Recession trickles to India’s tech industry

By J Kahn, New York Times

BANGALORE, India — After years of being blamed for job losses in America and elsewhere, India’s high-tech companies and outsourcing firms are going through a downturn of their own. The global slowdown is forcing them to reduce hiring, freeze salaries, postpone new investments and lay off thousands of software programmers and call center operators. While some industry insiders insist the global crisis will actually benefit companies here, as Western businesses seek to cut costs by moving jobs overseas, right now the sector is gripped by an unfamiliar sense of uncertainty.

“It’s certainly not irrational exuberance,” said Nandan Nilekani, co-chairman of Infosys, one of India’s best-known technology outsourcing firms. “There is a lot of introspection about what does this mean and when does it end.”

The downturn is exposing a deeper concern: India has become the world’s front office, handling customer service calls, and its back office, helping to process payments and run accounting and other computer systems. But it has not yet become the head office — making major new products, pioneering marketing techniques or helping to shape corporate strategy.

Rather than drowning American technology firms or work forces with a vast supply of cheap engineering talent, as some had feared, India — and Bangalore, its Silicon Valley — have continued to largely serve as the information economy’s version of manual labor.

“Historically, when it comes to innovation, Indian companies are relatively weak compared to the IBM’s and Accentures of the world,” said Partha Iyengar, the head of research in India for the Gartner Group, which analyzes trends in the tech sector. “It has been their chronic Achilles’ heel.”

Last week’s coordinated terrorist attacks killed hundreds and brought Mumbai, India’s commercial capital, to a virtual halt. But long before that brutal shock, the country had been suffering the effects of the global slump, losing capital as Western investors fled to the security of American Treasuries, undermining Indian banks and company balance sheets.

Infosys recently scaled back its earnings projections for the year, telling investors that it now expects revenue to expand 13 to 15 percent, instead of the 19 to 21 percent it had forecast and far below the 30 percent annual expansion the company had been used to.

Like many of India’s outsourcing companies, Infosys is heavily dependent on the financial sector, deriving a third of its revenue from banks like Citigroup and Bank of America and other financial clients. Its fate is also closely tied to the American economy: two-thirds of its business comes from the United States. Neither factor bodes well for the company’s prospects.

Technology Partners International, a consulting firm that publishes a widely watched index of global outsourcing deals, says its index is at a 10-year low. “People think that outsourcing is a recessionproof industry. It is not,” said Siddharth Pai, a partner at the firm.

That realization has changed the boomtown atmosphere of this city. Young workers still flock to a rooftop terrace on Residency Road every Wednesday night to grind to house and hip-hop music. But lately, the crowds at NYKS, an upscale nightclub, are a little thinner. They drink a little bit less. They talk a little less loudly. “Now they are thinking twice before spending money,” said Supreeth Chandrasekhar, a 25-year-old disc jockey at NYKS.

Chandrasekhar also said that he used to perform at numerous corporate events but that this business had largely disappeared.

In a country where most marriages are arranged by parents, the downturn has even taken a toll on the matrimonial prospects of those in technology outsourcing. “Because there is no job guarantees for IT people, for the last six months brides’ families have not been accepting grooms from this background,” said Jagadeesh Angadi, a matchmaker in Bangalore.

The Indian National Association of Software and Service Companies estimates that the country’s technology sector will create 50,000 fewer jobs in 2008 than last year, although it predicts the sector will still have added 200,000 workers by year’s end. India’s technology outsourcing companies have laid off about 10,000 employees since September, according to the Union for Information Technology Enabled Services, a labor group that represents technology workers.

Among the major players that have announced significant cutbacks in hiring is Satyam Computer Services, which slashed its recruitment plans to fewer than 10,000 from 15,000. Infosys, by contrast, has almost $2 billion in cash on its balance sheet, a significant amount that can help it weather the downturn. It said it intended to follow through on plans to hire 25,000 workers this year.

“We made offers to people, and we need to stand by them,” Nilekani of Infosys said. But some companies that have hired recruits are postponing their start dates. The deferrals allow companies, which once hired in anticipation of future business, to better manage overhead by adding staff only when they have confirmed projects.

A few so-called captive outsourcing operations — those that serve only their parent company in Europe or the United States — have also cut back. American Express laid off some 200 of its 6,000 workers in India, and Goldman Sachs announced last month that it would dismiss a similar number, or about 10 percent of its Indian work force.

Still, for the moment, the industry has escaped large-scale job losses. Indian labor laws make it difficult for companies to drop workers, and mass firings can draw a political outcry. But outsourcing companies have begun pruning workers, citing poor job performance, a way to quietly reduce labor costs without attracting much public scrutiny.

The large outsourcing company Wipro dismissed 2.5 percent of its work force in the second quarter. Outsourcing companies are also shelving expansion plans. Wipro, for instance, announced it was postponing the opening of a major new software development center in Atlanta.

But India’s business leaders see opportunity in the downturn. “Once things settle down, people will start looking at their business operations and how to make them more efficient, and that is where we play,” Nilekani said.

Even consolidation on Wall Street, which may eliminate some Indian companies’ clients, could help Indian workers, outsourcing executives say. Mergers require technical skills to integrate disparate systems, and there is a potential for profitable outsourcing work in areas like regulatory compliance. Banks are likely to be under stricter government scrutiny given the sense that lax oversight contributed to the financial crisis.

Raman Roy, chairman of Quatrro BPO Solutions, an outsourcing firm based in New Delhi, says he has 300 employees reviewing legal documents as part of bank mergers. Copal Partners, a company that uses employees in India to help investment banks do the sort of deal-based research normally performed by the bank’s junior analysts, has continued to expand even during the downturn.

Critics say that will not change the local industry’s basic competitive disadvantage: a creativity gap with Western competitors. Indian technology companies are too focused on increasing the efficiency of their internal systems, not improving their clients’ own industry-specific processes, according to Navi Radjou, an analyst with Forrester Research. “They are having trouble tailoring a technical application to a particular business need,” he said.

But India’s biggest tech outsourcing companies want to do as much as their European and American rivals, including expanding in Europe and the United States. And the downturn may allow them to acquire talent — and even whole businesses — on the cheap. In August, for example, Infosys acquired the British consulting firm Axon for $753 million. Wipro is said to be shopping for a similar acquisition.

The changes may come too late for workers like Vikram Hathwar.

In July, Hathwar, a 22-year-old engineer, graduated from a technical college with a job offer from a software developer. But instead of starting his job — paying nearly $6,000 a year, a good starting salary in this country — Hathwar has been waiting in vain for a letter from the company telling him when to report for work.

“I called them and they said they would be calling two or three months later, but still they have not informed me anything about when I should start,” Hathwar said.

In the meantime, he has begun looking for a temporary job. But he said most tech businesses are no longer hiring recent graduates. The few that are have begun asking applicants to intern for several months without pay and with no guarantee of a permanent position. “The recession has made for all these pressures on us,” Hathwar said. “It is very confusing to know what to do.”