IT companies behave like immigration agents: Is Narayana Murthy justified?

It is a known fact that one of the main reasons why the Indian IT sector has flourished, apart from the fact that we have English speaking engineers, is the cost arbitrage. Low wages of Indian engineers as compared to others in the developed world resulted in orders flowing India’s way. IT industry to a large extent owes its existence and proliferation to the age old concept of jobs moving from high cost base to low cost base.

It is thus a matter of surprise that N R Narayana Murthy, co-founder of Infosys has questioned the very foundation of the sector. He pointed out the inability of Indian companies to recruit citizens or permanent residents for work in client locations in the US or other foreign countries. Murthy said “Indian companies behave like agents for their employees. They guarantee visas, they guarantee green cards. They are immigration agents.”

Quite ironic that this comes from the founder of a company that is synonymous with body shopping.

Even more surprising is the fact that Murthy has not spared Infosys for its hiring policy. Murthy said that he had introduced a visa-independent delivery model in his second spell as its chief executive officer in 2011 but it has not been pursued after his exit in 2014. Murthy only has to look at the performance of Infosys to quell his anxiety. Murthy’s sudden love for the citizens of USA and other countries from where IT companies are getting orders not only is alarming but also raises many questions.

Let’s look at the ground realities first. An IT company bids for orders showcasing its strength and track record. It makes a pitch claiming that it can implement the order because it has the staff strength with the relevant capabilities needed for the work. Orders are bagged on the strength of capabilities and man-hour rates. The low rates quoted by the Indian company results in it bagging the order.

The assignment is handled by two sets of people in a team in an IT company. The offsite team manages the backend work which is the major chunk of the job while the onsite team (that stays at the site of work) is responsible for survey, study of scope of work, implementation and post implementation issues. Infosys has a ratio of 70.5 per cent of its employees working from offsite and 29.5 per cent are working onsite.

Most employees in IT companies after the first few years are on the lookout for an onsite assignment. The reason many change their jobs is because of a promise of an onsite assignment. From an IT company’s point of view, it needs people with relevant experience to bag and implement an order and thus offers onsite posting as a carrot to get the best talent.

The IT company charges higher for its onsite employees. Take the case of Infosys: though its onsite employees account for 29.5 per cent of its strength, their contribution to the revenue is 56.5 per cent. It can thus afford to send highly paid employees on the site.

If Indian companies follow Murthy’s statement and start hiring locally for their onsite work, their profitability will go for a toss. A Wall Street Journal article points out that a mid-level IT profession in the US three times as much his Indian counterpart.

One wonders what Murthy would like to say to American IT companies who are setting up shop in India. The only reason they have left their country and come to India is to take advantage of this cost arbitrage.

As for the visa-independent delivery model that Murthy has spoken of introducing, a look at the attrition rate during this period in Infosys tells the story. It was only after Vishal Sikka came in and canceled the delivery model and brought in a lot of changes in the working of the company, that attrition rate came down from 23.4 per cent to industry levels of around 14 per cent.

So what compelled Murthy to make a sweeping statement that Indian IT companies had a responsibility to create jobs for Americans. It could be that he senses the changing environment in the USA and the pre-poll rhetoric by presidential candidate Donald Trump or it could be the changing reality where jobs globally, especially in developed countries are hard to come by.

In either case, the day Indian IT companies replace Indian professionals with high cost locals, the sector will go in for a major correction on the bourses.