indianotes

My two bits on the reservation issue

2006-08-27T23:03:00.000-07:00

“Class vs. caste”; “merit vs. reservations”; “including them vs. excluding us”; “reservations in the private sector”; “Mandal revisited” – the talking heads are at it again! Leading newspapers, television channels, the blogosphere – the chaterrati are everywhere! Opinions fly back and forth, students take to the street, slick television anchors ask leading questions to well-heeled urban audiences so that complex issues are phrased in a manner to elicit simplistic responses.

In argumentative India, everybody has a point of view!

These range from the puerile “we have been oppressed for over 3,000 years and 50 years of quotas is not enough to make up for it”; “would you allow yourself to be operated upon by a SC/ST doctor?”; “I got through the entrance test but did not get admission to the engineering college whereas an OBC did despite failing the test” to the rational “where is the data to support these levels of quotas when the last such census was in 1931?”; “primary education is the key and not reservations at elite institutions such as IITs/IIMs” to the self-centered “we will be globally uncompetitive if we have to reserve jobs as per the quotas”; “quotas are alright for SC/STs but not for OBCs, who will leverage their political and economic assets to dominate office jobs”.

There is a lot of heat and too little light in this “debate”. There is clearly a paucity of hard facts for a rational person to take a stand on this issue. How has the lot of the SC/ST community improved with nearly 50 years of quotas? What has been the impact of broad affirmative action on our society? What is the rationale for extending the quota system?

Some recent research sheds some light. A paper, “Has Job Reservation Been Effective? Caste, Religion, and Economic Status in India” by Vani K. Borooah (University of Ulster), Amaresh Dubey (North-Eastern Hill University) and Sriya Iyer (University of Cambridge) in November 2005 measures the effects of positive discrimination in boosting the proportions of ST/SC/OBC persons in regular salaried employment and the discriminatory bias against Muslims who do not benefit from such policies. They conclude that an alternative, and more effective, way of raising the proportion of prime-age men from the SC/ST groups in regular salaried or wage employment would be to improve their employment-related attributes.

The paper also concludes that “…in arriving at this judgement about who should be eligible for reservation, the criterion has been a person’s caste rather than his income or wealth. Consequently, groups belonging to what Article 115 of the Indian Constitution calls “socially and educationally backward classes” have benefited from reservation even though, in practice, many of these groups could not be regarded as “backward”. This has meant that many of the benefits of reservation have been captured by well-off groups from the depressed classes (for example, chamars from the SC) while poorer groups from the depressed (for example, bhangis from the SC) have failed to benefit.”

The authors’ simulations showed that even modest improvements in the education levels of SCT persons could deliver significant employment gains.

Another paper by John M. Alexander, “Inequality, Poverty and Affirmative Action:
Contemporary Trends in India” starkly states that “The overall results of affirmative action in India now pursued for more than five decades present a mixed scenario. While it has been quite effective in breaking the monopoly of the upper castes in political, social and educational spheres of society, it has not been able to positively better the lives of most of the backward classes. It has enabled a small section of the least disadvantaged or
the relatively better off among the backward classes to move towards economic development and social inclusion but has left the vast majority with a false sense of social advancement. This is a stark reminder both to policy makers as well as the backward classes that affirmative action cannot be a universal remedy for the problems of inequality and poverty in India.”

The paper examines reservations in three spheres – politics, jobs and education.

In education, the paper states that the SCs had a literacy rate of only 38 per cent as compared to 52 per cent for the general population (1991 figures). In higher education, the achievement was a little more – 13 per cent of students enrolled in higher education were SC in 1995-96, as compared to 7 per cent in 1978-79. Although the increased enrolment of Scheduled Castes and Tribes in higher education is a cause for some optimism, it needs to be juxtaposed to certain other accompanying realities. The first among them are the economic and social hurdles that Scheduled Caste and Tribe students face as they climb the ladder of higher education. It is only the relatively well off or the socially influential among the Scheduled Caste and Tribe communities that are able to make use of scholarships and other benefits of affirmative action (Wankhede, 2001; Aikara, 1996).

The biggest success has been in public sector jobs – SC accounted for 8.2 per cent of Class I jobs in 1987 as compared to 0.35 per cent in 1953. (Ironically, the share is far higher, over 20 per cent, in the lowest category of government jobs – Class IV jobs.)

The limited data sheds some light on the future direction of the debate.

One, there should be a national debate on the need, criterion, goals, and time frames of an affirmative action program. (For instance, a key issue to be debated could be the relevance of job reservations in a context of only 30 million jobs of the 400 million workforce being in the organized sector.)

Two, pursuing a caste based affirmative action program without incorporating current economic status is bound to be unsuccessful. Such a program should be designed after undertaking a current census on caste and socio economic stratification of Indian society.

Three, there should be time-bound targets for fulfilling affirmative action goals.

Four, the affirmative action program could include some form of reservations not only in employment and education, but also in access to capital markets (micro finance and angel funding) and procurement programs of both the public sector and the private sector; to promote entrepreneurship.

Five, there should be an emphasis on public private partnership where the government commits to increased investments in primary education and industry steps up to impart ‘soft skills’ and set up ‘finishing schools’ to ensure employability.

Six, and probably the most important, it is important to increase the size of the pie than to devise devious ways of cutting it up. As the President A P J Kalam has argued, let there be a 100 more IITs and IIMs and medical colleges, and let our esteemed political leaders, civil servants and industrialists devise strategies to create 8 million jobs a year that are needed to sustain our economic growth.

Greater and widespread prosperity alone will finally cure the menace of caste in our ancient society.

An empire looking inward?

2006-03-30T01:44:00.000-08:00

While we bask in the almost post-coital glow of Tom Friedman’s ‘The World is Flat’, it might be wise to remember that it is getting increasingly jagged at the edges.

In 1993, Samuel Huffington wrote about “The Clash of Civilizations’ and remarked “…the world is becoming a smaller place. The interactions between peoples of different civilizations are increasing; these increasing interactions intensify civilization consciousness and awareness of differences between civilizations and commonalities within civilizations. North African immigration to France generates hostility among Frenchmen and at the same time increased receptivity to immigration by "good" European Catholic Poles. Americans react far more negatively to Japanese investment than to larger investments from Canada and European countries. The interactions among peoples of different civilizations enhance the civilization-consciousness of people that, in turn, invigorates differences and animosities stretching or thought to stretch back deep into history.”

He went to to state that ‘…the processes of economic modernization and social change throughout the world are separating people from longstanding local identities. They also weaken the nation state as a source of identity. In much of the world religion has moved in to fill this gap, often in the form of movements that are labeled "fundamentalist." Such movements are found in Western Christianity, Judaism, Buddhism and Hinduism, as well as in Islam.’

He further added, ‘The West's "next confrontation," observes M. J. Akbar, an Indian Muslim author, "is definitely going to come from the Muslim world. It is in the sweep of the Islamic nations from the Maghreb to Pakistan that the struggle for a new world order will begin."

The events in the past thirteen years certainly seem to bear out the above conclusions.

In today’s op-ed in the Washington Post, Jim Hoagland puts it this way.

“In radical Islamic propaganda, the United States has graduated from being a mere Great Satan out to undermine Iran's ayatollahs to being depicted as a global monster responsible for virtually every crime and failing since the dawn of modern history. Meet the new Jews: the Americans.”

“The centrality of American power to global change . . . inevitably carries with it a heavy burden abroad of resentment and opposition. In the wake of Sept. 11 and wars in Iraq and Afghanistan, a widespread stereotyping and a visceral hatred that imputes racial characteristics to national policies and actions have also taken hold.”

The response of the Americans has been to withdraw inward. Consider the following:

One of the largest public demonstrations since Martin Luther King was held on Saturday last, when 500,000 illegal aliens marched in LA to protest against potential tough enforcement measures to crack down on illegal immigration such as building a 700 mile border with Mexico.
The elected officials opposed Chinese takeover of Chevron, and approved IBM’s sale of its PC division to Lenovo after intense scrutiny.
The same officials opposed Checkpoint’s (an Israeli security software company) takeover of Sourcefire on grounds of national scrutiny. (The US opposing a business deal of an Israeli company?!!), and also banned the purchase of Lenovo’s computers by the US Navy.
The US legislature also forced Dubai Ports World to exclude US operations from the P&O takeover.

While the short term US economic outlook appears robust, the prospects for 2007 and beyond are a bit mixed due to the Iraq war, budget deficits, rising healthcare costs and unfunded pensions.

The risks of a jingoistic Congress launching a full-fledged trade war with China are not remote either.

This inwardness and rise of xenophobia is not confined to the United States.

France has witnessed riots twice this year already, and there was fierce debate and riots over the cartoons published by a Danish newspaper around the world. The riots by French youth, protesting the proposed reforms to labor law, are as much pro-jobs as they are anti-immigrants.

The WTO negotiations are headed nowhere, and any watered down deal is obviously a mere face-saver.

If the Western world is looking inward, why should our industry get worried?

One, the average Joe does not make subtle distinctions between illegal immigrants and smart IT workers on temporary work permits. Any law on the larger immigration issue will always use the work permits (or H1B visas) as a bargaining point. In countries such of the EU, with enormous business potential, there is a risk that inadequate work permits will prevent us from exploiting that potential.

Two, there is a strong resentment among average Americans towards foreign businesses; more to the Chinese, but increasingly to the Arabs and potentially Indians.

Three, over 80 per cent of Americans feel that their sensitive personal information should not be processed overseas. While we have managed to dodge any significant legislation on this issue, the risks of this emerging as an incipient non-tariff trade barrier are high, and growing by the day.

The history of our industry is a by-product of the history of US business, politics and regulations. We might be tempted to believe that the outsourcing debate is over, and that the world is indeed becoming flat. However, the moment the US economy stops adding 200,000 jobs a month or there is a huge data security breach in India, the challenges to global sourcing will manifest themselves all over again.

Dubai Ports World deal: War on terror or War on Stupidity?

2006-03-11T00:33:00.000-08:00

I was aghast when I read today that, in the exalted name of anti-terrorism, the US Senate rebelled against its Republican leadership and joined the House to prevent DPW from investing in the US. (See the Washington Post story: Burning Allies - and ourselves)

This sends out a very strong message to the Muslim world - America is basically hostile to Arab investment, even if it is from a moderate, pro-business state like the UAE. This will further fan the flames of xenophobia and ignorance. Now that the US elected representatives have won a battle in the 'War against terror', maybe they can launch a war on stupidity on Capitol Hill. (In this case, President Bush was right in proposing to veto any such bill, but he got steamrolled by his own people.)

Coming on the heels of a detailed investigation of Lenovo's takeover of IBM's computer division, it leads one to think of a new type of trade barrier - national security.

Already, there are fears being openly expressed of the possibility of 'rogue code' embedded in a software application written by a disguised Al Qaeda terrorist working in an Indian software company. Could national security be invoked more strongly as the exports from India grow (of IT services, BPO, software) and do we face possible tariffs or bans? It is a scary thought.

Casteism in Indian tech sector

2006-03-10T23:46:00.000-08:00

This is a deliberatively provocative title; though, I believe you will agree with me at the end of this piece that it is not unjustified.

Caste systems are traditional, hereditary systems of social stratification. Though historically and geographically widespread, the most well-known caste system today is the Indian caste system.

In my current role, I meet a whole lot of entrepreneurs from the IT sector - many of whom run software product companies. I also meet a lot of academicians and armchair thinkers within the industry. The common refrain everywhere is "Indian companies should develop products and move up the value chain"; "The growth in IT services is really people driven, and there is a limit to headcount-led revenue growth"; "The services model is not sustainable since there is a limit to how many people you can hire"; "There is need for non-linear growth of the Indian IT industry" and so on.

Not for a moment am I deriding these comments. India has had several software product success stories I-flex; Subex Systems; Nucleus Software, Ramco Systems, and many more in the embedded software space - notably Ittiam. These are smart, successful entrepreneurs who have braved huge odds and developed commercially successful IP.

However, the comments described before smack of at best good intentions with very little evidence to back it up. My common questions to such comments are as follows:

How many software product companies are there in the world with revenues of over USD 1 billion? (only 9). How many of these are US head-quartered? (8 of 9). Does this mean that the rest of the world does is not 'innovative' or has not 'moved up the value chain'? What is value chain? What is high-end of the value chain? Higher margins? Higher revenue per employee? Higher profit per employee? There is no commonly accepted definition, in my limited knowledge.

Lets take margins. In a sample of 82 listed product companies in the US, the average net margin was -3%; that's right - a negative 3%. If you exclude the 8 large companies, the margin drops to -14%. Is that high value added? Not if I were a shareholder.

So what higher end are we talking about? Most of this stems from an unspoken, unrecognised casteist sentiment. Low end work (read application development, testing etc) is seen as fit for shudras while software products is fit for Brahmnins. And when pushed, I find that many of the people who express these sentiments are in fact Brahmins. (Disclaimer: before I am accused of being politically incorrect and a reverse casteist et al, let me confess that I am of Brahmin stock myself.)

And while I have my share of concerns about the headcount led growth of Indian IT services companies, let us also remember that some of the highest revenue software products have been created by the very same IT service companies.

I have nothing against debating how to stimulate innovation in the country, but when the debate is not backed by credible data, there is a danger of us promoting wrong solutions without having pondered the true problem.

This discussion is nowadays spreading into the BPO sector. Call centres are low-end while Knowledge Process Outsourcing (the new buzz word - not my creation!) is high-end. Again, the above issues are true even here. I know many call centres who are more profitable than so called KPOs; and, most of the work in so-called KPOs is actually limited to Internet searches and populating spreadsheets. Let me reiterate I am not deriding the potential of our fine young talented graduates, CAs, MBAs and doctors to do acturial valuations or read x-rays (which they are increasingly doing). But I argue with the fact that such categorisation actually demotivates people. There are hundreds of thousands of kids working in call centres, working nights, using globally cutting-edge technology and delivering world class services, and creating employment for workers in retail and real estate and security and housekeeping companies. Why should we categorise their efforts as low-end when they are contributing to the country?

Why are companies or countries innovative? There is considerable debate over whether innovation is supply led or demand led. I subscribe to the latter school of thought. Innovation flourishes when there is adversity. Some of the most successful businessmen in India trace their roots back to some of the most adverse climates in India (Marwaris from Rajasthan or Kutchis from Gujarat; not unlike the homeless Jews in the West.)

In every sector in India which has been opened up to competition, there has been innovation in product offerings, pricing, customer service (insurance, cellphone services and low-cost airlines, to name three recent ones). In sectors where there is little competition, innovation has been limited or non-existent (power supply?). There is little use in blaming supply side factors (academia-university interaction, R&D spend, venture funding, entrepreneurial culture) unless the macro-economic conditions improve and permit free competition (low tariffs, no regulatory barriers), this country is unlikely to be swept by a wave of innovation.

Is it any wonder that 8 of the world's 9 largest software product companies come from the US, arguably one of the most open markets of the world?

Higher Education in India - Reforms needed

2006-01-24T04:18:00.000-08:00

At the start of the twenty-first century, India still has to meet the basic needs and aspirations of its one billion people. Despite being one of the largest economies of the world, over one third of its population is facing poverty. It has been recognized that only by competing successfully in the globally interdependent world economy can living standards be raised. For such competitiveness, every sector of economy in India requires major restructuring to enhance effectiveness and efficiency through intensive and judicious use of science and technology. This will trigger increased productivity, which should lead to expanded opportunities for employment, and thus a better quality of life.

While India has one the world's largest stock of scientists, engineers and technicians, it has not derived full economic benefit from this skill base because of the mismatch and inadequacy of education and training and the limited employment capacity of the labor market. The main problems facing the higher science & technology (S&T) education system today are quite well known – over-centralization and lack of autonomy and accountability (most institutions have little authority even in the area of faculty appointments, student admissions, structure of programs and financial management) resource constraints and wastage (heavy subsidies, lack of resource sharing among institutions, high drop out rates); poor quality and relevance (outdated programs leading to skill shortages in various industries); difficulties in attracting and retaining high quality teaching professional (industry salaries are higher so many students get a job or go abroad for higher studies than enter teaching); poor technology and infrastructure support (limited use of IT, poor quality of libraries, non-existent laboratory facilities); limited access and regional disparity (the four southern states alone account for over 70 per cent of engineering seats in the country).

Despite all our hype of a knowledge superpower, we lag behind all global majors in practically every key area of scientific and technical education. We rank 56th in the world in terms of patents granted per million capita, 91st in the world in terms of gross tertiary enrolment, 27th in the world in terms of research spending, 55th in the world in terms of quality of math and science education, there is no Indian university in the global top 25 (while Beijing University is 15th) and so on.

The above mentioned critical issues need to be addressed urgently if the Indian S&T education system is to meet the aspirations of millions of young Indians for a better quality of life, with greater economic opportunities.

Is this likely to happen soon enough? Most of our policy makers and elected representatives are more interested in the issue of quotas and reservations, and preserving one of the most elaborate, arcane and Byzantine regulatory quagmire that any sector in India faces.

As in the industrial sector, we need a similar liberalisation in education and the field of higher education should be thrown open to private participation and deregulated. The government can propose minimum investment commitments to ensure that only serious, long-term players enter the business. The university must be obligated to file with a regulatory body, or a credit rating company, all the information that students and parents need to make an informed decision about which university to study in (fees, finances, infrastructure, faculty, placement etc). The government must experiment with the notion of Special Education Zones mooted by experts. Corporate entities can function here, attracting faculty and students from around the world, with fees based on market forces but with scholarships and subsidized loans for needy students.

It is time to rethink innovatively about the future of higher education in India. As Professor James Tooley says “My prediction is that innovation in education, if freed from the restraints of the state, will mean challenging the grossly inefficient and wasteful systems that governments have set in stone. Once this happens, education can be reclaimed from the "two tyrannies", the state and schooling. Free of the state, the educational market will be free to challenge the shibboleth of schooling.”

Internet governance & ICANN

2005-11-19T02:09:00.000-08:00

The debate over ICANN’s role and political oversight has already produced several years of increasing politicization of ICANN and its functions. Already, alternative root server systems such as ORSN in Europe have formed to provide a check on U.S. authority over the root zone. Most governments believe it is inconsistent for the US to warn of “government intervention” in the Internet while reserving to its own national government special and exclusive powers. The U.S. role is a provocation to other governments, encouraging them to seek equal sovereign rights in the oversight of ICANN.

I think it is time to frame the debate.

One of the destructive myths surrounding the current dialogue is that there is currently no political oversight over the Internet. In many countries, but especially the US, the debate on oversight has been framed as a clash between the option of an Internet free from government and an Internet that is “run by the United Nations.”

That is a false dichotomy, for two reasons. First, it confuses narrow Internet governance (overseeing ICANN) with broader oversight (“running the Internet”). Second, it ignores the fact that political oversight of ICANN exists, but is unilateral: a single government (the US) actively supervises ICANN.

Today there are no formal mechanisms for broad political oversight of Internet governance. Creating and implementing new institutions for these purposes, assuming that it is desirable, would require sweeping changes and long-term negotiations among the stakeholders of the Internet Governance Forum (IGF) announced at the recently concluded WSIS in Tunis.

ICANN’s governance, on the other hand, is a more manageable issue and needs to be addressed in the near term.

I believe that unilateral U.S. oversight on ICANN is troublesome and needs to be changed. But there are two very different ways to do this. One way is to bring more governments into the supervisory process. Here, the danger is that ICANN could end up as one more of the numerous UN talking shops.

Another way is to remove the U.S. government from the picture. In other words, one can de-nationalize ICANN and find ways of making it accountable that do not require traditional inter-governmental supervision.

The de-nationalization is probably a better option than internationalization. Moreover, the existing mechanisms of U.S. political oversight can be modified to move toward de-nationalization without threatening the effective operation or freedom of the Internet.

The US exercises control over ICANN through four primary methods, its MoU with ICANN, its IANA (Internet Assigned Numbers Authority) contract with ICANN, its authority over the DNS root and its contract with Verisign.

While agreeing that US is oversight is biased, non-transparent and bound by US executive branch policy objectives and does not reflect interests of other governments, I believe, given the constellation of political and legal forces, to expect the US to give up control over ICANN is unrealistic.

A realistic option has been recommended by the WSIS Civil Society Internet Governance Caucus which has been explored by Milton Mueller of the Internet Governance Project.

The MoU between the Department of Commerce and ICANN, which is set to expire in September 2006 and the US government, in active consultation with all international stakeholders, should insert a set of conditions into ICANN’s MoU (these could include multi-stakeholder Board participation, independent financial audit, process for extraordinary appeal, public policy requirements regarding privacy rights and trade rules) that would prepare it for release from U.S. oversight. Once the new conditions of the MoU were met, the MoU would be allowed to expire and would not be replaced with any specific governmental oversight organization. Accountability would rely instead on applicable law and on improvements in process and representation within the broader ICANN regime.

Once it was no longer combined with the power to guide and direct ICANN’s policies and management, U.S. policy authority over the root could become less important.

The WSIS should recognize this and focus more on bridging the digital divide rather than who ‘runs the internet’.

Mid-life crisis in infancy

2004-12-15T01:31:00.000-08:00

The Indian BPO industry is facing a crisis. What crisis? Demand is greater than supply, multinationals are setting up call centers - almost one every day -, existing centers are ramping up staff strength, every analyst and 'offshore consultant' advises leading Fortune 500 companies to offshore BPO to India, demand for real estate is sizzling hot, hotel rooms in every single large city in India are full for the next quarter, and the recruitment pages of newspapers are full of advertisements from almost every BPO company in India. Crisis?

In my opinion, yes, it is a crisis. For every boom creates the seeds of a bust precisely when it reaches full-blown proportions.

Even elementary analysis of industry structure points to an inexorable decline in margins. More importantly, the underlying trends, worryingly point to a high probability of a life-threatening incident that could affect the rapid growth, if not the very existence, of this nascent industry.

First, the industry has no bargaining power with customers. Almost every customers retains consultants (McKinsey, TPI, Gartner, et al) to negotiate deals with vendors in India. These intermediaries, armed with the most granular cost data of different firms, conduct reverse auctions to negotiate prices and insert extremely stringent clauses (performance, exit et al) in contracts. These contracts are being blindly signed by our leading BPO vendors (Indian and multinational), and of course, they pay steep insurance premia to cover their risk of non-performance.

Second, the industry has no bargaining power with suppliers, especially recruitment agencies, that provide manpower to this industry. There are literally hundreds of anecdotes about how there is rampant 'poaching' of employees, continuous upward spiral in salaries, 'not-the-best-of-breed' people practices, and growing attrition rates. Most large vendors interview literally hundreds of candidates every day and bemoan the fact that there are very few 'good men and women' around who are willing to work in this industry.

Third, the levels of competition are extremely high. This is unnatural in a nascent industry. which is nascent and yet emerging.

Indian BPO: Inflection Point

2004-02-20T21:31:00.000-08:00

ITES Industry: Is 2004 the inflection point?

NASSCOM projects that the Indian ITES exports will reach US$ 3.5 billion in 2003-04, and the industry is well on its way to reach the aspiration of US$ 21-24 billion by 2008-09. There is enormous customer interest – both captive and third party vendors are adding capacity – and the mood is upbeat.

A lot has been said about the potential of this industry to transform India – create 1.2 million direct jobs and 2.4-3.0 million indirect jobs; earn over US$ 50 billion in foreign exchange (via exports and FDI) over the next 5 years; and contribute billions of dollars to the exchequer through personal income taxes; and enable companies around the world to become globally competitive.

However, the industry is in danger of becoming like Japan in the late eighties, which hit its own internal limitations (bad credit, corporate greed and ostrich-like regulators) with disastrous consequences. The industry in India is faced with huge challenges – which if not tackled in the next 18 months – could well see a rapid decline in the heady growth rates.

The challenges are being masked by the rapid growth today – and worryingly, these are not even widely articulated. Some of these challenges are exogenous to the industry, and many have been self-created.

The story of attrition is well known – agent level attrition is 30-40%, poaching is widespread and agents have been known to ‘abandon’ their jobs with no notice. All players condemn this practice; few, if any, have the discipline to limit customer expectations of scaling up operations, and honour no-poaching agreements. These attrition levels are factored into costs and prices. What is less-known is the attrition at middle management and senior management levels which is far more detrimental to the company’s growth and cultural continuity.

The growth of the industry has been driven by affordable bandwidth availability. However, there are real issues around the corner. NASSCOM estimates suggest that demand will exceed supply in the next 12 months. New capacity by VSNL, and Reliance (via FLAG acquisition) will come onstream only after the second quarter of 2005. Bandwidth pricing is not yet on par with competing countries – prices for higher capacity pipes like DS3 and STM-1 are nearly 6-10 times higher than those in the Philippines, for instance. The advantage of lower personnel costs can be rapidly offset by uncompetitive bandwidth costs.

The story of Indian quality and productivity has been the growth driver for the industry. However, while there is enough evidence of productivity, there are not enough examples of better quality through process re-engineering. Most customers want to move the process offshore and immediately see lower costs. But the incremental cost reductions in the following years will be possible only if our companies can rejig the process. Unless there is a strong focus on process re-engineering and communicating the same to the customer, the offshore momentum is likely to be slow.

India’s large pool of English speaking graduates has been one of the pillars of growth for this industry and the figure of 2.1 million graduates every year is often touted as evidence for India’s dominance in this industry. Yet, how many of them really know anything about the ITES industry? Do our colleges teach customer relationship, or US GAAP or insurance claims processing or payroll management? This forces companies to invest into training employees and increase their costs. The growth is in real danger of slowing down unless we create a government-industry partnership to backend ITES skills into the formal education system.

Another looming threat is the unlimited liability clause in customer contracts which all vendors sign with impunity due to competitive pressures. If there is breach of contract, the vendor faces unlimited liability, which can wipe out the entire revenues of the company and threaten the very foundation of this industry in India. Most contracts are negotiated by sales people of the vendors who often do not even know how to begin to negotiate with an army of lawyers of giant corporations.

The quality story is potentially a ticking time bomb. Given the huge success of the industry in the backdrop of low or nil job creation in the developed countries, there is a strong backlash against the industry – both from politicians and disgruntled managers in customer companies. Every contract of the industry is under intense scrutiny – marginal incidents such as those of Dell and Lehman Brothers to transfer even a few processes back to the US are reported widely in the global media. If there is a major quality incident, there is bound to be widespread negative publicity, which could potentially harm the entire industry. In this context, companies have to perform adequate due diligence on all employees (background checks, for instance) and continually adhere to, if not upgrade, quality standards, data protection norms, information security practices and disaster recovery mechanisms.

Last, but not the least, the government has to have clarity in its tax policies. If the intent is to promote the industry and create jobs, the last thing we need is some bureaucrat putting in place ambiguous notifications on taxing the industry via the back door. Such incoherence deters investors and customers alike.

All of these challenges can be addressed – many by the industry, and some by the government. The industry needs to design and adhere to a code of conduct regarding hiring practices, salaries, and contractual agreements and pricing levels. The government needs to have a long-term plan for developing the infrastructure, upgrading education curricula, regulating bandwidth in line with global standards and adhering to existing tax regimes. Else, we will end up shooting ourselves in the foot; and the industry will be one more of the many — with unrealised potential for the good of the country.

Why the blame game has just begun

2003-10-11T21:43:00.000-07:00

The present US administration is fairly reminiscent of the one in the 1960s with its “guns and butter” policy. The economy was hurt by the end of the boom, there was the Vietnam War and the government was talking of the Great Society. Today, it is Iraq and huge federal deficits.

The “jobless” recovery continues and despite the data for September, I believe that the carnage on the jobs front has not yet run its course. Employment growth of 57,000 is a fraction of the hiring of 200,000-300,000 that we see in a typical cyclical recovery. In addition, 60 per cent of the gains in September were from temporary staffing.

In addition, the global labor arbitrage has just begun. In manufacturing, foreign-funded subsidiaries (from the West and Greater China) employ 6.75 million people in China, 4.5 times more than ten years ago. In India, the 650,000 new jobs have been created in services exports (IT and ITES sectors). These trends are inexorable and driven by maturation of offshore outsourcing platforms (manufacturing and increasingly services) and the dramatic growth in the internet and telecommunications. They will continue to retard job creation.

The body politic in Washington is now looking at scapegoats. The finger is pointed straight at China. Soon, it will be India.

China accounts for the largest portion of the US trade deficit – some $ 103 billion in 2002 and probably in excess of $ 120 billion in 2003. And 2.3 million manufacturing jobs have been lost, mostly to China since 2001.

However, China has two key advantages that might just enable it to avoid serious consequences.

China is not the real reason for US trade deficits. The real culprit is irresponsible fiscal policy in the US. Over the past three years, the governmental balance (federal, state and local) has shifted from a 3% surplus to a 4% deficit as a share of GNP. And of course, the latest round of tax cuts will make it worse.

Hence, think tanks and economists will point to the fact that China is financing the US (having bought upwards of $ 100 billion of US bonds) and is not responsible for the trade deficit. They will argue that the US needs to build up domestic savings in order to drive down the current account deficit, since for a saving-short US economy, the macro accounting identity virtually guarantees a massive trade deficit.

In addition, the US corporations have to protect their massive investments in China. According to Morgan Stanley, fully 65% of the tripling of Chinese exports over the past decade – from $ 121 billion in 1994 to $ 365 billion in mid-2003 – is traceable to the outsourcing dynamic of Chinese subsidiaries of multinational corporations and joint ventures.

Even while the China debate continues to rage, the spotlight will be on India.

Corporate America -- namely, US multinationals have turned to offshore outsourcing as a means of competitive survival. Low-cost sourcing expands domestic purchasing power. But in doing so, it poses a serious challenge to high-wage workforces of high-cost US producers -- not just in manufacturing industries but increasingly in the once sacrosanct services (non-tradable?) sector. Politicians will turn to “evil” corporations who will “sacrifice American jobs for profits”. For a body politic that refuses to accept its role in causing America’s massive trade deficits, this twist will not be surprising.

This will fan the political flames even more aided by increasingly organised, well-networked and e-mail friendly service sector employees.

If it was only trade deficit and China factor, there would be trade frictions. Throw in a jobless recovery, and the continued flight of high-paying services jobs, the political morphing is difficult to predict.

Cybercoolies?

2003-09-20T21:26:00.000-07:00

On a recent visit to one of India’s largest call centers, one listened in to an incoming call. The call was from a customer of one of USA’s largest media companies. The customer had called to complain about downloading their newest Internet browser. The call was answered by a 24 year old man. The call took 22 minutes to complete, with the young man cross-referring multiple databases, online technical manuals and taking notes and talking at the same time. He guided the customer (who was irate to begin with threatening to cancel subscription) through complicated instructions, real time, and ensured the browser worked perfectly. At the end of the call, the customer thanked the young man several times.

One visited another call center thereafter. It was a facility owned by one of the world’s largest electronic design automation company, which has semiconductor design companies as its clients. A young lady, with an M.Tech in hardware design, is answering a customer call, from a chip designer in California, fixing some glitches with the newest version of their software, all in real time.

And it goes on, thousands of calls every day, settling insurance claims, verifying credit history, diagnosing x-rays, solving hardware and software problems, serviced by bright, articulate, confident young Indians. These are call center employees.

And they are not alone. There are chartered accountants who write qualifying notes as per global accounting regulations. There are biology graduates who work on genome databases. There are actuaries who write up premia for health insurance. There are lawyers who cross-index judicial opinion. There are Ph.Ds working on the latest graphic chips and DSL modems. There are financial analysts who forecast stock prices. There are journalism graduates who edit newsletters for think tanks.

As businesses re-engineer processes to gain efficiencies and lower costs and improve speed to market, the distinction between software services and business processing services is getting blurred. Global names such as IBM, EDS, Accenture, Infosys, TCS, Wipro, Satyam, HCL Technologies, and Iflex offer not only world class systems integration and software development but also increasingly offer outsourcing services. A lot of it from India. And, in the process, they are creating jobs, adding to forex reserves, and making India globally competitive and Indians prosperous.

These jobs are in the hundreds of thousands, and growing. These talented professionals make an average salary which is 4 times more than the per capita income of the country and which is at least 50 to 100 per cent higher than what they would earn in other jobs, if they got one. Their working environment is far better than any comparable office, with the latest food courts, gyms, and equipment. They get more training in technology and business functions than most in corporate India. They are global in their outlook with more knowledge of countries and cultures than the average Indian.

And yes, they use a phone to do their job.