Knowledge Partners

 Economic Laws Practice       Avalon Consulting

 Technloogy Holdings   

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.