost-cutter wouldn’t look elsewhere? Not so fast my friends. For a full understanding of the pluses and minuses of a move to China read the article in the blog Recruiting in China entitled China Marches into Outsourcing. The author has an interesting insight into the workings and plans for China’s information technology outsourcing industry.

India was there before China with BPO, Business Processing Outsourcing. Their revenue for 2007, $18 billion, dwarfs China’s for the same period. The author does make an observation that some may take exception to regarding the ability to speak English. I leave it to the reader to make your own determination. Here is the direct quote:

With its history as a British colony, India has workers with strong English skills and familiarity with Western culture. That gives companies there a big edge when bidding for jobs that require reading reports and talking to Americans.

I always get a little nervous when a totalitarian dictatorship comes up with a “plan”, anyone remember Comrade Stalin’s 5 year plans? Well it appears that our friends in the PRC have come up with one called the “Thousand, Hundred, Ten” project. The title is derived from China’s plan to situate 1000 Chinese outsourcing vendors in 10 cities servicing 100 foreign clients. The plan targets foreign clients other than the current Asian clients and moves the vendors out of the bigger and more familiar Chinese cities of Shanghai, Beijing, and Shenzhen to the less costly towns for housing and wages of Wuhan, Jinan, and Changsha. Government incentives abound from two-year tax waivers to subsidies for employee training to cash infusions for certain industry sectors (e.g. $56 million for the animation industry in Changsha).

China does have some hurdles to overcome. Most of their current IT outsourcing is to Japanese firms. The outsourcers that have set-up shop in Changsha are relatively small and prone to failure. The work performed is not the glamorous engineering and design, but the more mundane coding and software testing. Consequently the talented engineers leave for the more exciting cities on China’s coastline with more opportunities.

Search, as you may, for any mention of the over 500,000 Chinese in re-education camps (we call these political prisoners) or for any mention of Tibetan monks being beaten, but you will not find it. I’d put that down as another hurdle China needs to overcome.

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I recently came across a very interesting article. The article begins by stating what most of us already know, (i.e. more than two-thirds of companies outsource their IT services and India gets a large chunk of that business). Be patient while reading this article and get through that first bit of rehashing the already known facts. The article sites some very interesting and reputable statistics which puts the current situation into a different perspective. It brings into question what I alluded to in the title of this post, when you come right down to it will the infrastructures of India keep pace with the massive rate of growth of the IT service providers or will such infrastructures collapse from India’s inability to repair and replace or build new infrastructures.

Let’s start off with some one of those facts from recent studies:

The number of developers in India who service primarily US markets is 250,000. In the United States there are about 500,000 developers, where roughly half are in product development. This makes the Indian programmer pool equal to the available domestic programming pool.

Indian software exports alone exceeded 17 billion last year, representing a four billion increase in one year (Gartner Group).

Bangalore has built a sort of Silicon Valley a few miles out of town. However experts are beginning to wonder if the Bangalore infrastructure can hold up under the intense pressures put upon it from the ever increasing expansion. Continuing on with some more of the facts:

Now Indian IT professionals, with their newly found wealth, have continually been buying motorcycles and cars adding 900 a day to the already overcrowded streets (The Bangalore Paradox).

Other problems include “a water shortage, inadequate sewers, and an erratic power supply” (The Bangalore Paradox).

As a user (or should I say hostage or victim) of the Chicago metropolitan highway system, the next fact I can particularly empathize with the IT professionals of Bangalore:

The poor road systems make a small 7 mile drive take roughly an hour to complete.

The Gartner Group reports further that:

A survey of 25 large organizations with a combined $50 billion in outsourcing contracts found that 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. One in four companies has brought outsourced functions back in-house and nearly half have failed to see the cost savings they anticipated as a result of outsourcing” (Gartner Group). Also, a reported 20% of outsourcing deals do not produce cost savings while 10% of those deals actually wind up increasing costs. In 2005 alone, 50% of all outsourcing projects will not deliver their expected value and will be labeled unsuccessful (Gartner Group).

Others see the outsourcing possibilities as endless. 

General Electric’s “70-70-70″ plan is an example of this. GE plans to outsource “70 percent of its head count, push 70 percent of that outsourcing offshore and locate 70 percent of its workers in India.” (Gartner Group).

The future of US outsourcing to India remains to be seen. Will they be able to keep up with the increasing demand and concomitantly provide the quality and timeliness expected? As a betting man, I’d have to say yes. There is just too much at stake to let this deteriorate and fail.

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FOXNews.com has picked up an Associated Press story that Wednesday, January 30th, two undersea cables were cut resulting in a huge interruption to India’s bandwidth. The Internet Service Providers' Association of India reported that “the country had lost half its bandwidth.” The cut cables, which lie in the Eastern Mediterranean Sea, first affected the Middle East, including the Dubai Stock Exchange. The slowdowns and outages quickly spread through the Persian Gulf States, Pakistan, India, and Bangladesh. Customer Service call centers located in India were severely impacted as engineers attempted to reroute the traffic through satellites and cables in Asia. As of now the cause of the cuts is unknown. It is estimated that repairs to the cut cables could take up to a week.

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IBM has revealed that it has approximately 73,000 employees in India. Based on the headcount at the end of 2006 of 355,766 employees and a projected rate of growth equivalent to 2006, IBM now has approximately 20% of its workforce in India. And why not? India offers a skilled workforce without the high cost of labor that usually accompanies such workers in the West. The projected annual revenue from the Indian market for 2007 at $1 billion is yet another reason for IBM to ramp up its workforce in the sub-continent. The BRIC countries (Brazil, Russia, India, and China) are expected to have high growth rates in the coming years and IBM Chairman, Sam Palmisano, wants to direct more of IBM’s investments into these emerging economies. Jesse J. Green Jr., IBM’s Vice President of Financial Management, is optimistic and stated, “we see continuing good stability in the BRIC countries in general and good opportunity for growth in those countries as well.”  (See Associated Press article)

I think that it is commendable that IBM execs are aware of the labor savings and the potential for increased revenues from emerging markets. Many of us have direct investments in IBM or indirect investments through 401K’s and other investment funds. As a public company IBM is acting according to its mandate to increase investor value. However as a good corporate citizen there are other considerations as well, such as social, political, ethical, and religious. How much outsourcing of skilled labor is too much outsourcing? My only cautionary note is not to overdue and abuse the situation. Employee growth in these emerging markets should be, and I am sure that it is, managed growth to meet the needs of the growing market but not at the expense of these other considerations. We all remember the dot.com boom and then the bubble that burst. We are all aware of the real estate boom of recent years and the subsequent subprime mortgage bubble that has panicked much of Wall Street and Western Europe as well as investors from the Middle East and the Pacific Rim. India is a nuclear power and borders Pakistan another nuclear power and its antagonist. Does IBM really want to put all of its eggs in one basket?

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