Tax Impact on India Heritage IT / ITES Provider Revenues

Over the last couple of years, there has been a considerable brouhaha about the Indian Government doing away with the tax SOPs for the IT & ITES industry. But. the actual impact on of the STPI scheme going away is about 7% of revenue though the worst case scenario calculation tends to put it around 13-15%. Here's how. Give or take a few % points, for every $1 earned by India Heritage players they spend about 30 cents on wages and 25 cents on infrastructure & other fixed costs thus getting an EBIDTA of about 45 cents or there about. Currently there is a Minimum Alternate Tax of 11% applicable on these earnings – so about 5 cents go towards tax and accounting for the other expenses the operating margin is about 23 cents (23%). The change in STPI scheme means two things as far as I can understand. There could be some 11% tax applicable on some of the non-wage costs. In the worst case scenario this means that Indian Heritage players would spend an extra 3 cents on the 25 cents towards on Infra & other fixed costs. More importantly the companies need to pay 35% tax on their profit from export revenues. Using the reduced EBIDTA of 42 cents as a basis (for worst case scenario) that is an additional 10 cents paid in taxes. So in the worst case scenario the operating margin is reduced to 10 cents (23-3-10) - a reduction of 13%. In reality, this impact is expected to be the much lower 6-7% given that even now, the companies service India market, deliver from SEZs (tax holiday for 10 yr beyond inception) etc. There are multiple ways to look at even this impact. For one, the reduced operating margin of 16-17% for Indian Heritage players would still be about twice the margin of the established global players. So while the share-holders may not like it, they still can swallow the hit. On the other hand Indian Heritage players, still operate at lower blended average hourly rates than most Global players. Even if they bump up the rates by 6-7%, the blended rates of Indian players would continue to be lower than the blended rates of the global players. Furthermore, traditionally Indian players have focused relatively less on reusability and automation than Global players. The margin pressures both in terms of taxes and wage inflation is driving and will continue to drive Indian players to rely less on tapping the vast pool of inexpensive programmers / operators and start automating / reusing components to a greater extent. Finally, the Indian Government may relent and extend the tax scheme as others have pointed out. Or maybe they will implement the suggestion made during the Nasscom leader-ship summit by one very vocal proponent of Indian BPO industry – take away the STPI benefits from the Indian IT providers / revenue but continue providing this benefit to the Indian ITES industry / revenue. After-all the Indian IT industry has existed for 30 odd years while the ITES industry is still a baby at 10 odd years. This post inspired by Phil Fersht's write-up on How severely will the expiration of India's STPI tax scheme impact the Indian outsourcing industry?

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Building a Partnership with the ITES Provider

Building a partnership with a service provider requires extensive investments of time and management / planning effort on the customers part. It is no doubt possible for a buyer to continue demonstrating success in a model where the buyer is responsible for strategic & tactical management while provider is responsible for operations. While not the most healthy relationship - it is sustainable, or at least sustainable until external forces do not cause either the buyer or provider to change their business model. A more healthy relationship is a partnership approach, but this requires nurturing. It might however, be possible to couple the goals of the service provider with that of the buyer with somewhat lesser investment. Most mature buyers today hold annual IT planning summits where all their service providers are invited. The unit CIOs present their IT roadmap (and budgets) and the providers showcase capabilities and share best-practices. Among other things, this allows the buyers to benefit from the providers learning best practices from each other. Additionally, the providers make suggestions to improve the IT roadmap as they bid for components there-of. Unfortunately, given the longer term engagements in ITES / BPO - these annual summits by buyers may not apply. This actually moves the responsibly of conducting such summits to the service providers. No doubt the service providers have their own mechanisms to internalize and cross-share with other customers, the best practices that they discover with one customer. However, its possible to gain additional buy in to implement such best practices if the provider conducts a summit for all customers and perhaps for prospects. While the service provider contributes in terms of bringing in best practices - its for the buyer to share his plans & problem statements with the provider. It is the responsibility of the Contract Manager or the Sourcing Manager to mandate half-yearly / annual business review meetings requiring participation from the buyer CxO and the provider leadership & consulting team. It should be possible in such meetings to share strategic issues & imperatives - with the provider sharing their experience of resolving such issues. A few such business review meetings later -- there is automatically sufficient trust established at the management level to work in a win-win partnership mode rather than a provider-vendor mode. This post inspired by Phil Fersht's write-up on Is your outsourcing vendor really your partner?

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Organization Transformation - Does IT & Process Transformation need to be coupled?

In there attempts to be competitive, organizations continue to re-invent themselves. This transformation involves organizational changes as well as IT changes to support the organization change. The million dollar question is as to whether these two need to happen together or if they can be (and should be) decoupled. While coupling the IT initiative with an initiative to change the Organization could be an issue, more often than not the issue is the difference in priorities that the IT (CIOs) and Business has (COO). Having said that, it may not always be possible to de-couple the IT Initiatives from Organizational changes. A typical organization transformation project would involve process rationalization & process standardization. While it is possible to take baby steps towards rationalization & standardization without significant changes to the technology environment - it is easier to roll-out improvements / re-engineered processes if the various units / geographies are on a rationalized application system environment. The challenge in decoupling system rationalization from process rationalization and doing them sequentially is the length of time such a project might take. By the time you finish such a project - either the technology is obsolete or the business process no longer offers any unique advantage over competition. I am not advising a Big Bang transformation though. That typically ends up being more than one can chew - and a classic disaster. I do recommend dividing projects in phases based on functional / geographical areas rather than separating the business and IT changes. To ensure that the business users do not reject change - its important that they be involved through-out the life-cycle of the project. There are various means & methodologies to do so -- either use the 'agile techniques' or something like the Conference Room Pilots that the traditional ERP implementations had. The challenges are Define and finalize a scope that ensures short cycle time. Avoid scope creep. Ensure that all geographical / business unit are represented and deviations are accounted for -- else this becomes a never ending cycle Ensure representation from all levels of the organization. There could be a difference of opinion in the business operations team & the management team Most of these things are off course easier said than done. But if one addresses these issues - it is possible to undertake a successful transformation without feeling the need to decouple IT & Business Process change. The challenge is slightly different for an Organization that has standardized / rationalized its core applications and core processes. In such situations, the business typically seeks incremental improvements to help make better decisions. There are two types of challenges one sees in this environment The IT focuses only on "Keeping the lights on" and has no man-power / budget allocation to undertake the business initiatives The IT insists on 'standard' application set with its sweet implementation cycle instead of the quick & dirty utilities that the business demands. The business might be happy working on incremental VBA utilities but the IT wants its ESB & SOA and may-be a standardized ETL connecting to a data-mart in the central data-warehouse. It is in scenarios such as this - that the business demands should be decoupled from IT strategy. It might help to let the business have their quick & dirty utilities - thus allowing them to respond to the market sittuations in an agile fashion, so long as there is a defined plan to roll back these utilities into the standard environment.

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Critical Chain Project Management

Critical Chain Project Management (CCPM) is the application of Dr. Goldratt's Theory of Constraints to Project Management. It essentially believes in factoring resource availability constraints in addition to the elapsed time requirements (only) factored in by Critical Path I have put together here a compilation of slides detailing out CCPM - mostly plagiarized Presentation moved to Slideshare in May 2007

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OOP Criticism

I started off Professional Programming using the Procedural Paradigm (Algol) gradually moving to Component Oriented Paradigm using the highly efficient Unisys Linc - basically my path never crossing the much touted OOP paradigm before I gave up programming to become a manager. And boy, ain't I happy about that. As to why happy, somebody else has put that beautifully on this site OOP Criticism Additional Reading Don't fear OOP OOP, Better in Theory than Practice Nuts to OOP

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Offshoring, Impact on US Jobs & Economy - Part IV

This entry is part 4 of my rants on this subject. The previous rants can be found last week. Offshoring hurts – but is not offshoring an option? There have been talks about laws that would make it difficult (if not completely stop) companies from global sourcing jobs. But then who was it who said – every action has an equal and opposite reaction (albeit in a different context)? Two potential outcomes of preventing relocation – Prices in the USA go up as the cost of production goes up. Other Countries Stop Importing Goods/Services from the USA as a measure of retaliation. For instance the state of Indiana recently cancelled a contract awarded to an Indian company. The Indian company bid for $15.2 million and the next bid was $8 million higher. Though retaining the contract in the USA will no doubt increase the jobs in USA – but it will also mean that (at least) $8 million of tax payers money that could have been used from some other development will now be used up in this venture. This was a government initiative. A similar increase in the cost of initiative by a private concern would mean that the concern would either can the project or pass on the costs to the customer thus increasing the cost of goods. Depending upon circumstances this might eventually wipe out the company. For instance US car manufacturers did have trouble facing the onslaught of cheap Asian cars until they started manufacturing across the world. Now consider a couple of other scenarios – The USA imports 61% of its oil requirements. If the oil selling countries stop dealing with the USA (no doubt at a peril to themselves) – the prices of oil would quickly go up impacting the USA economy. IBM was not allowed to sell directly or employ directly in India till early 90s but Indian has been a big growth area for IBM since it reopened shop here. For instance for the fiscal year ending Mar 2003 revenues from India, though a meagre 0.5% of IBM's global revenues, grew at approx 16%over previous fiscal as compared to the CAGR of barely 2.5% that IBM has had in its global revenues between 1989-2003. If India closed its economy again – this opportunity will suddenly vanish. All in all, to paraphrase John Donne – No country is an island, entire of itself every country is a piece of the global economy.

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Offshoring, Impact on US Jobs & Economy - Part III

This entry is part 3 of my rants on this subject. The previous rants can be found at http://shyk.blogspot.com/2004/11/offshoring-impact-on-us-jobs-economy.html http://shyk.blogspot.com/2004/11/offshoring-impact-on-us-jobs-economy_10.html The statistics quoted (see last post) indicate that net job loss is zero. However that does not take away the fact that as there is increasing global sourcing; certain job profiles would get relocated. Off course laws can be made to make it difficult or impossible for companies to relocate jobs. Since that is something I would like to cover in my next post – let’s talk about what can be done if job relocation continues to happen. As an individual or rather as a group of employees – the one way to stop jobs from going to somebody else would be to convince the employer that hiring somebody else is not a good economic proposition. Typical offshore rates work out to around $25/hr or $4000/month. Perhaps that is peanuts compared to what peers in USA earn – but to me, offering to work at that salary (in the USA, mid-west) sounds like a good option when compared to NOT having a job. Throw in a few sentences about your experience/skills and the savings in terms of management effort and perhaps one can work out a deal with the employer. The concept of farm-shoring is something similar. And though monetary considerations probably make the biggest impact on the employers decision, skills and availability there of also have an impact. Retooling or acquiring skills to move on to the roles below can also help in retaining jobs (albeit with a new job description Moving on to roles up the value chain – Business Consultant, Project Managers, Solution Architect et al that require proximity to the end user and hence cannot be outsourced. Picking up new skills/new technologies such as data warehousing, ERP et al. Relocating to a less expensive area in the USA where jobs are available. Perhaps if Jingoistic politicians and community leaders stopped to think and helped the unemployed move into new roles – there would be far lesser angst all around. Additional Reading http://computerworld.com/managementtopics/outsourcing/story/0,10801,96381,00.html http://techrepublic.com.com/5100-6228_11-5210485.html?tag=crm

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Offshoring, Impact on US Jobs & Economy - Part II

This entry is part 2 of my rants on this subject. The part 1 can be found at http://shyk.blogspot.com/2004/11/impact-of-offshoring-it-jobs-on-us.html ... The numbers say that approx 2% of IT Spending will be/was diverted to Offshore. Does that really reconcile with what we “know” – Every one of us knows somebody who has lost a job or may be one of us has lost his/her job. Is the 2% really a BS then? Not really – for we do not account for the fact that Y2K and the dot com boom substantially increased the jobs available. There was bound to be a slump once these jobs were gone. We also do not account for the fact that at least some of the people who lost jobs (in 2003) have since gained jobs. Lets see what the numbers have to say…Let me refer you to the IT Workforce Study – 2004 conducted by Information Technology Association of America which is based out of Arlington, VA. I quote - “The U.S. IT workforce gained population in the last year, moving up two percent from 10,312,650 in 2003 to 10,526,289 in 2004." Ugh Ugh… 2% seems to be a recurring phenomenon. But seriously - the disconnect between the job losses and the number of jobs increased comes from two factors – Though the number of jobs have increased, the number of “programming” level jobs have decreased (these are the ones that get Bangalorized) Though the workforce size has increased, the demand for (new) IT workers continues to drop. My interpretation of these facts is that though programmer level jobs may have reduced there is still a big market for jobs that can not or are not being offshored. And if the US IT workforce manages to reposit itself to take on these jobs – the impact felt would be much lesser. But wait, I am getting ahead of myself. That is the subject for my next post For the moment let’s see what these (purpoted) job losses really mean to the US Economy. Economists claim that since offshoring gets tasks done cheaper – they would lead to a productivity growth for the US economy as a whole. I quote – “... Just as for IT hardware, globally integrated production of IT software and services will reduce these prices and make tailoring of business-specific packages affordable, which will promote further diffusion of IT use and transformation throughout the US economy” And then there are others who claim that every Dollar invested in offshoring actually returns more than a dollar to the US Economy. I quote – “A recent study by the McKinsey Global Institute, an economics think tank, calculated that for every dollar spent on a business process that is outsourced to India, the U.S. economy gains at least $1.12. The largest chunk -- 58 cents -- goes back to the original employer, but there are many other benefits" Or on a more frivolous note an article from the New York Times about an offshore center – “All the computers are from Compaq, the basic software is from Microsoft, the phones are from Lucent, the air-conditioning is by Carrier, and even the bottled water is by Coca-Cola” Additional Reading http://www.robertreich.org/reich/20030528.asp http://www.itaa.org/workforce/studies/04wfstudy.pdf http://www.iie.com/publications/pb/pb03-11.pdf http://www.mckinsey.com/knowledge/mgi/rp/offshoring/perspective - to be continued -

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Offshoring, Impact on US Jobs & Economy - Part I

I have expressed my views on this topic in the past on other forums and this found this an easy subject to start of blogging on…. Any analysis of Offshoring’s Impact on US Economy necessitates analysis of The Dollar Value of Off shoring IT Job Availability in the US Handling Job losses in the US Impact of NOT Globalizing Let’s visit these in detail over the next couple of days The Numbers US Software Spending (2004 forecast) - $234 Billion US 'Applications' spending (2004 forecast) - $76 Billion US 'Custom Software' spending (2004 forecast) - $17 Billion India’s software revenues from US exports for the period Apr-03 to Mar-04 were a $6.3 Billion or less than 2% or total US software spending. In fact these revenues were way less than Walmart’s imports from China in 2003 ($12 billion). So how big an impact on jobs can a 2% spending be? I have conveniently ignored two factors The outsourcing to other locations – China, East European countries and Canada. The rapid rate of increase in outshoring. But then, I believe that the former is yet in nascent state and the later may not lastg given the outcry against offshoring. Additional Reading http://news.com.com/Commentary:+The+state+of+software+spending/2030-1069_3-5261559.html http://money.canoe.ca/News/Sectors/Technology/2004/06/03/484868-ap.html http://www.computerworld.com/industrytopics/financial/story/0,10801,68591,00.html http://freerepublic.com/focus/f-news/989935/posts - to be continued -

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