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labor arbitrage

Google Touts Programmers 10 Times More Productive | Sherpas in Blue Shirts

By | Blog, Digital Transformation

Are you looking to increase productivity at your company? Google believes that its engineers are 10 times more productive than a typical engineer or programmer. On its surface, that sounds astounding. Yet, Google believes this to be the case. Is it that the people Google hires are 10 times smarter? That doesn’t make sense. We know the distribution curve of IQ means there is no such thing as someone 10 times smarter. So, something else is going on here. What is it?

Let’s take Google’s claims at face value. Here’s how they make their claim a reality. Google hires smart people and then puts them into an environment with accelerators (such as cloud, automation, integration tools and agile product disciplines) that enable them to be 10 times more productive. The results are astounding both in impact and cost to operate.

Let’s compare this this impact to the other most important factor that shaped the market for the last 20 years: labor arbitrage. If you can move work offshore to a third-party service provider, they can pay workers between 20-60 percent of what is paid to onshore workers. After taking into consideration service provider profit margins and overhead, on an hourly cost comparison, this realizes savings of 20-30 percent. If we just compare the cost savings to Google’s claim of 10 times greater productivity, the benefits dwarf those of the arbitrage model.

Read more at my CIO Online blog

US Manufacturing | The Reshoring Is Real, The Jobs Are Not | In the News

By | In The News

As costs rise in developing countries, and automation eliminates the most mindless tasks, some manufacturing and service businesses are going home—but with greatly reduced labor needs.

A different equation pertains to reshoring decisions on white-collar work. Shipping is irrelevant when the product is database management or help-desk assistance. Wage growth has slowed with the growing supply of educated graduates in key outsource countries, says Michel Janssen, Dallas-based chief of research at consultant Everest Group. India’s university student population has more than doubled since 2008, to 25 million, dampening their elders’ pay demands. “We predicted that the labor arbitrage for service outsourcing would be finished by 2015–2020,” Janssen says. “Now we expect it to be there until 2040–2050.”

Read more in Global Finance 

No, India’s High Tech Labor Isn’t Leaving The U.S. For Bangalore | In the News

By | In The News

If Silicon Valley thought that crackdowns on immigration in the U.S. would mean their favorite foreign worker would be hightailing it back to Bangalore, they are wrong.

Over the next three to five years, India will need around 40% less people than they current need for their labor arbitrage-based work, meaning outsourcing, or moving tech related service jobs to where the service can be done cheaper. Second, the real software and digital tech talent usually needs to be located in IT India’s main markets, which are the U.S. and Europe. Third, IT India has “over-hired” entry level computer science graduates and have too many mid-level employees who need training for the digital worlds being created on the backs of new technology like blockchain and artificial intelligence. The result is the continual churn of India’s IT employee base back home, says Peter Bendor-Samuel, CEO of the Everest Group, a global consulting firm with its headquarters in Dallas.

In the early 2000s, industry analysts said India’s advantage as a source for cheap tech talent would end by 2020. The consensus was that as wages rise in the U.S., it might just be easier for the Indian firms to move some labor back home.

“There is no doubt that India is still a a highly attractive and viable option for low-cost labor…and it will likely remain so for another three decades,” Michel Janssen, Chief Researcher at Everest, said. They now think India remains a hub for low cost tech talent way out into the 2040s!

Read more in Forbes

Everest Group revises forecasts for BPO, ITO in India based on labor supply | In the News

By | In The News

In the early 2000’s, many analyst models predicted that the US labor arbitrage incentive for outsourcing work to India would have run out of steam by 2017, but Everest Group recently revised its forecast, saying that train may still be running strong in 25 to 30+ years.

“India is still  a highly attractive and viable option for low-cost labor, albeit not quite as good as it was 15 years ago, but still very compelling, and it will likely remain so for another three decades,” said Michel Janssen, chief research guru at Everest Group.

Read more in InfotechLead

Offshored Information Technology jobs may not return home | In the News

By | In The News

India’s standing as a labour arbitrage market could survive for the next three decades, IT consultancy Everest Group said, and that it was unlikely that previously offshored work would return to its home market.

In the early 2000s, industry analysts had said the labour arbitrage advantage would end by 2020. Analysts have also suggested that as wages rise in offshore centres, it might be feasible for the jobs to move back onshore.

“There is no doubt that India is still a highly attractive and viable option for low-cost labour, albeit not quite as good as it was 15 years ago, but still very compelling, and it will likely remain so for another three decades,” Michel Janssen, Chief Researcher at Everest, said.

Read more in The Economic Times

 

From Labor Arbitrage to Digital Arbitrage: Shareholder Value in the New IT World | Sherpas in Blue Shirts

By | Blog, Onshoring, Outsourcing

Recently, corporate developments, such as management changes, corporate governance, and investor activism across Indian IT service providers, have bombarded the investor community. Many investors perceive the initiatives taken by these companies to be a watershed moment in their histories.

Furthermore, with next generation automation, digital services, artificial intelligence (AI), and other disruptors creating massive, requisite, and unavoidable change in the IT services industry, investors and service providers are in increasingly opposing schools of thought. However, many of the investment firms we work with struggle to correlate these developments with their investments and returns.

Given the scale of the IT industry and the pace of disruption happening in the entire ecosystem, it’s valuable to take a few minutes to dissect and analyze the situation.

Growth vs. profitability equation – digital arbitrage vs. labor arbitrage

For the past two decades, Indian IT service providers have reported a stellar net profit margin in the range of 18-25 percent. The business grew on the investments made in human resources. The players achieved impressive returns primarily due to their grip on labor arbitrage. The investor community embraced the stocks, and experienced significant returns. For instance, an investment of US$350 in one of the top Indian IT service providers in 1992 would have yielded US$377,643 in 2015!

The emerging IT services model – driven by digital disruptors – gives little emphasis to labor arbitrage or the providers’ earlier factory model, and instead focuses on innovation and value creation for enterprises that extends far beyond greater efficiency. Not many IT service providers have demonstrated a mindset aligned to these new requirements. They are still hesitant to loosen their noose on profitability, as they set investor expectations very high with their earlier business model.

What is bothering investors?

Investment firms we work with believe that most disruptive technologies will drive lower profitability for Indian IT service providers likely in the 8-15 percent net profit range. They also believe that technology disruption will not allow the same level of offshoring as before, and will further erode profitability.

As most of the Indian IT service providers have zero debt and own huge piles of cash, investors think they should receive distributions in the form of dividends. Their demand is stronger when they learn the providers are going to invest in low-margin digital businesses, as they believe they will not receive the optimal reward they are due.

A twist

Believing that the market is undervaluing their stocks, IT service providers are planning share buybacks, spinning them as a way to reward shareholders. However, they actually plan to reduce tax leakages caused by dividend distribution, as Indian tax law stipulates they pay a 15 percent Dividend Distribution Tax (DDT) on dividends paid. Additionally, the share buybacks help them increase their control over the company.

What is the reality?

Both these opposing schools of thought fail to think in the long term.

Investors looking for dividends aren’t acknowledging Berkshire Hathaway’s theory of dividends. If a business can deliver promising returns in the long-run, dividends act as a negative catalyst for growth. In an attempt to pacify their investors, most of whom are technology novices, most Indian IT service companies are relabeling their old offerings as “digital.” Instead of dividends, investors need to ask IT service providers’ leadership tough questions on how they plan to use their large cash piles relative to their IP, platforms, acquisition, talent development, and client relationship strategies. How do they plan to differentiate in this crowded market? When large-scale offshore development centers fail to provide the needed competitive advantage, what does their armory contain to create shareholder value?

The way in which IT service providers are surrendering to investor pressures gives the impression that they are not willing to utilize their cash for digital technology investments. This in turn reinforces the popular opinion that Indian IT service providers are not confident enough to tide over the current transition. That some of the providers are distributing cash instead of putting the money in beneficial investments is making some market observers uncomfortable.

Furthermore, if the providers are not planning to distribute cash, they must ensure that they use the money for useful investments rather than just share buybacks. This is a win-win situation, as the providers get a boost to their topline and ability to endure the current business transition, and shareholders get maximized wealth in the long term. Net-net, firms that invest wisely are going to withstand the changeover, while those that use their cash piles to temporarily shut out investors are likely to witness a tough time.

Are these companies capable of implementing the business model?

As the adage goes, easier said than done. Although service providers are vocal about re-skilling employees opening onshore centers focused on digital services, the viability of these initiatives are questionable. The majority of these companies have amateur design thinking capabilities, and their DNA is around supplying people, not innovation and strategic partnerships. Indeed, in our recently published report “Customer (Dis) Satisfaction: Why Are Enterprises Unhappy with the Service Providers,” enterprises only gave providers a score of five out of 10 on their strategic partnering abilities.

Only time will tell whether service providers made the right move in distributing cash or investing in low-margin businesses.

A Cold War | In the News

By | In The News

Peter Bendor Samuel, CEO of Everest Group, a research firm, says the fight is about two competing visions of Infosys’s future. “Arbitrage-first or digital-first. Under the arbitrage-first vision of the founders, Infosys will consolidate its role as the leading labour arbitrage player.” The digital first vision of Sikka’s will ensure that Infosys will transform itself into a digital company in much the same way Accenture is driving its transformation. “Infosys will accelerate its investments in automation, analytics, cloud and cognitive technologies to build a new source of value for its customers,” says Samuel. Read more at Business Today

The Cognizant Dilemma | Sherpas in Blue Shirts

By | Blog

A very public debate has been taking place between Cognizant and Elliot Management Corp – the activist investor that bought a $1.4 billion stake in Cognizant a year ago. Effectively, Elliot has actively sought to alter the course Cognizant’s board has taken for dealing with the changing situation in the IT services industry. As the leading providers in the services industry have accumulated a lot of cash, investors say it makes sense that they should return extra earnings to the shareholders. Let’s look at both positions.

The Debate Essentially Focuses on a Tradeoff

The legacy labor arbitrage market is mature and services providers can no longer maintain their high margins. However, if they transform to digital business models, they have an opportunity to achieve the same or even better margins.

Which vision is the right strategy for their future? As I explained in my recent post, “The Infosys Dilemma,” Cognizant faces the same tradeoff situation currently causing a noisy debate among the founders, board, CEO, and activist investors at Infosys as to which vision is right.

Providers with a legacy arbitrage-based book of business have two options for growth strategies:

  1. Arbitrage-First Vision. In this strategy, providers use their profitability to invest in mergers/acquisitions, consolidating the industry and becoming even bigger in the arbitrage market. This strategy offsets the declining growth of this market. It also drives shareholder value by returning cash to shareholders through repurchased shares and increased dividends.
  2. Digital-First Vision. In this strategy, providers use their profitability to invest in transforming into digital companies with new opportunities to compete and grow in the future. This is the path Accenture has taken to drive growth. This strategy is higher risk and involves actively cannibalizing a provider’s existing arbitrage business. Further, it doesn’t allow returning cash to shareholders, as providers need to invest in digital transformation including aggressive mergers/acquisitions to quickly gain digital talent and business.

Cognizant initially chose the second path. But in December 2016, Elliot sent a letter to Cognizant’s board stating the company should be managed differently to achieve a higher stock price. It also stated the firm should return some of its cash to its shareholders by buying back stock. Its opinion was, and is, that the firm has a strong enough balance sheet to undertake both growth strategies but that it needs to increase its margins.

Therein lies the dilemma: there is a tradeoff between margins and growth. The inconvenient truth is digital is less profitable right now, so a digital-first strategy means giving up profitability.

Cognizant’s management agreed to change its position to come into conformance with Elliot’s open letter to its shareholders, agreeing to a substantial return of cash to shareholders and committing to improving its margins. Cognizant is well positioned to execute on both these commitments; however, it is also clear that these commitments add difficulty to executing a digital-first strategy.

The commitment to improve margins is particularly risky at a time when the market is facing increasing competitive intensity resulting in downward pressure on margins. Cognizant’s plans to increase profit margins and drive stock valuations up by emphasizing its arbitrage business will inevitably deemphasize a digital-first strategy, which requires a willingness to trade margins for digital growth.