Next Big Thing In Indian IT Industry: Build, Buy Or ‘Borrow’?
Posted in Operations & IT Articles, Total Reads: 3134
, Published on 05 September 2012
The Information Technology Services Sector has consistently been one of the fastest growing Industry Sector of the Indian economy. The Information Technology (IT) companies which started their services with ‘Only Transactional Work’ have evolved into end-to-end service providers providing a mix ‘transactional and transformational’ work.
This changed business environment has reemphasized the importance of ‘human resource’ which continues to be the most critical factor for IT Companies; providing a competitive edge over competitors. Taking recognizance of the evolving operating environment, spending on Training & Development by major IT companies has continued to remain very high as compared to other industries. The high spending on up-skilling the workforce is also reflected in the fact that the bench strength and quality has improved over the years.
However, time and again several HR managers from IT companies foresee the problem of talent crunch. Given the success of Training & Development function and the large supply of engineers being pumped into the market, it is ironic that large IT players continue to fight for the ‘limited’ talent pool. This article aims to explain this paradox and also how IT companies are combating the same.
Supply Side Perspective
The different service being rendered by IT companies can be classified into diverse practices ranging from traditional Application Development & Maintenance to Enterprise Package Implementation, Data Warehousing, Business Process Management, Remote Infrastructure Management, Enterprise Content Management, etc.
The availability of talent with the requisite skills (where skill is being defined in terms of sufficient proficiency in a particular technology or platform) varies across each practice area. The primary reason being the availability of courses or trainings offered by various institutions ranging from Government run institutions like C-DAC, IGNOU; Educational Institutions like Engineering Colleges and private players like NIIT, Aptech, etc. offering programs for both individuals and corporate clients.
Based on the availability of courses, the practice areas can be demarcated into broad skill practice area (courses on which are easily available across the aforementioned institutions) like Application Development and niche skill practice area like Enterprise Resource Planning (ERP) (courses on which are offered only by private players to large corporate clients alone).
This difference in supply side can also be gauged by using LinkedIn database by using the skill as the search string. The number of LinkedIn profiles in India for a broad skill eg. Java, C++, etc. belonging to Application Development practice typically exceeds 20,000 while the same for niche skill like Pega, Tibco,etc. belonging to Business Process Management practice is less than 5,000 (May 2012).
Further analyzing the results from LinkedIn, it appears that at least 3 years of experience is typically required before being provided an opportunity to work on niche skills. In contrast, the broad skills (e.g. Application Development) are part of the basic modules of training in almost all the major IT companies. Thus, such distortion in supply side dynamics explains why scarcity and abundance co-exists in the industry.
Why not Build or Buy?
The natural question now arises: If there is a shortage of skills in some practice areas why can not the IT majors like Infosys, TCS, and Accenture which have a very strong Training & Development function build a talent pipeline in niche skills? The answer to this question can be traced by understanding the traditional approaches employed by IT companies.
Traditionally IT companies had one of the following approach for sourcing IT skills - ‘buy’, ‘borrow’ or a combination of both. However, they have realized that these approaches have their own limitations, build approach takes longer time especially when it comes to niche skills, while buy approach is typically a zero sum game and inflates salaries in the market. This problem gets accentuated when dealing with niche skills as uncertainty of winning contracts requiring niche skills in short run again is much higher as compared to a traditional broad skill. Thus the probability of recovering investments made on training is significantly low.
Advantage of ‘Borrow’
So how are the IT companies tackling the skill shortage in niche skills?
The IT companies have reinvented the business model and have started embracing the concept of borrowing skills by hiring a contingent workforce. As per the ‘Borrow operating model’, IT companies when requiring people with niche skill send a request to a sub-contracting company which in turn releases resource for the IT company. This resource works for the IT Company and can be released upon completion of the project. Thus, such a model has major advantages which are:
a) Avoids wage inflation: As this approach creates a pool of talent for the entire industry, poaching of talent goes down, thus avoiding the spiral of wage inflation.
b) Avoids rapid skill obsolescence: As technology changes at a fast pace, the skill inventory in the organization needs to be revised at regular periods. However, with this approach the onus of up-skilling the workforce shifts to the sub-contractor who in order to remain competitive upgrades the skill of its work-force.
c) Improves utilization rate: Utilization rate is an important parameter in industry. This gets affected adversely by higher time spent on training activities. With this approach, the work-force being made available is already equipped with sufficient proficiency in the skill and thus requires less training and thereby improving utilization rate.
d) Overcoming Visa issues: Visa restriction especially in US market has been a major bone of contention for IT majors. This can be avoided by employing contingent work-force which finds it easier to get a visa.
The ‘Borrowing’ approach in the industry is on the rise. This can be gauged from the fact that spending on sun-contracting by IT majors in India has been increasing over the past few years. The following graph depicts the same.
The trends can also be seen from Job sites like Monster India, Naukri, Shine & Times Jobs where the major recruiters for niche skills are not the IT majors rather IT sub-contractors like Magna Infotech, Team Lease and Collabera Solutions, etc.
Problem with ‘Borrow’
There exists a potential problem with the ‘Borrow’ approach. The IT companies’ clients may have concerns regarding the concept of hiring a contingent work-force which while executing the project may be exposed to highly confidential client data. This issue has been raised by a few clients especially in banking and government segment.
Although there may be some concerns regarding the ‘borrow’ approach, the business case for it has given HR managers in IT companies some food for thought. There is a compelling need to explore the approach as a ‘mainstream sourcing approach’ in the future. As for tackling the current issues of data confidentiality, IT companies may develop appropriate Service level agreements with sub-contractors and clients to fully leverage the option of ‘Borrowing’.
This article has been authored by Ayush Rai from MDI Gurgaon.