India’s Labor Arbitrage Strategy

It has been an interesting few days of being on the receiving end of tremendous hate mail due to my widely syndicated and (looks like) read and discussed Death of Indian Outsourcing article.

The article has met and exceeded my expectation in terms of a tool for catalyzing thought and debate. Those of you who have discussed it on this site, thank you for your comments. Those who have discussed it on the rest of the blogosphere, also, please accept my sincere thanks. Forbes and Rediff readers – if you are reading this message, thank you also for both your positive and negative arguments. A debate is interesting only when both sides are represented.

Now.

For those of you who are my regular readers, you know me by now, enough, to know that I am not a negative thinker by any stretch of imagination. My instinct has always been to look for solutions.

This particular piece was preceded by my Sridhar Vembu story, in which I showed readers an example of an entrepreneur who has been creative in seeking solutions to problems. Have any of you stopped to wonder why I published those two stories in that sequence?

My hope is, that with hard-hitting pieces like the Death of Indian Outsourcing, I will be able to raise awareness of the problems that are brewing in India, and catalyze action, solutions.

In public and private discussions, the metaphor that comes up continuously, is that the Indian industry is burying its head in the sand. [Look through the 100+ quotes on Rediff.] It is this attitude that I have chosen to speak against.

I have also chosen to speak against complacence, which I see rampant in the Indian industry.
But with the hope that things will change.

In Sridhar Vembu’s story, there are ingredients of that change.

“Not only that, in India, Sridhar’s operation does not hire engineers with high-flying IIT degrees, thereby squeezing the cost-advantage. No. “We hire young professionals whom others disregard. We don’t look at colleges, degrees or grades. Not everyone in India comes from a socio-economic background to get the opportunity to go to a top ranking engineering school, but many are really smart regardless. We even go to poor high-schools, and hire those kids who are bright, but are not going to college due to pressure to start making money right away. They need to support their families. We train them, and in 9 months, they produce at the level of college grads. Their resumes are not as marketable, but I tell you, these kids can code just as well as the rest. Often, better.”

I have shown in my piece that if a 15%+ salary hike rate continues, India loses its edge. But it doesn’t need to be so. For starters, Indian companies should look at Sridhar’s example and open operations (BPO, KPO, Call-Centers, IT Services Centers) not only in second and third tier cities, and away from Bangalore, Mumbai, Delhi, but also in small towns like Kohima, Siliguri, Jodhpur, and hire and train a population that is not part of the current IT workforce.

Increase supply. Reduce salary levels. This is Economics 101.

Yes it will take time. English training. Accent training. Programming training. Big charter. But, as Sridhar shows, it CAN be done.

I pointed you to Atanu Dey’s RISc model earlier. He suggests a move to a micro-city model, as follows:

“India’s economic growth depends critically on the development of its 700-million strong rural population living in 600,000 villages. The challenge is to manage their transition from a village-centric agricultural-based economy to a city-centric non-agricultural economy urgently.

The total rural population of India can be covered by about 6,000 RISCs each servicing the needs of approximately 100,000 people. By providing a full complement of services, RISC creates a ‘micro-city’ which seeds the formation of a city by drawing to it the population from the surrounding areas. RISC focuses on the development of the rural population, and not on the development of villages which are destined to be extinct anyway.”

I like the model as an alternative to the bursting situation at the cities. My suggestion is to align each of these 6000 RISCs with a major IT employer that can employ at least 5,000 people. Infosys can have 10-20 RISCs, IBM, Wipro, SAP, Cisco, Microsoft, … yes, the low-end work is at risk of being near-shored and smart-shored, but if India can create a compelling case for keeping the jobs in India via strategies like this, the horizon can be extended dramatically.

Atanu’s equation offers an additional 30 Million people – perhaps not very educated people – but
people who can be trained and brought into the workforce, thereby preserving the labor arbitrage advantage for the non-differentiated work.

And, in fact, if the cost-structure is pegged at the right level, and a training methodology can be put in place by these employers, India can also do work for other emerging markets, including Latin America (Spanish speaking, except Brazil, which is Portuguese speaking), and Europe (multi-lingual). And, importantly, India can do work for itself.

Ultimately, India’s population can be an advantage, but the population needs to be “processed” to be turned into an advantage.

In conclusion, I would like to see some serious long-term thinking from India’s IT leaders, instead of this 15% salary hike trend, and Nasscom’s unsophisticated rah-rah “everything is fantastic” analysis.