If only India’s IT companies could focus on real transformation instead of appeasing Trump

Has the penny dropped?
Has the penny dropped?
Image: AP Photo/Michael Conroy
We may earn a commission from links on this page.

On May 02, Infosys, India’s second largest information technology (IT) company, announced that it will hire 10,000 American workers over the next two years. Three days later, on May 05, Nasdaq-listed Cognizant Technology Solutions, which has a large presence in India, also revealed plans to significantly ramp up hiring in the US.

The companies spun these moves as part of the re-engineering underway at India’s IT sector—a decisive shift away from the traditional back-office services to more higher-end technology work.

Infosys CEO Vishal Sikka explained that his company was hoping to “help invent and deliver the digital futures for our clients in the United States.” Cognizant president Rajeev Mehta maintained a similar line. “We are shifting our workforce largely in response to clients’ increasing need for co-innovation,” he said.

But it’s hard to miss the timing.

Pivot vs. PR

Although Indian tech giants have been bracing for rising protectionism, the Donald Trump administration’s push to tighten immigration—particularly the H-1B visa regime—has really set the wheels in motion for these companies to pivot away from the traditional outsourcing model that the industry was built on.

“It is a chance for Indian software companies to change the model,” Anand Mahindra, chairman of Tech Mahindra, India’s fifth-largest IT outsourcing company, told the Wall Street Journal.

Effectively, the well-worn playbook of shipping cheap Indian engineers to the US for helping with lower-end services like application maintenance and remote infrastructure management must change. Indian IT companies need to move up the value chain and corner key services  that will drive a client’s revenue and customer experience, according to Sudin Apte, CEO and research director of Offshore Insights, an advisory and research firm.

“It (the shift) was required, but in the last two years, nothing much happened,” said Apte. “Now, because of the Trump administration, the process has got accelerated.”

So, Indian IT giants now must considerably increase local hiring in the US and build an onshore delivery structure that will work for local clients. ”As the focus shifts from back-office to client facing functions, you need a very different set of domain experts,” Apte added. “So, people who have experience of US banking, people who have experience of US healthcare and so forth.”

This local workforce will be different from the legions of Indian engineers on H-1B visas as the latter are sometimes locked into a specific project for a single end-client. “So these kinds of recruitment will have to be done locally, it can’t be L1, it can’t be H-1B,” said Apte. “You can’t do digital and transformational projects with a traditional onshore-offshore model.”

Proximity, for instance, is increasingly becoming a key factor. After years of serving clients from afar and/or with small local teams, companies like Infosys are now changing tack. “We polled our customers and a lot of our newest locations require a lot of presence,” Infosys president Ravi Kumar S told the New York Times. “This year, we are taking it to scale.”

Yet, skeptics feel this is more a public relations (PR) effort.

“The number that Infosys talks about (hiring) in a short period does seem like an acceleration and even Cognizant, kind of, talks about those numbers,” said Partha Iyengar, Gartner’s head of research in India. “But in the grand scheme of things, I think, those are more PR-centric, protectionism-centric actions or announcements, and I don’t think they fundamentally change the situation on the ground.”

Talent trouble

Even if Indian IT firms go ahead, building these new onshore teams will not be easy—or particularly cheap.

For one, finding talent will be tricky. “If you look at the unemployment rate in the US for IT, or broadly technology, it’s already beyond full employment,” Iyengar said. “And at that level, even (for) the local US companies, the biggest challenge they face is access to skills.”

As more as more US students more away for the STEM courses, Iyenger said, there isn’t enough local talent that Indian IT firms can easily tap into. This is quite unlike in India where some 1.5 million engineering graduates line up to join the workforce every year. “It’s a known that there is no way they (Indian IT firms) can mimic or reproduce the kind of hiring they can do in India in the US,” he added.

Moreover, if and when they do end up attracting talent, Indian IT companies may have to pay through their nose for it. “Those skills and expertise will be very expensive. They will end up getting a lot of college kids, who they will end up spending a lot on training,” said Sanchit Gogia, chief analyst and CEO of Greyhound Research. “So, in fact, the cost of operation will increase.”

In an analyst call on May 05, Cognizant insisted that ramping up local hiring may not necessarily cost more. “On a like-on-like basis, if we’re hiring the same skills with a local worker versus somebody who comes over on a visa, there really isn’t significant difference in the cost structure by the time you factor in the cost of the wages, the relocation, et cetera, versus the compensation that we’re paying,” said Karen McLoughlin, Cognizant’s chief financial officer.

Still, Gogia reckons that the increase in the cost and complexity of doing business will shave between 5% and 10% off the margins, year on year, for Indian IT companies. It’s hardly propitious timing, given that India’s three biggest IT companies are lagging average industry growth, and haven’t quite been able to deliver on expectations.

Gogia’s bigger concern, however, is that Infosys’s pledge to hire a certain number of US workers could eventually corner other companies in other key geographies. “Committing a number was not the right thing to do in my humble opinion,” he explained. “Because today they’ve done this in the US, tomorrow it’ll be the EU and then it’ll be Australia. And it’ll also add pressure on their peers like TCS, Wipro, and Tech Mahindra, who will be expected to follow suit.”

“Apple comes to India and says we’re going to invest $3 billion,” said Gogia, offering a corollary. “They never say we’re going to hire 50,000 people.”