The End of Indian IT Outsourcing
I just finished watching a movie called Beautiful Boy-- about a family coping with addiction over many years-- and because my brain connects the oddest dots, I thought about my childhood home-- India— and its 30+ year relationship with IT outsourcing.
I remember the hope and promise when it first began. Outsourcing was-- at least initially-- a rising tide for India’s engineering community-- lifting all boats by signaling to the rest of the globe that there was a lower-cost alternative to US and European engineers.
[Enough reminiscing.]
The hard truth is that 30 years later, outsourcing’s business model still depends on global labor arbitrage... which itself depends in large part on information asymmetry between the big IT vendors and the engineers they employ. [Note: if you’re an engineer and that sentence lost you, it means you should have taken some Econ electives at university. They’re concepts worth googling.]
In plain English, outsourcing only remains a viable business practice if India’s engineers do not fully understand their economic value-- if they continue to choose to work for companies who pay them x and rent them out at (x + profit margin)... when they could just as easily work for the clients of those same IT firms… who are willing to pay x++ for their services.
More and more Indian engineers are waking up to this. And sometime over the next decade, that awakening will hit critical mass– relegating the entire industry to footnote status in the history of business… which would be a shame.
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This is a larger-than-blog problem with larger-than-blog solutions. But it’s always worth starting a candid conversation when complexity is involved.
So here goes nothin’.
Salary Consciousness
India is– thankfully– not the US.
The US has a very pro-corporate, pro-privacy, never-mention-your-salary-to-your-peers culture which ultimately benefits companies— not employees— because they leverage that lack of peer-relative salary knowledge to continue to pay “market rates” when they’re actually paying below-market rates.
Indian companies have tried to follow the same corporate model but it simply doesn’t work when your employees live vastly different cultural lives.
That’s in part why every Indian IT executive complains about how product companies are stealing their best candidates with unreasonably-high salaries.
Get ready for the stunner: product companies *are* paying market rates.
Everyone else is… um… profit maximizing.
It’s not even a dirty little secret anymore. It’s gotten so bad that NY has put laws in place to try to protect employees. For instance, it’s now illegal for employers in NY to ask potential hires how much they make at their current job. Why? Because companies use that information to offer the candidate more than what they’re currently making (yay!) but less than the market rate (wait… whaaa?).
Another example: NY has made it mandatory for companies to post salary ranges for all available jobs. Why? Same reason: a market economy— without compensating controls— relies on information asymmetry to maximize profits.
Now apply that to India.
You can’t be a company without wanting to maximize profits. [Can you?] Well, Indian companies can’t maximize effectively because the region’s culture deeply values social sharing. Relationships across India are built on what is shared— the more private, the more meaningful.
So employees in India have no qualms about talking about salaries: their own, their peers in-house, and those who jumped. Everyone knows what everyone else is making. And they have a reasonable idea about what their US and European counterparts are making… because India’s ex-pats are still culturally Indian.
All that sharing creates what profitable markets abhor: information symmetry— an important dimension of the multivariate tide that threatens to end an unjust outsourcing model.
Churn and Burn
Quick history lesson. Back when unions were a thing, companies would try to break their backs with a tactic called churn and burn. The "churning" part was the management practice of constantly adding new anti-union workers to the floor. The idea was that if you get a lot of poorly paid, entry-level workers with a high turnover rate, the union eventually dies because support drops low enough to "burn" it through decertification.
See… now you know the history of the term “churn and burn.”
Now apply that to India— which sadly, doesn’t have a unionization problem.
What they do have is a 30-year legacy built on cost-arbitrage. They jumped on the globalization bandwagon and sold themselves as (relatively) cheap labor. The US and Europe bought in.
But… once you reduce the price of a service (or start it about as close to freemium as possible), there ain’t no going back (or up).
Why? On one side, client expectations in the West are now set (think concrete shoes) and hard if not impossible to change. On the other side, India’s large IT firms have shareholders who hold them to account, forcing them to maintain their margins.
In plain English: if IT firms try to sell their upskilled engineers for more, their customers will balk. And if they try to pay their upskilled people more, their margins will shrink— causing their shareholders to balk.
[That’s a lot of balking.]
So what do India’s IT firms do? They play within those constraints and in the process, redefine “churn and burn.”
When their cheap, junior employees finally pick up real, marketable engineering skills and are ready to step into a more expensive role, the IT firm’s operating model can’t give them more money… because 1) their clients won’t pay more for that better-skilled person, and 2) paying the employee more without charging more for them would break their sacred margins.
So… India’s IT firms intentionally/deliberately let most of their upskilled employees move on to other companies (i.e., “those damn product companies are stealing all our best people”)… and they hire more cheap, junior employees… creating a post-union-busting version of “churn and burn.”
The whole thing is comical because US and European clients constantly complain about Indian IT firm attrition and India’s lower quality of skilled engineers… and they– businesses in the West– are deeply complicit in both.
And staying on that theme…
The Ex-India Operating Model
Companies in the US and Europe have had 30 years to adjust their operating models to use outsourcing effectively. And they’ve all mostly failed.
Don’t get me wrong. They’ve learned to use the engaging language of global operating models— passionately emphasizing that India has a real seat at their table(s).
But most corporate power still rests ex-India.
So the operating challenges that come with using India are not just the whole “time-zone” thing. It’s that the west continues to use India’s engineers as order-takers. Why? Because the overwhelming majority of engineers (everywhere in the world) simply don’t understand their businesses well enough to be anything other than waiters. And it’s in the power structure’s best interest to keep it that way.
Because chefs cost more.
And we can’t have everyone costing more… because… you know… earnings.
So the next time someone points out that there’s a time-zone challenge with India, kindly remind them that everyone in India (and to be fair, everyone in tech ex-NY and ex-London) is waiting for a business person in NY or London to tell them what to do. That’s a business inefficiency, not tech… and certainly not India’s— not after 30 years to fix it.
India– like its engineers– has been painted into a box– the worst kind of box– the kind that robs it of autonomy and agency and leaves it there forever.
Or… until it figures out that it can learn the businesses that it supports and do what any good businessperson would do: disintermediate. [But I’m stepping on the next section.]
How to Unwind 30 Years of Well-Intentioned Legacy
There are no easy answers. So let’s try some hard ones.
First, the intent of learning needs to change at Indian IT firms (as it needs to in all tech organizations globally). It can’t start and end with creating better Java developers or getting everyone that fourth cloud certification. And it can’t be one, isolated weeklong immersion into the client’s business (i.e., financial services).
Firms need hard-core, continuous business training and a way to evidence their engineers’ progress toward that end for their clients. The goal is to shape their engineers into real threats to their ex-India business partners– you know, the ones who have been saying for years that “We’re not a bank. We’re a technology company.” Those business folks need to fear for their jobs. It has to be that serious.
[And oddly, those business people will thank you for it.]
What level of learning investment does that signal? Silicon Valley level– what you imagine a well-funded, benefits-rich printer-of-money would invest to compete with Google.
The investment’s measure of success– paradoxically– will be a level of expertise in your engineers that should land them in their next, higher-paying role… whether it’s at their current company or another.
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Second, Indian IT firms need to reinvent their internal cost structures so those business-savvy engineers that they’re training don’t jump. That means finding clients that aren’t anchored on cheap… which means expanding from pure-play professional services firms to hybrids that also build products.
I’m not talking about TCS’s BaNCS (or to a lesser extent Infosys’s Finacle)– which is really professional services masquerading as product.
I’m talking real products: software-as-a-service, platform-as-a-service, maybe even infrastructure-as-a-service (takin’ on the big dogs).
It’ll demand courage and risk-taking from their c-suites. Instead of their current leadership hiring trend– to put a non-Indian at the top to signal to ex-India that they’re not the cheap-labor-providers of old.
Lipstick on tofu. No one is buying that.
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And third– and most difficult– Indian IT firms need to challenge their clients to change their US-centric operating models. As someone who previously managed 10K of the brightest India-based employees (in the world!)– my last company’s full India footprint (Tech and Ops)– I know firsthand that India’s operating model won’t change until the operating model of the US (or the UK) does.
I don’t mean symbolic changes that involve more garlands around the necks of more US executives.
I mean substantive changes in global power distributions.
And if their US clients don’t change… the only other choice– and it’s not a bad one– is to change the dynamic with them– quietly becoming their competition.
There’s a reason Amazon allows third-party sellers on their platform. Those sellers do the hard work of innovating until one of their products sticks. Amazon– by being the platform– knows what’s sticking with buyers. And they leverage that knowledge.
India’s IT firms don’t know it yet but they too are a platform. In fact, the greatest threat to banks isn’t other banks… or digital-first fintechs.
The greatest threat is that India will learn the lessons behind Amazon’s success. And they will reinvent themselves as platforms.
[But that’s another blog for another day.]
In Summary
There is a ton of complexity surrounding India’s IT firms– the least of which is what we’ve learned to politely call “cultural differences.”
The hard truth is that the industry-wide practice of churn and burn is both financially- and ethically bankrupt.
The harder truth is that implementing globally-fair financial incentives for employee loyalty and growth will inevitably cause profits to take a short-term hit.
But the alternative is the continuation of two decades of slow decline and outsourcing’s eventual death – the high cost of equity spurned.
Minus radical changes in both India and its patron countries (or a wholesale revolution against medieval notions of patronage), the tide of attrition at IT outsourcers will reach tsunami levels, washing away the viability of an entire industry.
Postscript: Some Hope
I can’t wait for the day when every one of India’s engineers earns the same as their counterparts in the US and Europe. It will mark a new day in global equity.
That said, ending any addiction (including the addiction to cheap labor) comes with its complexities. For instance, if engineers cost the same everywhere globally, what would compel *any* company to continue long-term offshoring (with or without IT vendors)?
That should signal India’s business- and political elite to radically change their investments (and positioning) immediately-- at a minimum, from being the world’s lower-cost software factory to its highest quality. No country has that crown yet… although Israel and China are marching toward it in cybersecurity and AI respectively.
The other option is to be bold, take some risks, and reinvent themselves and the region as platforms.
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Although I wasn’t born in India, I attended boarding school there as a child. I grew up loving the country– the land, the people, the cultures… my childhood friends from 40 years ago and my colleagues today.
That was why seeing the movie Beautiful Boy triggered this piece: as with all addictions affecting those you love, your mind immediately jumps to the urgency of intervention.
That’s a little dark… like the movie. But it comes from a good place. Because I remain hopeful that India will recognize that the West’s offshoring model– what we all affectionately call follow-the-sun– is getting in the way of realizing that she herself is the sun.
Send me some 1-on-1 feedback with your thoughts on this piece or head back to LinkedIn to post a comment and participate in the ongoing discussion. You can also “love” this piece there (because a “like” is cold and impersonal and makes everyone think that you don’t actually read anything).