Saturday, December 17, 2005

The next wave in India outsourcing

Nice summary from the economist. The point that legal services, like accounting, can be outsourced rings particularly true to me. Most legal services (from IP to contracts to employment law) that we consume as a startup are delivered over the phone or Internet, at exorbitant prices ($300 per hour is what you are charged for an associate; a partner bills even more). The effectiveness of the attorney is largely driven by raw brainpower, once some basic knowledge is acquired. I can easily see a model with a US-based partner and half or more of his or her staff (including associates) based in India. $30 per hour would be very good compensation for a highly intelligent Indian attorney.

Should we be concerned for the future of our young friends in law school? See here for related discussion.

ASKED for a sound-check at a function in Delhi this month, Bill Gates eschewed the “1,2,3...” favoured by ordinary mortals. “One billion, 2 billion...,” he counted. They think big, these IT moguls, and especially, these days, in India.

Microsoft later announced plans to invest $1.7 billion in India over the next four years, about half of it in adding to its existing research and development (R&D) and technical-support operations. “The only thing that limits us in India,” Mr Gates told the local press, “is the speed at which we can recruit.” A few days earlier, Intel, a giant chipmaker, had unveiled plans to invest more than $1 billion over five years, much of it in expanding its R&D centre in Bangalore. In October Cisco Systems, the world's largest maker of the routers and switches that direct internet traffic, announced its own plans to invest $1.1 billion in India.

The euphoria is confined neither to American multinationals, nor to information technology. It also encompasses India's own IT industries, and the expanding range of other back-office services that can now be performed remotely. The three biggest Indian IT-services firms—Tata Consultancy Services (TCS), Infosys and Wipro—are each recruiting more than 1,000 people a month. And to take just one example of the other services now moving to India, J.P. Morgan Chase, a big investment bank, this month revealed it is to double, to about 9,000, its staff there. Anyone who assumes J.P. Morgan will simply be doing low-level “back office” tasks in the country—a bit of data entry and paper-shuffling—would be flat wrong. One task for the new recruits is to settle complex structured-finance and derivative deals, what one insider calls “some of the most sophisticated transactions in the world”.

All these investments illustrate that a third stage of the great Indian services-export boom is well underway. In the first, firms such as TCS developed world-class expertise in software “application development and maintenance”, and their low-cost developers became the preferred partners of many Western IT firms. In the second, Indian firms and the local “captive” operations of multinationals started offering low-end back-office services that could take place a continent away—telephone call-centres, transcribing medical records, processing insurance claims and so on. In the third, in both IT and the broader spectrum of other “business processes”, ever-more sophisticated functions are happening in India.

So strong are the forces driving this shift that what seemed improbably rosy projections by NASSCOM, the Indian software- and service-industry lobby, and McKinsey, a consultancy, back in 1999, are coming true. This week NASSCOM and McKinsey produced the second full-scale update of their study. It argues that exports from India's IT industry and from “Business Process Offshoring” (BPO)—both from services “outsourced” to Indian firms and those performed by captives—are on track to reach $60 billion a year by 2010.

That would be a huge surge from the $17.2 billion in the year ending in March 2005. But it implies a compounded annual growth rate of 28%—below that achieved in recent years. Moreover, according to McKinsey's estimates, it requires India merely to maintain its present shares of the markets for offshore IT services (65%) and BPO (46%). This is because the study predicts a massive rise in the size of the overall market, estimated at present to make up just one-tenth of those services that could be sent offshore. The proportion is expected to rise as demography—a western labour shortage—becomes more pressing than protectionism.

In IT the growth in Indian exports is expected to come both from the software market, and from “traditional IT outsourcing”—such as the remote management of whole systems, a market now dominated by the big global IT consultancies. This is expected to rise from 8% of Indian sales now to about 30% in 2010, while software-development's share will fall from 55% to 39%. In business-process-offshoring, the big industries will remain banking and insurance. But rapid expansion is also expected in other areas, like legal services.

The law, in fact, illustrates how vast is the untapped potential market. About $250 billion is spent on legal services world-wide, about two-thirds of it in America, and as yet only a tiny proportion goes offshore. Forrester, a research outfit, has estimated that, by last year, 12,000 legal jobs had moved offshore, and forecast that this will increase to 35,000 by 2010. India, with its English-language skills and common-law tradition is well-placed to secure a big share of the business. It is not just a question of “paralegal” hack work such as document-preparation. Sanjay Kamlani, of Pangea3, a small Indian firm, calls it “real lawyering”—drafting contracts and patent applications, research and negotiation. His clients are both big law firms and in-house legal teams.

India's fundamental attraction has not changed since it first drew software developers: fantastic cost savings. With American lawyers costing $300 an hour or more, Indian firms can cut bills by 75%. Across the board, despite climbing rates of pay in IT and BPO, where rapid expansion has brought frantic job-hopping, India remains, say NASSCOM and McKinsey, the lowest-cost of all the main outsourcing destinations. It also has, among these countries, by far, the largest pool of employable people—those with the necessary language and technical skills. On this measure, India, which produces 2.5m graduates a year, 250,000 of whom are engineers, has 28% of the global available workforce, compared with 11% in China.

Yet the supply of talent may be the biggest constraint on the Indian industry's growth. On these latest projections, the number of people working in IT and business-process exports in India will increase from about 700,000 now to 2.3m by 2010. But on today's estimates only 1.05m suitably qualified people will graduate from college between now and then, so there will be a shortfall of nearly 500,000, with business-processing the worst affected. McKinsey's Jayant Sinha believes the education system can be fixed in time to plug the gap. A bigger worry, he says, is India's creaking urban infrastructure. IT firms in Bangalore, for example, are in revolt against the local government for its neglect of basic amenities. Yet India's IT and business-process industries will need about 14m square metres (150m square feet) of office space by 2010: “a new Manhattan”.

Hectic building is under way, and not just in the big IT and business-processing centres (Bangalore, Mumbai and around Delhi) or the “second tier” of cities such as Pune, Hyderabad and Chennai (Madras). The industry's worry over infrastructure, as over education, is that it cannot do everything by itself. Having thrived by keeping government at arm's length, business now needs help.


Anonymous said...

I go to a top law school in America and we have lots of foreign students pursuing L.L.M degrees on top of the degree they already have from their home country.

To get into my school they have to be very bright and accomplished (in their own country) but rarely have to speak english with great fluency.

With only few exceptions, they prove to be poor students, unable to master english to the extent it takes to do meaningful research and make cogent arguments. I truly believe a non-native speaker cannot be a great attorney. This is evidenced by the fact that there are next to no non-native attorneys of any special repute, while other fields, like science, are often dominated by them.

Lastly, the exportable jobs, research and writing for transactions and patents, are also the hardest and therefore even less likely to be done properly by a non-native english speaker.

Steve Hsu said...

Interesting comments. Are you including Indians as non-native speakers? I would say that, with the exception of a slight accent, many Indian scientists I know have a better command of English than their American counterparts. East Asians are, of course, another story.

Anonymous said...

Anonymous law student here again.

I acknowledge that it would be easier for Indian to get an American attorney's skills compared to an East Asian. Indians use a phoenician alphabet, speak an Indo-European language, English is the universal second language in India, and Indians even use the same Common Law system we use here in the United States.

This still leaves the question of why aren't there a significant number of Indian expatriates doing this lucrative work? The average American attorney makes over $100,000 a year. Logically, they should be pursuing law not computer programming, if they could.

Also, being an attorney in Germany (or anywhere else in continental europe) is far less lucrative than being one in American partly because they use a civil code that requires less reliance on the attorney's skills. Therefore you'd think a lot of Germans with strong verbal skills would simply hop the pond, adopt a language close to their own and start practicing and earning. Needless to say this, doesn't happen.

The ability to speak English clearly and understandably is no sign of the ability to do quality legal work. If it was, then most telemarkerters would be transitioning to the more lucrative field of law.

Steve the confusion here may amount to a certain "professional blindness." While I could probably not tell the difference between your level of skill and a high school physics teacher even after some thorough examination, you might not be able to tell the difference between an attorney and a high school civics teacher. Never the less, a significant difference exists in both.

Steve Hsu said...

Sorry, perhaps I misunderstood your claim in the first comment. I thought you were asserting that language ability was the key factor. Now you seem to be making another point.

I certainly wouldn't claim that there are no differences in ability between lawyers. Quite the opposite - I've dealt with people from big firms in Silicon Valley with a range of abilities, and I think I can tell the difference. But, I don't think the pool of talent for this kind of work resides exclusively in the US, anymore than it does for science.

Just because historically most attorneys have not come from abroad doesn't mean that will continue to be the case. Of course, foreigners will tend to first pursue fields where the language requirement is less important. But, once opportunites exist, people will exploit them - it just takes time. (Recognizing these opportunities and exploiting them is exactly what entrepreneurs do.)

There are already many prominent academics in English, literature and economics departments who came from India, such as Homi Bhabha or Amartya Sen. Do you think legal work is so different that these examples are not indicative? Remember, at the moment I am only suggesting a model where lower level tasks are outsourced. I hate to break this to you, but most billable tasks are easy and repetitive -- employment contracts, standard licensing agreements, trademark stuff, etc. This is probably not unrelated to the high attrition rate in the legal profession - people get very bored!

Finally, I think I can judge the attorneys I've worked with just as well as I can the CEOs, marketing people, engineers and VCs. There is nothing magical about the legal profession. (Someday, if you ever get into a technology law practice, you should ask your fellow attorneys how often they are surprised that some some brilliant engineer can see the logical implications of a tiny clause in a non-compete or licensing agreement much faster than they can.)

Anonymous said...

Well I have to say Law is one area where I'd LOVE to see the salaries get hacked down big time. From my personal experiences lawyers have the shady reputation they deserve but they earn much more than they should.

Anonymous said...

Most American lawyers are radically overpriced-and some, like me, are radically underpriced.

The big firms are lunacy. Way too much mahogany wall paneling is factored into those hourly rates.

It's the expectations game though. People would rather eat 2 star food in 5 star surroundings than 5 star food in 2 star surrounding, especially if their company/shareholders are picking up the tab. People simply want the pomp and majesty of outrageous legal fees. If its $300/hr. it HAS to be good, right? Wrong.

Me, I'm just a small solo guy who will undercut whiteshoe types whenever I can, but, with my budget, I can't afford to take all the execs golfing in Vegas, so I'll never get Fortune 500 business.

There's no concept in law itself that's harder to grasp than the fundamental theorem of calculus.
That could all be outsourced. But knowledge of the law itself is increasingly negigible to me now.

My value is in the social knowledge I've gained from helping people fight about money for almost 20 years, and, although some people never realize it, some of my best work comes from keeping a fight from starting in the first place.

Anonymous said...

Anonymous law student, I would point out that Indian students are interested in long term immigration papers, and require a company to sponsor them. A company would only reasonably undertake the cost and inconvenience if they were 1) desperate for the candidate's talent, or 2) if the cost of such candidate was significantly less than the comparable cost of hiring an American. Because IT, Engineering, and Research vacancies are large in number, and the relevant employers are historically scrambling with a desperate need to find willing talent, you have the present dynamic. Now, with respect to the students you have seen, that does not sound very impressive, I agree, but I can tell you, that you will find killer attorneys in India, who can really rock your boat. Look, smart kids go for medicine and law in the US. They will be fine. However, back office processing for law firms will become a huge reality, and you should not underestimate the coming impact on the legal industry. In the end, it will be good for the customer, as billable rates will drop on average. Low level US personnel such as paralegals are on the way out, and domain specific research and patent related work will follow suit. Trial attorneys, divorce attorneys, corporate attorneys, will always remain in demand however, so choose wisely. BadNewsLawyerFromIndia.

Anonymous said...

Outsourcing software development has hugely changed the face of the IT sector and the world woke up to the capabilities and poweress of the seemingly unthought of countries like India which is one of the most sorted as far as the IT work is concerned.

Anonymous said...

The rising prices on the aviation industry and the unheard of charges that are being levied on airfares have disturbed people all over the world. This change has shocked people all the more as they had become habitual of comparatively cheap airfares. The IT industry is also following the same trend. The concepts like outsource software development and offshore software development took birth and found existence due to the combination of optimum quality product at competitive rates. Sadly, the IT sector is also experiencing a major downward slope in the present times.

Blog Archive