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December 30, 2003

Indian IT cos. giving headaches to large US system integrators

In an interview to BusinessWeek, Chell Smith, Global Managing Director of Cap Gemini Ernst & Young's Technology Services group, talks about how the weak US economy and "upstart Indian firms" have transformed the IT consulting business in the US.

Here are some extracts-relating to Indian companies:

The pure-play firms from India (are) coming on and offering services like systems integration at much different price points than had traditionally been there. In some segments of the market there has been 40% price reduction -- or more -- over the last three years because of that.

There's no question some organizations like Wipro, for example, are building up on-shore capabilities. They've acquired some local firms, they're moving upstream. As they start to do that, their costs go up. Their onshore people cost the same as ours.

I wouldn't say "oh doom and gloom, life as we know it is over," but it's tougher for us. We have to work harder.... We're absolutely taking smaller contracts with more specific expectations and greater risk on our part.

December 28, 2003

The booming market for outsourced Clinical Trials

Several companies are tapping into the market for "clinical trials" or testing of new drugs in India.

Recent articles in Far Eastern Economic Review (free registration required) and Business Today (paid subscription required) describe this billion dollar opportunity and the players involved.

December 27, 2003

What's Dr.Bala Manian up to in India?

Despite his sterling track record as a serial entrepreneur in the US, Dr.Bala Manian, has maintained a very low profile in the media. This is in sharp contrast to Indian IT entrepreneurs in the US--several of whom we got to see on the covers of business magazines, but whose their start-ups promptly bit the dust once the bubble had burst.

Maybe, the fact that Dr.Manian's areas of interests lay outside the glamorous IT industry, helped him stay out of the media spotlight. But, not any longer. A detailed profile in the latest issue of Business Today reveals his plans for India.

Here is a quick profile of the man's career:

He has founded of a long list of biotechnology and instrumentation companies including Biometric Imaging Inc, Surromed, QDOT, Entigen, Biometric imaging, Lumisys, Molecular Dynamics, and Digital Optics Corp--several of them have proved highly successful.

Biometric Imaging Inc, where he was Founder & Chairman, was acquired by medical device firm Becton Dickinson & Co. Dr. Manian founded two companies--Lumisys and Molecular Dynamics--in 1987. Both companies went public on the Nasdaq before being acquired. Lumisys, which manufactures and markets Tele-radiology systems to the medical imaging market, was acquired by Eastman Kodak. Molecular Dynamics, which manufactures and markets analytical instrumentation systems to molecular biology and genetic engineering research, was acquired by Amersham Pharmacia Biotech.

In 1980, Dr. Manian founded optical instrumentation and systems development company Digital Optics Corp (acquired by Matrix Corp in 1984). The technology co-developed by Dr.Manian, at Digital Optics Corp., and transferred to Lucas film Ltd. in 1983, allowed filmmakers to insert special effects into movies using computerized digital imaging. Lucas Films used the technology in creating movies like "Return of the Jedi" and the Indiana Jones Trilogy.

An expert in the design of electro-optical systems, Dr. Manian holds more than 30 patents, many of which have resulted in successful commercial products. Additionally, Dr. Manian has authored more than 35 scientific publications. He has a BS in Physics from the University of Madras, an MS in Applied Optics from the University of Rochester, and a Ph.D in Mechanical Engineering from Purdue University. He has been a Faculty Member at the University of Rochester's Institute of Optics for four years, teaching courses in optical fabrication and testing, optical instrumentation and holography. Dr. Manian left the institute in 1974 to pursue entrepreneurial opportunities.

Dr.Manian, who is sought by top Silicon Valley VCs for advice on life science related issues, is also a Charter Member of networking and entrepreneurial mentoring forum EPPIC (Enterprising Pharmaceutical Professionals from the Indian subContinent)--which is an equivalent of the TiE network (which is dominated by IT industry professionals) in the Life Sciences space.

Dr.Manian work has so far been restricted to the US. But, he is now taking active interest in his native land. The Business Today article reveals his plans for India.

His latest start-up, ReaMatrix which is located in Bangalore, focuses on nanotechnology technology applications for the pharmaceutical/biotech industries. According to the BT article, Dr.Manian also advises Wipro's health sciences division, VC firm 2iCapital, as well as ICICI's Knowledge Park in Hyderabad.

The article also throws up some interesting personal facts about Dr.Manian, including the fact that he lost one eye in an accident involving a compass while at school, and that ICICI Chairman N.Vaghul is his younger brother.

Click Here to read the full BT article. (Paid subscription required).

December 26, 2003

Nanotech start-ups bullish as Bush signs off on $3.7-B federal grant

US President George Bush signed off on the $3.7 billion National Nanotechnology Initiative (NNI) bill which provides for four years of federally funded nanotech R&D. "The plan is for the R&D to eventually trickle out of the laboratory and into the hands of entrepreneurs and investors, who will then find ways to commercialize nanotechnology that can detect and treat disease, monitor the environment and produce and store energy," reports Private Equity Week. "As a result, the number of federally funded projects is expected to skyrocket, and universities, research institutes and startups all stand to benefit. The bill is expected to foster cooperation between academics and entrepreneurs, so that research developed by one group can be productized and marketed by another," the report adds.

About 21 nanotech companies are estimated to have raised about $207.6 million in private equity investment in the US last year. Since the science itself is pretty young, nanotech companies require large dollops of funding before they can generate returns. The federal funding is expected to allow researchers to focus more on application development rather than on basic science. "If a company can acquire more money in the form of grants, it can commercialize the technology faster without having to dilute the company with more equity," Bill Athenson, vice president of Nanosphere, a venture-backed company in Chicago, says in the PE Week report.

Click Here to read the full Private Equity Week article.

December 25, 2003

Productivity is the real "villain" for job losses; not outsourcing

China lost 16 million manufacturing jobs, a decline of 15 percent, between 1995 and 2002, says The International Herald Tribune quoting a recent study by Alliance Capital Management. In that same time, U.S. factory employment shrank by 2 million, or 11 percent. That is, China--the so-called factory of the world--lost manufacturing jobs at a faster rate than the US!!

So where are these jobs going? "That place is called Silicon Valley, where engineers are producing machines that work cheaply and make businesses the world over run more efficiently," says Kevin Laws, Entrepreneur In Residence at Venture Capital firm Pacific Rim Partners, in his VentureBlog article. "Running more efficiently means you can produce more things with less capital --and less people," he adds.

Here is how the IHT article concludes:

As hard as expendability is on the workers themselves, increased productivity is the way progress is made. And the alternative is not so appealing.

"Our studies suggest that hunter-gatherer societies offer full employment for all, simply providing the basic necessities of food and shelter," Steve Wieting, senior economist at Citigroup, says.

Of course, with all of their resources devoted to providing food and shelter, hunter-gatherers tend to have little "income" left to consume anything else - made in China or otherwise.

Kevin Laws rephrases this from a tech industry perspective in his article:

Of course it would be possible to keep the jobs in America through measures to prevent corporations from outsourcing development, just as it would be possible to keep high buggy-whip industry salaries by banning autos.

But we won't, because technological progress makes us all wealthier. Our bargain with each other is that we can't stop the technology that hurts our own jobs as long as others can't stop us from producing the technology that hurts theirs. In the end, we'll do better living in a society that is advancing rather than one that protects all our current positions by preventing innovation.

Private Equity Week features heated debate on offshore outsourcing

Though it isn't clear why the social implications of offshore outsourcing is a fit concern for a magazine focussed on Private Equity, PE Week's Editor-At-Large Dan Primack has triggered off an interesting debate with his column on the topic.

According to Primack, US-based businesses should examine every possible avenue of hiring locally before going overseas. "It should be one of the most difficult decisions of your professional career. If it isn't, then it's generally safe to say that you are a fairly self-centered and callous person," he says in his column. "For those companies who do wind up with operations in Beijing or Mumbai, it is your responsibility to retrain the workers you are leaving behind and/or to help them find new jobs," he adds.

The column has received feedback from several PE Week readers. Some extracts from the feedback that I found interesting:

The Sentimental

It is "callous and self-centered" to move jobs overseas? Have you traveled recently to these countries and seen the overwhelming poverty? Provided that you are willing to enact socially responsible business practices in your new locations, the only egocentrism I see is those nationalistic isolationists who don't recognize our universal humanity: foreign people are no less "worthy" of decent jobs than Americans are.

-- Jed W

How about the jobs being created overseas - don't those count? The US is pretty much the most prosperous country in the world and even though we complain that unemployment levels are high, they are one of the lowest levels globally. We learn in Economics that countries should engage in what they do best and that seems to have served the US very well for many years, but now that companies are moving operations to countries where labor is a comparative advantage - complaints abound.

If we say we are part of a global economy we can't expect to just get all the benefits with none of the disadvantages. I'm a dual citizen (American and Nigerian). America benefits from the fact that it can import many of its products to Nigeria since Nigerians do not have the technology to produce these products. But Nigerians (and other agricultural economies) do not experience the same benefits in terms of importing some of its produce to the US because American farmers are subsidized and thus price imports out of the market. Is that fair?

Many of the workers who lose their jobs when basic operations move overseas can get retraining on their own or by the company that laid them off - for example, most employment agencies offer free basic computer training if you sign up with them. We are so lucky in this country but we just don't realize it. Even in the worst-case scenarios where people end up jobless there are welfare benefits which are non-existent in most of the countries where the jobs move to.

I understand that you are trying to make the point that the executives who are moving operations are doing so for purely financial reasons, however, I think there is a broader point here and it is that we should care about those that are less fortunate than us and not just our fellow Americans. There are so many impoverished people the world over that are benefiting from these overseas moves. The overseas moves benefit the people it creates jobs for more than it hurts those who lose their jobs in the US.

--Feyi B

India is a poor country with a billion people. George Bernard Shaw said once, "there is no greater sin that poverty" and when you see that India's teeming millions may have a chance to 'catch up' (well, in another thirty years) in terms of standard of living, etc. the outsourcing story will not sound entirely evil.

Poverty begets many things Dan, and as we've learnt so painfully, Sept 11 was a result of some people's poverty that some greedy but cowardly thugs sitting in mountains managed to exploit. For a more equitable world, the ironing out process will have to come with pain for many....If corporations can somehow be more humane about the outsourcing story, identify opportunities that they say are available in the US and UK for displaced workers, enable job training, reconcile themselves to slower profit ramp up, I guess we can still live in a world where we don't need to start new hatreds.

From my one trip to the US a few years ago, I was touched and moved by the acceptance in the hearts and minds of Americans, from loving Indian food to clothes, to the people, I would hate for all that to be reversed due to the onset of globalization that is unstoppable but something that definitely ..can be handled with more finesse and class.

-- Parvati P

The Practical

What you are proposing here is effectively a "social tariff" on labor (e.g. the "cost" of offshore labor should be considered higher because of exogenous effects on local labor). If a producer can purchase comparable labor at lower prices, then free markets demand that advantage be capitalized upon. To do otherwise, exposes a firm to competitors that do not face such a social tariff. The evidence on the destructive nature of tariffs on markets is immutable. Tariffs protect markets from competition reducing the need (or capacity) to innovate ultimately causing obsolesce. The steel industry in the US is dead because the federal government tried to "protect" it through tariffs. The business was nevertheless captured by the Japanese and others who innovated.

The risk to labor in increasingly technical and skilled areas is absolutely clear. The wage arbitrage opportunity is compelling. But arbitrage is a brilliant equalizing force driving two factors that come into play (1) as the wage differential continues to be exploited, over time, labor prices in the US will go down, and labor prices in India and China will go up reducing the incentive to move offshore, (2) US labor will have to innovate, provide comparative advantage exclusive of price through creativity, imagination, and new skills. This labor rate pressure will demand innovation of labor and lead the US economy into the next growth phase.

The social equity question of who pays for this retooling of American Labor is a difficult one. You can rely absolutely on the fact that people will do what's in there own best interest. Unfortunately, there is no return incentive for companies to simply retrain workers unless it is to improve returns for their shareholders. Unfortunately, the switching or training costs are often out of reach for the average computer programmer with a mortgage, two kids, and a dog. This gap is a credit constraint not unlike that faced by a high school graduate who is desirous of the income effects of acquiring a college degree. Perhaps, the a student loan program designed to fill such a gap is the answer.

Not necessarily an elegant solutions, but competitive markets are harsh In terms of individual outcomes and optimal in terms of overall result.

-- Brian F

One thing to contemplate is why third world countries can compete so easily with US based firms. We spend more money on education per student than any country in the world, but India, China, Romania and myriad other less developed countries beat us not just on price but on quality. I work with a telesales outsourcing company with a call center in India. These people speak better English than most university educated people in the US and with virtually no detectable accent. Furthermore, they appear more motivated.

Does anyone think that working in a call center is a good job? For all our advances in technology and education shouldn't all or most US citizens be capable of far more? These jobs require no more than a 3rd grade education and training in how to use a computer.

Where can our people provide value? How can the US leverage our intellectual property development capacity? This is both a business issue and a societal issue, and we are at a cross road. Do we believe in free trade? How can we saddle businesses with job retraining costs? Can we expect them to pay more for a commodity than the rest of the world?

--Caleb W

Interesting comments. For info, it was quite difficult but we've done that with a startup we bought in the US, when revenues dropped we moved all software devt in Mumbay. It made it possible to build a great product (one of the most promising i have seen this year) and now they are recruiting again in the US. obviously these are not the same people. i am now working on a model where we don't have to make anyone redundant by proposing them jobs as consultants.

-- Herve H

The Critical

It is a debate between economics and politics.

As a VC, the economic rationale for outsourcing/job loss makes perfect sense. If capital flows to opportunities with highest returns; jobs will flow to locations with the lowest costs & highest quality; or labor will migrate to locations with highest wages. America will have to give up free-market capitalism at a global level and resort to protectionism to prevent such arbitrage opportunities from taking place.

The political issue you have raised is valid, but needs to be addressed in a political forum and not an economic forum such as a private equity newsletter.

-- Matthew V

6 years ago business and political leaders in this nation were painting themselves and having the media paint them as "genius" and " great leaders" for leading a wave of economic improvement and stabilization in a friendly nation of ours, India. Now, from all accounts, Indian companies and government economic officials would have to storm the offices of those "leaders" in order to get a meeting. Now they have to hire lobbying firms and play politics to preserve something that they were the beneficiaries of, but less than half a decade ago, we were tripping over ourselves claiming creation of, their economic empowerment and evolution to the table of growing nations.

Come on...quit playing politics with reality, and with historical evolution...

Companies here or anywhere else on earth are in business to "make money"!! That's their purpose, public or private. It's their obligation to do THAT in the most cost effective manner possible, and that has ALWAYS been the case... it's just sad that it's only when downturns hit and we seem to be feeling the consequences of our great, revolutionary leadership does anyone want to stand up and cry. I would have much more respect for those arguing if they had been standing proudly in defiance of all that this outsourcing trend is now producing, if they had done so during the height of the boom of the 90s, years in advance of the downturn and it's potentially having a personal impact on them.

I enjoy your columns and input, but personally, on this point of outsourcing, you've gotten too "political" which hasn't made reading your normally insightful, concise morning reports much different than reading the editorial pages of the WSJ or LA Times.

-- Rob R

Click Here to read the full version of Dan Primack's column and the feedback it generated.

Kumar Mahadeva's exit from Cognizant and heavy stock sales raises eyebrows

The retirement announcement of Cognizant Technology SolutionsÂ’ Chairman & CEO Kumar Mahadeva has caught stock market analysts and industry players (including Cognizant employees) by surprise, according to reports in Business Standard and Economic Times

"The Indian software services industry is intrigued if not downright puzzled by the abrupt exit of Cognizant's founder, chairman and CEO, Kumar Mahadeva," the ET report said. According to the ET report, Mahadeva had sold around $57.6 million worth of stock options and individual holdings from March 2000 till December 3, 2003.

"Analysis of how the New Jersey-based Mahadeva has been consistently selling his stock in the market would reveal that it is a carefully managed exit. In the last six months, Mahadeva sold a whopping $25 million of his stock, filings with US Securities and Exchange Commission show," the BS report said. "Although Mahadeva is known to de-risk his stock holding in Cognizant by selling a reasonable number of shares every quarter, the last two quarters saw some unusually high volumes. He sold about $25 million (roughly Rs.110 crore) worth of shares-about $15 million in the September-ended quarter and another $10 million in the (current) quarter till date," BS said. The BS report added that Mahadeva's remaining $50 million in Cognizant stock options is an indication of his faith in the abilities of managers who are to succeed him. The report did not mention whether the Mahadeva's remaining options were vested.

December 14, 2003

It's not always cheaper to build start-ups in India

With people like Sequoia Capital partner Michael Moritz saying things like "We can barely imagine investing in a company without at least asking what their plans are for India", it certainly seems like the "build in India" mantra has become mainstream in Silicon Valley.

"Startups funded today should be built entirely abroad-from product design to product development to quality control to (in some cases) even sales and marketing. For every employee you have in the United States, you can have five in India," Ravi Chiruvolu, general partner of Charter Venture Capital, had said in his Venture Capital Journal column in March. "It's such an important a strategy that if a company presents a business plan saying it needs 40 employees-all in the US-to help develop and bring its product to market, we'll pass in favor of a company that can do the same thing with just five employees here and the other 35 in India," he had added.

But now, Chiruvolu, is singing a different note: one of caution.

"Talent is not as cheap as we had thought. Basic office infrastructure is not quite as easy to obtain. Business partnerships are fraught with government and political loyalties and traditions. Even office leases can become complex entanglements," he says in his latest column.

More extracts from his column that explains the cautionary note:

Building a business from scratch in India is not for the nave or gullible; nor is it for the passive investor. If building a startup anywhere takes courage and commitment, in India you must double that and find a good tour guide....

We estimate operations to be "turnkey" at more like six months. Moreover, despite our intuition, certain costs are actually higher than even in the United States. Bandwidth in India can cost more than four times that of the U.S. And similar to the Valley in 1999, there's a shortage of labor in Bangalore, which can be dramatic...

The talent would rather take half the salary and work for a known quantity like Intel, Motorola or Cisco than take double the salary to work for a startup. We worked around that by hiring 25 employees for one of our Indian startups by first recruiting them to work for one of our more established companies, then contracting with them to provide the engineering talent for the startup. Salary alone does not mean everything to the locals. As educated as they are, titles are still very important and brand recognition in terms of recognition by family members is critical, as is company stability. Workers will even receive favorable car and home loans from their bank if they work for a larger company. In one case, we had to pay our respects to a local bank manager to make sure our employees would be given the best loan rates.

He also cites the nightmarish experience that Ishoni Networks went through--during which members of the management team and board of its Indian software development subsidiary allegedly set up a rival company and tried to bankrupt Ishoni, steal its employees, and acquire its intellectual property on the cheap.

So, is Chiruvolu, giving up on India? Not at all.

The lesson is that moving R&D to India should not be done solely to save cost, he says. "It needs to be a strategic decision that fully incorporates the risks, fixed costs and inefficiencies that will plague ventures in the short-term. You may wind up paying five times the price for certain things and still not getting what you want, but that's the cost of doing business in markets we either have yet to fully understand". "The price of new market entry may be high (expensive tuition), but the opportunity costs of not developing competencies where 40% of consumers are and where the bulk of growth over the next 20 years will be, could be greater still," he adds.

Click Here to read the full column.

December 08, 2003

The winners and losers in offshore outsourcing

Some interesting extracts from New York Times' coverage of a roundtable discussion on the topic of job migration:

Stephen S. Roach (managing director and chief economist of Morgan Stanley):

Over the September to November period, employment has turned up, but many of those jobs came from the temporary hiring industry. These are service jobs, contingent workers without benefits and significantly lower pay scales. We're getting the G.D.P. growth, and by now any recovery in the past would be flashing green on the hiring front. This one isn't.... This is a profoundly different relationship between hiring and the business cycle. And I think these jobs are, by in large, lost forever....

...This is classic election-year posturing by a Congress that is basically responsible for the problem itself and doesn't want to admit it. We have trade deficits with China and Japan because Washington is running the most reckless fiscal policy we've seen in the United States since the late 1960's. They are the problem. It's not the Chinas and Japans and Indias of the world. Moreover, there are a lot of assumptions being made, especially by political leaders, that the rapid growth of Chinese exports and production is the smoking gun of the threat to traditional sources of job creation. About two-thirds of the export growth China has realized over the last 10 years has come from Chinese subsidiaries of multinational corporations headquartered in Japan, the U.S. and Europe and their joint venture partners. These are our companies. It's us; it's not necessarily them....

...In the future there are two roads. One is to look backward and hang on to what we think we're entitled to. The other is to recognize what has made America. Our virtues lie in a flexible and open, technology friendly, risk-taking, entrepreneurial, market-driven system. This is exactly the same type of challenge farmers went through in the late 1800's, sweatshop workers went through in the early 1900's, and manufacturing workers did in the first half of the 80's. We've got to focus on setting in motion a debate that pushes us into new sources of job creation rather than bemoaning the loss. There are Republicans and Democrats alike who are involved in this protectionist backlash. They're very vocal right now, and they need to be challenged.

Diana Farrell (Director of the McKinsey Global Institute, McKinsey & Company's internal economics research group):

There is an assumption by protectionists that these jobs are going somewhere else, and all this money has been pocketed by C.E.O.'s who take it home. A little more sophisticated version is: It's being pocketed by companies in the form of profits. One step further and you say those profits are either going to go as returns to the investors in those companies, or they're going to go into new investment by those companies. Those savings enable me, if I am an investor, to consume more and therefore contribute to job recreation, and if I am a company, to re-invest and create jobs. That's important because I agree that we are migrating jobs away, some of which will never return, nor should they....

...We will require different services, medical devices, all kinds of things to support an aging population. Fifteen years ago, you would not have been able to fathom many of the jobs that exist today.

M. Eric Johnson (Director of the Center for Digital Strategies at the Tuck School of Business, Dartmouth College:

It's all about innovation and productivity. As long as we maintain those two engines, we'll continue to have a very high standard of living. Out in the Bay Area there are plenty of folks who would love to create a little bit of protectionism around their I.T. jobs, but we are far better off letting a lot of those jobs go. Low-skill jobs like coding are moving offshore and what's left in their place are more advanced project management jobs.

Click Here to read the full article titled "Who Wins and Who Loses as Jobs Move Overseas?"

December 05, 2003

US programmers now willing to work at Indian-level salaries, says BW column

According to a column in BusinessWeek, when Jon Carson, founder of cMarket, recently felt an urgent need for four programmers, he asked his IT director to call an offshore software service intermediary. The intermediary came back with the number for the services from India: $40,000 per programmer--compared to the $85,000-90,000 a year required to hire experienced American programmers.

But since Carson was "personally very uncomfortable" in sending the jobs overseas, he decided to offer the jobs to Americans--at the same rate he would be paying for Indian programmers. He placed some ads in The Boston Globe, offering full-time contract programming work for $45,000 annually. (He had decided that it was worth adding a $5,000 premium to what he'd pay the Indian workers in exchange for having the programmers on site.)

The result? About 90 resumes "flooded in", many from highly qualified programmers having trouble finding work in the down economy. "I think I got the best of both worlds. I got local people who came in for 10% more (than Indians). And I found really good ones," Carson says in the article.

Click Here to read the full BW article titled "U.S. Programmers at Overseas Salaries" and dated DECEMBER 2, 2003.

November 30, 2003

Equity research outsourcing picks up steam

US brokerage firms are sending more and more of their equity research work to India says a recent report in Businessworld. The work being done out of India is not just increasing in terms of volume, but also in value. Quoting data from BPO firm Evalueserve, the report says that 34% of the 77,000 professionals currently involved in equity research activities worldwide, carry out "library functions"--i.e., data and information collection work. Some 25% of these functions would be done out of low-cost offshore locations by 2005. By that time, 10% of the jobs in the next higher rung--those of junior analysts--would also be offshored.

Among the captive units, JP Morgan and Morgan Stanley have hired over 1,000 people each over the last year to staff their Indian centers. Other captive operations listed in the article include those of Citigroup (in Mumbai), Lehman Brothers, and HSBC. The report lists Evalueserve (in Gurgaon), OfficeTiger (in Chennai), WNS Global (in Mumbai), Smart Analyst (in Gurgaon) and Irevna (in Chennai) among the significant thirdy-part units in this space.

Click Here to read the full article.

US CEOs can't afford to ignore India: Businessweek

In its cover story titled "The Rise Of India", Businessweek magazine says, whether Americans regard the outsourcing of services jobs to India as disruptive or beneficial, one thing is clear: Corporate America no longer feels it can afford to ignore India.

Some extracts:

"If India can turn into a fast-growth economy, it will be the first developing nation that used its brainpower, not natural resources or the raw muscle of factory labor, as the catalyst. And this huge country desperately needs China-style growth. For all its R&D labs, India remains visibly Third World."

" Still, this deep source of low-cost, high-IQ, English-speaking brainpower may soon have a more far-reaching impact on the U.S. than China. Manufacturing -- China's strength -- accounts for just 14% of U.S. output and 11% of jobs. India's forte is services -- which make up 60% of the U.S. economy and employ two-thirds of its workers. "

"We can barely imagine investing in a company without at least asking what their plans are for India," says Sequoia Capital partner Michael Moritz, who nurtured Google, Flextronics (FLEX ), and Agile Software (AGIL ). "India has seeped into the marrow of the Valley."

This year, the tax returns of some 20,000 Americans were prepared by $500-a-month CPAs such as Sandhya Iyer, 24, in the Bombay office of Bangalore's MphasiS. After reading scanned seed and fertilizer invoices, soybean sales receipts, W2 forms, and investment records from a farmer in Kansas, Iyer fills in the farmer's 82-page return. "He needs to amortize these," she types next to an entry for new machinery and a barn. A U.S. CPA reviews and signs the finished return. Next year, up to 200,000 U.S. returns will be done in India, says CCH Inc. in Riverwoods, Ill., a supplier of accounting software. And it's not only Big Four firms that are outsourcing. "We are seeing lots of firms with 30 to 200 CPAs -- even single practitioners," says CCH Sales Vice-President Mike Sabbatis.

Adapting to the India effect will be traumatic, but there's no sign Corporate America is turning back. Yet the India challenge also presents an enormous opportunity for the U.S. If America can handle the transition right, the end result could be a brain gain that accelerates productivity and innovation. India and the U.S., nations that barely interacted 15 years ago, could turn out to be the ideal economic partners for the new century.

Click Here to read the full article.

Nishan Systems founder sues VCs, others over McDATA acquisition

Nishan Systems founder and board member Aamer Latif has filed a suit against the company's Venture Capital (VC) investors and others in the California Superior Court, Santa Clara County. ComVentures (and its General partner Roland Van der Meer); Lightspeed Venture Partners (and its general partner Gill Cogan); Robert Russo (CEO of Nishan); John McGraw (Chairman of Nishan's board); McDATA Corporation; and investment banking firm Credit Suisse First Boston; have been named among the defendants in the suit.

The suit alleges that the defendants engaged in fraudulent vote-buying to garner common shareholder votes needed to approve McDATA's acquisition of privately held Nishan Systems. Among other claims, the suit alleges that the venture capital firms stacked the Nishan board so as to promote their own financial interests at the expense of Latif and other common shareholders.

The lawsuit stems from the recent $90 million acquisition of the San Jose, CA-based Nishan, a supplier of storage over IP technology, by McDATA. The deal, announced on August 25, 2003, closed on September 19, 2003. Along with punitive damages for fraud, vote-buying, and other infractions, the suit seeks a redistribution of the merger proceeds.

According to the suit, certain common shareholders were promised cash payouts of up to $1.1 million in return for their affirmative merger vote. The venture capital firms, the complaint alleges, walked away with $11 million of the merger package for a two-month bridge loan (at about 800% interest) they had offered Nishan after the merger with McDATA was agreed upon in principal.

"This is a clear case of shareholder vote-buying," said Rony Sagy, attorney at the law firm, Sagy Law Associates, representing Latif. "To win their votes legally, the defendants could have offered more money from the merger proceeds to the Nishan common shareholders, the founders and employees who worked hard for little pay, in anticipation of making the company successful and reaping the benefit of that work in the future. Instead, the defendants blatantly ignored their obligations to the remaining shareholders and pocketed a much larger portion for themselves."

Click Here to track the developments in the case via the Sagy Law Associates web site. This web page provides links to the press release on the suit issued by the law firm and Latif; news articles covering it (including in the San Jose Mercury News and Byte and Switch), etc.

Tim Oren defends the VCs
Reacting to the San Jose Mercury News report on the case, Tim Oren, Managing Director of VC firm, Pacifica Fund, says in his web log: "While I'm quite sure (it) has happened in the venture world, ... (the Nishan case) is not a very persuasive case of venture investors cheating some poor founder out of his rightful money." Oren highlights the fact that the VCs either lost money or barely broke even on the total amount they invested in Nishan.

November 15, 2003

Social software scene heats up

Silicon Valley-based "social software" services like dating service Friendster, and LinkedIn have raised several million dollars in venture capital from top-drawer VCs like Kleiner Perkins and Benchmark Capital (Friendster), Mayfield (, and Sequoia Capital (LinkedIn).

Click Here to read Fortune columnist David Kirkpatrick's article that provides a backgrounder on such services.

Now that dollops of VC money is involved, these "networking" companies seem to becoming less fond of each other and are feuding over business models and even patents on such software.

Click Here to read LinkedIn's press release (on its $4.7 million funding) in which it takes liberal digs at its rivals. "Unlike networking services geared to singles and salespeople, LinkedIn has been able to attract a user base of successful professionals and executives by providing the most powerful and effective set of privacy and email inbox protections."

Click Here to read a article on the patents dispute.

Fierce debates rages on online forums over whether these VCs are creating yet another financial bubble with their investments in such companies, which have not yet firmed up their revenue models, let alone profitability. Says Michael Perkins, co-author of the book "Internet Bubble", in a discussion at Always-On Network:

Perhaps you've heard about the bumper sticker someone spied in Silicon Valley: "Please, God, just one more Bubble!"

November 14, 2003

Why are NRI techies returning home in droves?

Earlier, we used to encounter names like "Sean (Suresh) Narayanan" only in US magazines. Now, we come across such names in the Indian business media as well. Reason? The Non-Resident India (NRI) techies are heading back home. And how!

Both Businessworld and Business Today explored this phenomenon--in rather longish articles--recently.

"Take a walk around the India Development Centres (IDCs) of multinationals and you will run into H1-B workers, Green Card holders and Indian-born US citizens," says the Businessworld Cover Story. It places the number of returnees at 40,000 (since Sept. 11, 2001) qouting McKinsey and Nasscom estimates." Almost all companies that BW spoke to said their US-returned staff (ie, folks who had been in the US for three years or more) has increased from less than 5% of the total workforce about four years back to over 12% today.

Click Here to read the full Businessworld article.

Click Here to read the Business Today article. (Subscription required)

"Having back-end in India can salvage ASP business model": Kanwal Rekhi & Co.

The Opportunity: The Application Services Provider (ASP) business model--which involves delivering software over the web on a rental model--is a great way to tap the 7 million strong small business market in US which can not afford enterprise software that come with a high-ticket price.

The Problem: As several ASPs have discovered over the last 2-3 years, the high cost of developing software in the US nullifies the "small price X large volumes" rental revenue model.

The Answer: Do the software development, maintenance and support out of India.

At least, that's what several Indian entrepreneurs heading US-based ASP firms--including veteran Silicon Valley entrepreneur Kanwal Rekhi (now the CEO of web-hosting software company Ensim Corp.), Munjal Shah (CEO of online auction tools company Andale), and Ram Varadarajan (CEO of sales automation software firm Arcot Systems)--believe, according to a recent article in Businessworld.

Click Here to read the full article.

Why captive BPOs are feeling the heat

There have been a string of announcements from captive BPOs--including the pioneer, GE Capital--that they will start pitching for business from companies outside of their parent. Obviously, these companies have to make very fundamental changes--including setting up marketing teams, re-align their cost structures, etc.--to cater to external clients. So, what is making them take this step?

Businessworld magazine recently carried an interesting article titled "Crunch Time For Captives" answering this question.

"In the last couple of years most of the captive units have begun to hit saturation point. That's when their parent organisations in the US, like GE, took the decision to derisk the India business by setting up alternative bases in Mexico, China, Hungary and the Philippines....By then, most of them had hired people in anticipation of more work moving to India. So when the events of 9/11 took place and concepts like disaster planning became common, they suddenly put a ceiling on how much a captive unit could grow," the article says. "With not enough new work on offer in the last two years, they have struggled to devise new, more meaningful roles for middle and senior managers. The result: attrition rates as high as 35%, with maximum erosion in the middle and senior management levels. So GE has to recruit and train 4,000 new hires every year to replace the exiting employees," it adds.

The article has a Gartner Group analyst predicting that several captive BPO units would be up for sale in 3-4 years time. In fact, the article (quoting unnamed industry analysts) says Infosys' BPO subsidiary, Progeon, has actually avoided scaling up since it expects to snap up such units at a good bargain! WNS President & CFO Neeraj Bhargava confirms that his company is waiting for such acquisition opportunities. "The trends globally throw up several instances of third-party vendors (like EDS and ACS) buying up in-house (captive) operations," he says in the article.

Click Here to read the full article.

November 13, 2003

Over 40% of software development is outsourced : META Group

An average of 41% of new IT development activity is now outsourced, according to IT research firm META Group. Last year, the average percentage of new development from outsourcing providers was 35.9% worldwide.

Though they haven't been as dramatic (or gotten as much ink) as Forrester Research's "3.3-m US jobs to be lost due to offshoring" report, META Group pronouncements too seems to have an anti-India slant. The latest press release for example, talks about India getting a lion's share of the offshore pie despite "(its) political instabilities", "the highest (IT Staff) turnover rate", etc.

"India continues to be the preferred offshore country, with more than 500,000 knowledge workers, but other countries are competing -- Russia, the Philippines, Ireland, Israel, and China are the up-and-comers to watch," the release adds. Sure.

And then there is the expected words of sympathy for the sad plight of US IT workers. "There is no doubt that 2003 has been a terrible year for IT workers," META Group Executive Vice President Dr. Howard Rubin says in the release. "Staff cutbacks and the unavailability of new positions have sent many IT professionals looking for new career options," he adds.

Let's hope 2004 is the year in which Forrester, META Group and Co. learn to stop fighting what's irreversible and stick to providing figures without any slants.

Click Here to read the full Meta Group press release.

November 06, 2003

US politicians will not legislate against offshoring to India: FEER report

The Far Eastern Economic Review has (rather belatedly) discovered that there is a backlash among US IT workers to jobs getting offshored to India. It provides the usual job loss statistics and quotes all the "usual suspects"--from a representative of the US-based Washington Alliance of Technology Workers and Kiran Karnik of India's Nasscom--in its report on the topic.

The only new aspect in the report comes towards the end and pertains to whether and how the US elections of November 2004 would influence legislation on offshore outsourcing. "It's anyone's guess as to which way the political roulette wheel will spin. We will definitely see more posturing, but the question is: Will we see regulatory action?" Vivek Paul, vice-chairman of Wipro says in the report.

Quoting analysts, the FEER report concludes that India will NOT face strident criticism--and action--even if politicians opposed to offshoring are big winners in the election. "There's no constituency for bashing India," James Steinberg, a foreign-policy analyst in the Brookings Institution think-tank, says in the report. "There are only two countries that get an applause line when they're bashed [in the US]: China and France," Steinberg, who served as No. 2 in the Clinton administration's National Security Council, adds. He points out that it's politically easier in the US to attack Beijing's communist government than the world's largest democracy. On top of that is the fact that American politicians raise a lot of money from Non-Resident Indians in the US.

Click Here to read the full report. (Free registration required).

November 03, 2003

Opponents of offshoring proffer new arguments

With the fear-mongering over job losses managing to just get the attention of a few local politicians and state governments, the anti-outsourcing lobby in the US is now coming up with other arguments against outsourcing. Arguments that they hope will cause some "FUD" (fear, uncertainity and doubt) in the minds of US corporate executives.

Some of these new argument have appeared in the form of articles in Businessweek (which claims the poor quality of software developed offshore actually makes it costly) and the San Francisco Chronicle (which worry over the threats to data privacy due to offshore outsourcing).

Click Here to read the Businessweek article titled "The Hidden Costs of IT Outsourcing"

Click Here to read the SF Chronicle article titled "A tough lesson on medical privacy"

Click Here to read the SF Chronicle article titled "BofA to send tech work, data to India"

November 01, 2003

Sanjiv Sidhu on i2's partnership with TCS

In an interview to Businessworld magazine, the Chairman & CEO of i2 Technologies, waxes eloquent about his company's partnership with Indian software services firm, TCS. (The duo have created a solutions center in India for leading Australian food retailer, Woolworths.)

"Earlier, companies used to build their own software. Then they shifted completely to packaged application software. Now people want more flexibility in application software. So the TCS-i2 combination is telling people that why not have the best of both worlds - packaged, world-class IP and custom-built application software," Sidhu says. "Our contribution to this solution is in terms of our order management, event management, demand planning, replenishment and transportation software IP. This solution has to be integrated with Woolworths' existing ware-house software and in creation of new data categories. TCS-i2 does all that".

So, is this kind of "part shrink-wrapped, part-customized" software the future of larger enterprise software solutions? Sidhu's answer is Yes--as long as the customization is done in India. "Semi-customization is not effective if done at $200 per hour, but with an Indian value proposition it starts making a difference," Sidhu says in the interview.

Sidhu also talks about i2's poor financial results and its new strategy--including how he is betting the company on web services--in the interview.

Click Here to read the full version.

October 29, 2003

Red Herring's December event to feature Offshore Outsourcing

"Outsourcing in India and elsewhere" features prominently among the topics listed for the Red Herring Fall conference, an invitation-only event to be organized by the newly relaunched technology and entrepreneurship publication Red Herring.

Other topics to be covered include restructuring of the venture capital industry, 3G and other wireless technologies, China, and the digital home.

Sachio Semmoto of eAccess, Guy Gecht of EFI, Lawrence Calcano of Goldman Sachs, Guerrino De Luca of Logitech, Craig Conway of PeopleSoft, Thomas Weisel of Thomas Weisel Partners, Stratton Sclavos of VeriSign, and Gary Bloom of Veritas are listed among the speakers at the conference.

Event Details

Location: Monterey, California, USA
Venue: Monterey Plaza Hotel
Date: December 8-10, 2003

Click Here for more information about the event.

SEBI's Venture Capital advisory committee submits report

The Advisory Committee on Venture Capital has submitted its report to India's capital market regulator, SEBI. The committee, under the Chairmanship of Dr. Ashok Lahiri, Chief Economic Advisor, Ministry of Finance, was set up to advise SEBI in matters relating to the development and regulation of the VC industry in the country. The report has been placed on the SEBI website for public comments.

Some of the key recommendations of the report include:

* Removal of the requirement of lock-in of shares post the listing of their investee companies. (At present, the VC funds are subjected to a lock-in for a period of one year after listing.)

* Allowing venture capital funds to invest upto a third of their corpus in listed companies (against 25% of their corpus allowed currently) . The report has however said VC funds will not be given any special exemption from the clauses governing the takeover code.

* Introduction of hybrid instruments (which are optionally convertible into equity) for investing in privately held companies.

* Allowing VC funds to invest in Non-Banking Financial Companies, Real Estate and Gold Financing.

Other recommendations cover formation of Special Purpose Vehicles, allowing domestic VC funds' to invest in foreign VC funds, tax related issues, and foreign exchange related issues.

Click Here to read the full report.

October 27, 2003

Manish Sabharwal's interview to Knowledge@Wharton

In a fascinating interview to Knowledge@Wharton, Manish Sabharwal, Founder & Managing Director of pioneering HR BPO firm, India Life Hewitt, provides both solid and witty insights into a range of industry issues: how he started out, why he sold out, why he focused on India as a market, etc.

Some extracts:

Business schools as venture incubators
I think VCs who started incubators got it wrong; business schools like Wharton are the best incubators in the world. I milked the school's ecosystem. India Life was my final project in six classes. Many professors helped me think things through, and I had a group of first-year students do a field application project. I used the summer between the two years to travel to India and refine the plan, and then moved back to India straight after school.

I guess it would make a better story if I said all my professors gave me bad grades for my business plan. But they didnÂ’t; they thought it would do well. In retrospect, entrepreneurship is like hypothesis testing. You can never prove anything right, but you have to prove it wrong. Wharton helped me eliminate many potential false starts...It was a movie I hadn't seen before, and having a vision for how it would end gave me unique leverage.

India as a market
Everybody looks at India as a production base, we looked at India as a market -- and in doing that, we inhabited a different thought-world. Because we built our business in India, we were able to leapfrog rapidly into Asia -- into countries like Singapore. For me, the question as a start-up – I had raised a teeny $2 million in venture capital from the View Group -– was whether to move back to the U.S. and compete with the big boys or to do it here in India. I decided that it would be good for us to learn in India and expand outside later.....

...We were leveraging across India and Asia, and didnÂ’t have the outdated concept of "export quality". Clients found the single window attractive, which is why 75% of our client base is multinational...

..Most global players are hesitant about setting up operations in Asia because of its complexity. But coming from India, we didn’t have a problem because that is the most complex location of all. So Asia didn't intimidate us...

India's strengths
We compared the Philippines and China, and India’s price performance equation for our business is not going away anytime soon. The Indian mind is quite agile and there is an ecosystem and hinterland that is hard to replicate. I now live in efficient Singapore and believe that one of the upsides of India’s messiness and problems is creativity, questioning and a hunger for jobs.

Beyond low costs
The major challenge is getting the client to agree to what their fully loaded in-house costs are... Using India or the costs of any offshore destination to sell is very dangerous. If pricing is your only differentiator, it quickly becomes a race to the bottom. Even if you win the rat race, you are still a rat...

...We know that for now our cost structure is a competitive advantage but selling on price is a slippery slope. People come to India Life for our domain knowledge, proven track record of execution, re-engineering capabilities and so much else. Obviously price is a ticket to entry that you have to get right but there is much more to the decision.

My sense is that commoditization occurs in every business, and you’ve got to rip up the road behind you. That is why we moved from payroll to HR management, recruitment administration, performance management, training administration and other types of activities.

The need for focus
That’s the only way we can avoid commoditization. Some potential clients say that they will only give us HR if we also take travel and other operations. But that is unacceptable. It would corrupt our DNA. That is why the opportunist or generalist BPO company is dead.

Why India Life sold out to Hewitt
(The biggest challenge for India Life was) we were a start-up and our brand was hardly known. One of the biggest neutralizers of that objection was the gift-wrapping that came with our becoming part of Hewitt. We now have $1.8 billion in revenues, we handle 16 million employees globally, and have an annual IT spend of $350 million. When our customers or prospects hear that, they realize there is much more at stake than their contract....

.....You need deep pockets in this business. God has switched sides in BPO. She is no longer on the side of the best shots; she is with the biggest armies.

On dealing with a large parent
Gift-wrapping doesnÂ’t come without strings, right? ...

You’re riding a horse, and suddenly someone puts a cart behind you...

...I keep telling Hewitt that the removal of resource constraints, which was one of my biggest attractions, does not compensate for the cholesterol that comes with becoming part of a big organization. ...

...Even at this stage of Hewittization, I think it’s a net gain. A water pistol won’t get you very far if you want to meet customer expectations. In HR, the technology treadmill is becoming so hard for companies to stay on. For us it would have been impossible without Hewitt.

The inevitability of offshoring
Many of us in emerging markets like India, who vigorously fought to deregulate and break down our own walls, feel badly let down by the attempt to now build walls against us. Good economics is not always good politics -- but I have faith that this too shall pass. The economics of offshoring are irresistible. The offshoring wave may be delayed, but it is unstoppable.

Click Here to read the full interview.

Products and services businesses require completely different DNA: Infosys sales chief

"(When) someone asks me why my company (Infosys Technologies) isn't being more aggressive with products, I will just put it down to misplaced national pride. They want India to be known for great software products. It should. But India is already well known for its services companies. And that's something to be proud of," says Basab Pradhan, Infy's Senior Vice President and Head - Worldwide Sales & Retail (North America), in a column for

Some extracts:

* The products and services businesses are so different, that the odds against a company with a dual strategy are fairly high.

* Indian IT services companies Infosys and Cognizant both show far better margins and growth compared to leading software product companies Siebel and PeopleSoft. (Pradhan substantiates this statement with a table containing actual figures.)

* It is true that in the last two years, rates in the IT services industry have been pummeled like never before. Clients won't pay what they used to simply because their businesses can't afford it. (However) the need for IT services has not diminished in any fundamental way.... Enterprise software, on the other hand, is in a bit of a pickle. Most industry pundits believe that the licensed software sales model needs a serious overhaul. Customers are just not willing to pay large sums of money towards license fees up front.... And then there's open source. Open source is the biggest force shaping the enterprise software industry, especially on the tools and platforms side, where some believe open source will suck the value out.... On the other hand, open source or proprietary software, you always need an integrator. Services never go out of fashion.

Click Here to read the full column.

"Venture Capital is not available for start-ups"

"Today, there are no true start-up VCs. Investments are happening in companies which have made cash profits and are looking for funds for the second phase of growth." says venture capitalist Vishal Nevatia of GW Capital in an interview to Economic Times.

GW Capital is focussed on mid-sized companies in the media & entertainment, retailing, and BPO sectors. Around 60% of the fund's Rs.150 crore corpus has been invested in these sectors, Nevatia said.

Click Here to read the full interview.

Selecting an offshore software development partner

The McKinsey Quarterly recently published a primer on offshore software development with an aim to help US companies identify which projects they should outsource to an offshore vendor and to whom.

Some extracts:

* Only companies with fairly large IT staffs—more than 50 in-house employees focusing on software development or maintenance—should consider offshore software partnerships, since much time and substantial resources are required to negotiate them and to oversee the work and the integration of development teams. Furthermore, a company that outsources software development shouldn't have a taste for "bleeding-edge" technology, which ought to be created in-house since it requires a high number of design-code test-redesign feedback loops.

* Offshore outsourcing is a particularly important option for maintaining legacy systems—often a large and onerous part of an IT organization's workload and one that is getting harder to accomplish given the relative rarity of legacy skills and the unattractiveness of the work.

* Offshore partners may have difficulty maintaining application designs for projects such as e-commerce applications, which have short time frames or call for feedback from users. But once these projects enter the later stages of development, even they can benefit from outsourcing.

* (The client company) should maintain its ties with other vendors so that they can serve as backups for local or highly specialized work or in the event of emergency development efforts.

An interesting feature of this primer is that quotes from real examples (based on McKinsey's work with clients and interviews) for quite a few of the recommendations. For its recommendation that a client company "should make every effort to ensure that its in-house staff stays up to speed technically with its offshore vendors so that it doesn't become entirely dependent on their assistance", McKinsey provides the following example: "A financial-services company we encountered in our work found itself almost held hostage by its offshore vendor: no one in the client company had supported one of its legacy systems for three long years, which meant that it had no substantial knowledge of this system and thus simply couldn't switch vendors. As a result, the company was unable to negotiate a favorable deal with its current vendor, which was in a position to charge $1 million more than any competitor would have done for similar work—on a contract that totaled only $3 million to $4 million. The client company escaped from this trap only when it finally replaced the legacy system in question"

Click Here to read the full article. (Free registration required)

What's slowing India's economic growth?

A recent study by global consulting firm McKinsey found three main barriers to faster growth in India: the multiplicity of regulations governing product markets, distortions in the market for land, and widespread government ownership of businesses.

"We calculate that these three barriers together inhibit GDP growth by more than 4 percent a year. Removing them would free India’s economy to grow as fast as China’s, at 10 percent a year. Some 75 million new jobs would be created outside agriculture--enough not only to absorb the rapidly growing workforce but also to reabsorb the majority of workers displaced by productivity improvements," the report says.

Click Here for more information about this report. (Free registration required).

October 18, 2003

TiE to organize India tour in February for Silicon Valley professionals

"At TiE (The Indus Entrepreneurs), one of the things we do is help the movers and shakers in the valley -- the lawyers, venture capitalists, accountants -- build relationships with their counterparts in India. We're conducting a tour in February to help build their Roledexes in India," Raj Jaswa, a senior member of TiE (and founder of Selectica Inc.) said in an interview to Silicon Valley Biz Ink.

"People do business with people they are comfortable with, feel an attachment to. The movers and shakers here need to have the ability to figure out a cost to a company to go into Hyderabad, for example. Or they need to know what to do in order to recruit managers and engineers. They will now have contacts they feel comfortable with," Jaswa added.

Click Here to read the full interview.

Click Here to visit the TiE web site.

New research counters anti-outsourcing lobby

At last, there is some research to counter the huge negative press generated by the "3.3 million US jobs to be lost due to offshoring" report put out by Forrestor Research.

The Indian software industry and BPO industry association, Nassom, in combination with BPO firm Evalueserve, has published a report--backed with numbers--that makes the case that outsourcing (including offshoring) benefits the US economy in the long-term.

Here are some extracts:

Outsourcing is being understood today as a win-win partnership between Indian and US companies. Both are expected to benefit, with the gains spilling over to the overall economies and domestic markets of the two nations. The Evalueserve-NASSCOM research projects the following benefits for the US economy as a result of outsourcing:

* The US economy can expect net savings of billions of dollars due to offshoring over the period 2002-2010. This is over and above the positive impact on the bottom-lines of companies
* For every US$ 100 of call center work offshored by US firms, US$ 145 is invested back into the US economy in the form of repatriated profits, increased sales of telecom equipment and cost savings.
* Similarly, the amount invested back into the US economy (for every US$100 of work) is US$133 for IT services, and US$ 142 for high end knowledge services like equity research, underwriting, tax preparation and risk management
* Offshoring of IT services has enabled US workers to move to specialized and creative roles while moving process oriented programming to offshore locations. The proportion of specialists in the US IT workforce increased from 38 percent in 1983 to 74 percent in 2002
* Utilization of offshore facilities results in the growth of the local economies and an increase in the disposable income, leading to the expansion of the global market for US goods and services. For instance, in India, the proportion of the consuming class in the overall population expanded from 14 percent to 30 percent in the 1990s and is set to touch 40 percent in 2006-07. The Indian retail sector is expected to expand from US$ 180 billion in 2003 to US$ 300 billion in 2010
* Further liberalization of the Indian economy will provide increased access for US companies to Indian markets.
* India's large middle class will open up a major opportunity for US companies
* The US economy will continue to benefit from the Indian community in the country. Indians are the most advanced minority group in the US, with IT professionals contributing over US$ 500 million to US Social Security, $500 million to income tax and spending over US$1.8 billion during visits

Click Here to read the full report at the Nasscom web site.

Other articles & resources in defense of offshoring/outsourcing

Why Offshoring Is Good for America

"Focusing on job losses in America without recognising the corresponding job gains is like managing a bank account by counting the withdrawals, and not the deposits; disregarding the improvements in the quality of jobs is like ignoring the interest payments," says Max P. Michaels, Co-founder of CRYZTAL Capital. "Indian business and political leaders should not get embroiled in these debates, lest India become the lightning rod that bears the brunt of the fury of the US workers. Let the invisible hand of the market make its way. Let US companies and their shareholders enlighten their consumers and workers on the merits of cross-border outsourcing," he advises in a column appearing in Business Today magazine.

Click Here to read the full column. (Subscription required).

The Real economics of offshoring: McKinsey

"Any move to slow down the job migration could actually hurt the United States," says a research report from global consulting firm McKinsey. "Sending US jobs offshore to cheaper labor markets generates heated political debate. Yet offshoring benefits not only individual US companies and their foreign partners but also the US economy, primarily by freeing up funds to create higher-value jobs," the report says

Focusing the offshoring debate on job losses misses the most important point: Offshoring creates value for the US economy by creating value for US companies and freeing US resources for activities with more value added, McKinsey says.

McKinsey says offshoring creates value in four ways:

Cost savings
For every dollar of spending on business services that moves offshore, US companies save 58 cents, mainly in wages. Offshore workers, who enjoy higher-than-usual wages (in their countries), tend to be more motivated compared to US workers who perform the same role. "Reduced costs are by far the greatest source of value creation for the US economy," the report says.

New revenue
In order to provide offshore services, Indian outsourcing companies buy equipment and services--from computers and telecommunications equipment to legal, financial, and marketing expertise--from US companies. McKinsey estimates that for every dollar of corporate spending that moves offshore, suppliers of offshore services buy an additional 5 cents worth of goods and services in the US. Exports from the United States to India stood at $4.1 billion in 2002, compared with less than $2.5 billion in 1990.

Repatriated earnings
Many Indian offshore service providers are in fact US companies that repatriate earnings. Such companies generate 30% of the revenues of the Indian offshore industry. Thus an additional 4 cents of every dollar spent on offshoring creates value for the US.

Redeployed labor
Offshoring also brings indirect benefits to the US economy: Capital savings can be invested to create new jobs. "Indeed, this is exactly what has happened over the past two decades as manufacturing jobs moved offshore," McKinsey says. "As jobs in call centers, back-office operations and repetitive IT functions go offshore, opportunities to train labor and invest capital to generate opportunities in higher-value-added occupations such as research and design will appear."

Net-Net, offshoring, far from being bad for the US, creates net value for the economy. "It directly recaptures 67 cents of every dollar of spending that goes abroad and indirectly might capture an additional 45 to 47 cents--producing a net gain of 12 cents to 14 cents for every dollar of costs moved offshore," McKinsey says.

The report acknowledges that the total possible wealth creation does not ease the plight of people who lose their jobs or find lower-wage ones. "These issues must be addressed. Training programs and generous severance packages, perhaps accompanied by innovative insurance programs, are among the measures that could mitigate the effects of the transition without great cost to the economy," McKinsey says.

The key message is that while many people will undoubtedly suffer short-term disruption, it should be set against the consequences of resisting change: If US companies can't move work abroad, they will become less competitive--weakening the economy and endangering more jobs--and also miss the chance to raise their productivity by focusing on the creation of jobs with higher value added. "The openness of the US economy and its inherent flexibility--particularly that of its labor market--are two of its great recognized strengths. The current danger is that public policy will make its economy less flexible. To do so would endanger the economic well-being of the US."

Click Here to read the full version of McKinsey's defense of offshore outsourcing.

Click Here to view the chart describing the McKinsey's numbers.

An argument for outsourcing

In a recent article, E5 Systems' CEO Gordon Brooks says that while limits on outsourcing may protect some U.S. jobs in the short term, the bans would end up doing more harm than good.

Click Here to read the full article.

The Economist profiles travel BPO firm Tecnovate and its UK parent ebookers

New Delhi-based Tecnovate, the Indian BPO subsidiary of UK-based leisure travel firm, ebookers plc, recently raised $10 million at a valuation of $160 million. The company which has so far catered to the needs of ebookers' European subsidiaries, now plans to use the new funds in expanding its services to third-party clients.

In a recent profile in The Economist, ebookers Founder & CEO, Dinesh Dhamija, explains why Technovate is very important to ebookers' competitiveness. According to Dhamija, Technovate saved his company £1.5m in the quarter ending June 30. “If there is a market share battle, then it will be the company that keeps costs lowest that will be the last standing,” Dhamija says in the article.

An interesting extract from The Economist article:

Delhi helps provide a round-the-clock service along with offices in Europe. But what about local knowledge or language skills? That was the fear of ebookers' office in Finland, which trained some Finnish students and sent them to work in Delhi during their college gap year. The idea has now been expanded and 50 Europeans are working alongside the 600 Indian staff. More are on their way. It is the ability to answer questions by e-mail within a few hours—even on a Sunday evening—which is characteristic of the high level of service that Mr Dhamija is counting on to help ebookers stand out from the pack.

Click Here to read the full article.

Knowledge@Wharton's interviews with BPO experts

Ravi Aron, a Wharton business school professor, interviewed a range of experts to obtain different perspectives on the latest trends in the BPO industry. The interviews were published in the latest issue of Knowledge@Wharton. As a sample, I'm posting below some extracts that I found to be especially interesting.

Extracts from the interview with Rebecca S. Scholl, principal analyst at Gartner Research:

Aron: Is the decision to migrate or outsource a process seen as a strategic (as opposed to tactical or operational) decision? Who makes this decision within the firm? CEOs, CFOs or CTOs?

Scholl: Key decision-makers for domestic BPO are the CFOs and the CEOS (in large enterprises the CFO plays a larger role and in smaller enterprises the CEO plays a larger role). CIOs and CTOs are rarely involved in the initial decision to outsource and typically get involved during the provider selection process. Most offshore BPO is highly tactical today (CIOs are more involved in offshore BPO as they are in domestic BPO).

Click Here to read the full interview.

Extracts from the interview with Peter Bendor-Samuel, founder and CEO of Everest Group, a consulting firm in Dallas, and Michael Quinn, president of Strategic Management Solutions:

Bendor Samuel: Clearly at this time India has the largest capability for English speaking labor arbitrage and has the most significant momentum with organic in-country firms. We do not expect any other nation to seriously challenge India for U.S.-based business over the next two years. For Europe, we expect Eastern European nations to emerge as destinations of choice, although at a higher cost point to India....

...We believe that the most significant development in offshore outsourcing will be the growth of large sustainable business processes such as claims processing, back office functions such as F&A and HR, and application support. We expect BPO will overtake the current IT-focused projects oriented work.

Click Here to read the full interview.

Extracts from the interview with Kiran Karnik, president of Nasscom (India's software and BPO industry association):

Aron: Some groups that advocate labor interests claim that many of these operations are data sweat shops – i.e., that workers are paid substantially less than the average income levels for equivalent levels of occupations in the country. As a result, they argue, these workers are quite badly off and they work for bare minimum wages. Can you give an estimate of the average salary of a call-center worker in India, and then tell us where this would place her or him in an income gradient - compared to the country’s per capita income?

Karnik: According to a NASSCOM-Hewitt Associates survey, the average salary of a call center worker in India is $180 a month. This is five times the country’s per capita income. For a fresh college graduate, a call center job pays about 2.5 times as much as other job openings.

Karnik: NASSCOM estimates suggest that private firms have spent close to $4 billion in setting up a world class, large and spatially dispersed telecom infrastructure in India - this includes connectivity by fiber optic cable and satellite. The cost of an international half-circuit (India-U.S.) is approximately US$1,900 for a 2 Mbps link.

Karnik: The software services and BPO services export industry in India has grown its revenues from $6.2 billion in 2000 to $7.7 billion in 2001 and $9.5 billion in 2002. In 2003, NASSCOM estimates the industry will grow its revenues to $12 billion.

Click Here to read the full interview.

Extracts from the interview with Marcus Courtney, an organizer with the Washington Alliance of Technology Workers, an affiliate of the Communications Workers of America, and Ron Hira, a professor of public policy at the Rochester Institute of Technology:

Courtney: I have yet to find any compelling argument from pro-globalization cheerleaders that can point to how in the long run this will create more jobs and greater opportunity. If exporting jobs creates more jobs or saves jobs, why does our manufacturing sector continue to decline in employment?
Aron: I often hear an argument from senior executives who favor outsourcing. They maintain that in many cases, migrating some operations to lower-cost labor regimes actually results in saving jobs. That argument runs thus: When some jobs move to lower-cost centers, that move makes other parts of the company viable and results in saving several other jobs. For instance if a retail bank with a 1,400 person back-end operation that supports product lines that are barely profitable (or are unprofitable) moves 400 seats overseas to contain and manage its costs better, then the remaining 1,000 jobs are saved. If the company is forced to run all its operations from within the U.S., then it would have to withdraw from several product lines because it is unprofitable to compete in those markets.

This would have a two-fold impact: First, workers would be laid off from those unprofitable product lines, and second, consolidation would occur. A few large financial services companies (retail and corporate banks, insurance firms, brokerage houses) would grab most of the market share. As we know, the direct impact of such consolidation is the loss of jobs through centralization of operations. Outsourcing of services allows firms to stay competitive and saves several jobs that remain. How do you react to these observations?

Hira: This probably does happen in some cases, but my sense is that this is the exception and not the rule. I’d love for someone to actually collect statistics on this and give me a real and verifiable example. Companies have obvious interests in all of us believing that this is the norm rather than the exception. I’m willing to bite if provided a better sales pitch, but I doubt that is coming.

Click Here to read the full interview.

October 17, 2003

Why searching for The Next Big Thing is a waste of time

What's going to be "The Next Big Thing" (or its variation the "next killer app")?

Reams and reams of newsprint, web pages, conferences, and even oh-so-precious TV air time, is devoted to this topic--especially now that the "Internet wave" has subsided a bit (or rather, become more "mainstream").

Tim Oren, a Silicon Valley veteran (currently Managing Director of VC firm, Pacifica Fund ), has made a great post at his web log explaining why looking out--or listening to the "punditocracy"--for the NBT is a waste of time. "The Next Big Thing is a narrative we lay on top of the events after they happen..... (it generally) sneaks up from behind while you're trying to do your work, kicks your ass, walks over you, and either rifles your pockets or drops gold into your hands," Oren says. "Anyone tells you different, you're talking to a liar." Oren goes on to "tell a few tales" from his personal experience--at Apple and Kaleida Labs--to illustrate his point.

Oren does doubt that there will indeed be a NBT. Only that the odds of anyone "calling it in advance aren't very wonderful. Most likely, it will hit rudely from behind, when least expected".

So, what's his advice (for folks looking for the NBT)? "Find something that solves problems for real people, gets you up in the morning, and lets you work with good folks, and dig in".

Click Here to visit Oren's blog to read his full post (titled "Silicon Valley 4.0: You never know where you're going 'til you get there")

October 16, 2003

Red Herring relaunches online as past and present heads take digs at each other

French entrepreneur Alex Vieux, who acquired the Red Herring brandname, has relaunched the technology and entrepreurship magazine in an online format. (The new owners of the Red Herring brand cannot bring out a print magazine until September 2004 as required by Time Warner--publishers of tech business magazine Business 2.0--which bought the old RH's subscriber list.) Vieux has hired former Business 2.0 editor James Daly to head the new RH editorial team.

In an interview to San Jose Mercury News, Vieux has attacked RH's founder and original editor-in-chief, Tony Perkins, calling the old version of the magazine "hype-ridden". According to the Mercury News profile, Vieux, who served as a US correspondent for the French newspaper Le Monde, launched business conference company Dasar in 1990. The conference business "put him in touch with the tech elite", the profile says, adding that he now sits on the boards of Computer Associates, Checkpoint Software and Commerce One. Click Here to read the full Mercury News article.

Tony Perkins, who now heads the technology business "blog" Always-on, is upset at Vieux' comments and has chosen to hit back. "As Mr. Vieux embarks upon his new publishing career, he might be well advised to ponder the fate of another Frenchman from an earlier century whose ambition and arrogance were much grander than his own shortish stature," Perkins says in his latest AO column.

In the column's Member Comments section, Michael Perkins (Tony's brother and co-author of the book "The Internet Bubble"), has this to say about his interactions with Vieux: "The most poignant encounter was at Red Herring's 1999 holiday bash. Alex came up to me and began hassling me about the fact that he thought our book was wrong and that we were "misguided." (Gee, Alex, try doing the math). He better hope he has a little more perspicacity in his new endeavor." Click Here to read the Perkins brothers' take on Vieux' comments.

October 14, 2003

Bio-tech investing: the risks and rewards

At a time when VC investments in bio-tech companies (both in the US and India) is on the uptick, a recent Knowledge@Wharton article covered a conference titled “Value Creation and Destruction in Emerging Technologies: Lessons for the Biosciences” provides some insights and background.

Click Here to read the article.

September 22, 2003

More Silicon Valley start-ups are pushing product development to India

It's not just the US software services companies like EDS, Keane, CSC, Accenture, Cap Gemini-E&Y (apart from "oldies" like IBM) that are making a beeline to set up operations in India. The product companies don't want to get left behind.

Just a glance at the job supplements of the top newspapers in Bangalore will confirm this. Last week's job supplement of Economic Times had a large ad from the Sunnyvale-based telecom equipment start-up Infinera (which has raised $130 million from top Silicon Valley VCs including Kleiner Perkins, Mobius VC, Accel Partners, Benchmark Capital, and Venrock Associates). In fact, Infinera has almost become a regular advertiser in this supplement.

In an article titled "India Inside" , in the latest issue of Business Today, the magazine's Assistant Editor Priya Srinivasan, has elaborated on this trend.

"Oh, it's an absolute fad out here; VCs are practically compelling their companies to go to India," says Krishna Kolluri, CEO of Sunnyvale, CA-based Neoteris, which "has had India on its business plan from day one". "We have interacted with several large VCs and companies they have funded. At least 50 per cent of these companies either have a presence in India or plan to have one soon," says Seenu Banda, CEO of NetDevices. (NetDevices itself has recently raised $15 million in first round funding from leading venture capital firms including Jumpstartup, Comventures, Columbia Capital, and Artiman Ventures. Jumpstartup, an US-India cross border VC firm, is assisting NetDevices in setting up its Indian operations.)

Oak Investment Partners, a large US-based VC fund, has roped in Ranjan Chak--who set up Oracle's development centers in India--to guide its portfolio companies with their India strategies. "Oak investees that want to come to India range from very small companies to those with several tens of millions of dollars in revenue. Around 10 Oak companies already have some presence in India. The most recent entrant is Aventail, a company that specialised in security for virtual private networks," says the BT article.

Why this rush to India among product companies? "After the tech meltdown, VCs are looking for more efficient business plans. An India presence becomes necessary," Amit Shah, a partner at Palo Alto, CA-based Artiman Ventures, says in the BT report. "Start-ups kept spending on product development, proof of concept, customers and marketing. By the time the product hits the market, the outgo can be as high as $50 million (Rs 230 crore). Now they have to compress these costs. You can cut two thirds of the engineering expenses by moving to India," adds Ganapathy Subramanian of Managing Director of Jumpstartup.

The BT article estimates that about 40 software product companies have set up devleopment centers just in Karnataka (read Bangalore) over the past year. Added to these are companies like the Bangalore-based Symphony Services (founded by Romesh Wadhwani, who earlier founded Aspect Development) and Hyderabad-based Pinexe (formerly called Portal Player), which offer product development services for hire.

Putting these trends together, BT concludes that "(India) could well become Taiwan's equivalent in software. Just like all chip manufacturing moved to Taiwan, all software 'manufacturing' could move to India. Products, which are conceived anywhere in the world, could be designed, built, tested, maintained, supported and upgraded out of India."

Mike Moritz chants the "go to India" mantra
In a recent Businessweek cover story on The Rise Of India, Sequoia Capital partner, Michael Moritz, who led the fund's investments in Yahoo and Google, says: "We can barely imagine investing in a company without at least asking what their plans are for India,. India has seeped into the marrow of the Valley."

September 18, 2003

Indian software product firms

The Economic Times carrired an article profiling a list of some software product firms.

Click Here to read the article titled "Product dynamos byte the big boys"

September 08, 2003

India's first biotech fund makes its maiden investments

The bio-technology focussed APIDC-VCL, a Rs 150-crore joint venture fund between the Andhra Pradesh Industrial Development Corporation (APIDC) and Dynam Ventureast, has made its first investments: in three Indo-US companies, reports BusinessWorld. The companies include Bioserve Biotechnologies, Genomik Design Pharmaceuticals, and Silico Insights.

Click Here to read the full report.

August 30, 2003

Information Systems changes to Infrastructure Realty

When a whole horde of former financial services companies appended "Software Services", "Information Systems" or just "Infosys" to their names, it marked the beginning of the end for the boom in IT services stocks.

Now, BSEL Information Systems Limited has informed the stock exchange that it has changed its name to 'BSEL Infrastructure Realty Ltd'.

Not sure what to make of this!

August 20, 2003

Private Equity survey by Businessworld

Engineering software specialist Geometric Software, airline and hospitality software maker Kale Consultants, and optical disk manufacturer Moser Baer, are among the few Indian companies in which their private equity backers have made over 10-fold returns, according to a recent Businessworld article on Private Equity investments in India (issue dated August 11, 2003). Click Here to view the full list of the top "multi-bagger" investments.

Citibank Private Equity (which invested in I-Flex, Polaris), Electra Partners (Moser Baer), ING Barings (Mphasis-BFL), Draper International (Rediff, Selectica, Prio) rank among funds which have made returns of more than 2.5 times their investments in India. Click Here to view the full list of the top performing funds.

Click Here to read tead the full Businessworld article.

August 06, 2003

Businessworld's BPO Status Report

Businessworld magazine did a comprehensive cover story on the BPO industry in its issue dated August 04, 2003.

The article covered, among other aspects, statistics on the industry's size, winners & losers, and the sectors which held the most promise.

Some extracts:

"As on 31 March 2003, the sector employed 171,000 professionals. It has $1 billion invested in it, creating about 100,000 smart cubicles in 7.5 million sq. ft of space. And it generated revenues of $2.3 billion in 2002-03."

"The Indian BPO story is replete with such successful examples--and also with abject failures. Around the time OfficeTiger was crafting its success in Chennai, another Chennai-based company, Brigade, was busy writing its own epitaph.
Brigade made a series of errors. Soon after it got its first $50-million infusion of capital from General Atlantic Partners, Brigade went on a mad spending spree. By 2001, it was burning cash at a rate six times that of its revenues. An office setup in the US saw the company employing 162 marketing people even as its delivery centres in Chennai and Hyderabad had hardly taken root.

By April 2002, its attrition rate was a whopping 168% a year. It changed three CEOs and drove down billing rates to such an extent that operations became unviable. Once a flourishing 1,100-men operation, the company is now down to just 450 employees."

Click Here to read the full Businessworld report.

For the story in graphics, see:

Listing of Top Companies

Companies that are "feeling the heat"
(includes FirstRing, which has since been acquired by ICICI-OneSource)

...and the list of reasons "why they are losing"

The most promising sectors by market size.

Other countries for offshore BPO work where Indian companies can set up disaster recovery centers.