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December - 2008 - issue > Slowdown Impact
Those with faith in the India model will benefit from the downturn
Sharad Sharma
Thursday, December 4, 2008
At the very onset, let me say that I do not have the complete answer as to the impact of the global economic downturn on the IT industry in India. I will, however, share what I see around me.

Broadly, three things are happening, and all at the same time: some companies that had no or very limited presences in India are coming into the country in a major way; yet others are scaling up their operations, and yet others are re-looking their India policy.

In the past few days, teams of senior people from companies with virtually no presence in India whatsoever have met me and my colleagues. These companies are actively looking at setting up operations here, faced by the downturn and increasing squeeze back in the US.

Then there are traditional players, like Texas Instruments and Yahoo, with a proven India model. These are companies that swear by the efficacy and sustainability of the India model and are scaling up, despite the downturn.

I think out of 40 odd captives in the country, only around 10 will be looking at scaling up long-term. For captives to scale, they must have success stories to talk about to their parent companies and convince the latter to route more work here. But few captive centres actually have such stories.

Thirdly, there are in-the-middle companies—ones that have been in India for some time, but not long enough to cultivate a belief in the model that experienced players like TI and Yahoo possess. And at the same time, on account of their having been present here, they do not have the enthusiasm that companies coming in afresh, like Myspace spoken about earlier, possess.

So, essentially, it is these middle guys who are scaling down, or not hiring at all. There are some companies in this bracket that have had a very limited presence in India, one that did not yield much success and are now considering moving back.

Captives & OPD firms
I strongly feel that OPD 2.0 firms, ones that offer a risk-reward model, will actually be able to reap benefits from the downturn. They must approach big companies in the US that are now facing the heat, and say, “let us do it; if it doesn’t work, my skin is on the line”. OPD firms that are able to offer the risk-reward model, as against the fixed cost one, will bring in new business.

The OPD space was, anyway, witnessing a gradual shift towards a risk-reward model, and the downturn will bring it on much faster. Companies like HCL have already put the model into practice, while others are still edgy about it.

The best part about the model is that companies which outsource work no longer need think about whether the India model will work; it is not their headache, but that of the OPD firm.

An interesting development, or impact of the economic crisis, is that some companies are scaling back their operations in India. Let me point out here what I mean by scaling back.

When things were stable, companies were adding R&D headcount here as well as in the US. As the situation started getting bad, companies froze hiring in the US, and added some numbers in India. Now, with the crisis at its current level, companies are looking at cutting jobs in the US; yet since work must be done, they need add people somewhere, and some companies are thinking hard as to whether this should be India any longer.

A lot of this has to do with the fact that India no longer offers the cost benefit that it once did. Also, with the imminent change of guard in the US, the atmosphere is politically charged. Companies are wary of moving their business to India, given the Democratic viewpoint against outsourcing.

However, some companies, like Cisco, that continue to scale up will do so even if the cost becomes similar to the US. For them, more than the cost, it is the proximity to the market and the innovation that emerges from India that matters.

The downturn, of course, has forced many Indians in the US to consider returning. I think such people should ideally join startups once they’re back, since India as a market offers great opportunity and IT is still very much under-served in this market. If they happen to join an captive R&D centers or OPD firm, they must join a product that is not half way to the graveyard. For, if the crisis is as bad as is feared, companies in the US, essentially clients of OPD firms, will look at rationalising their product portfolio, and the willingness to carry on with dead products will be very less.

The author is CEO, Yahoo! India

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