Knowledge Partners

 Economic Laws Practice       Avalon Consulting

 Technloogy Holdings   

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.