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India's looming IT labor crunch

As demand for IT services continues to grow at 30% a year, some say the trained labor supply will soon run out. Then what happens?

When Indian software services giant TCS Ltd. hires managers these days, it doesn't just negotiate pay and benefits. Each new hire also learns about a rotation available in one or more of TCS' offices in 146 countries. And through a virtual community called "Maitree" (literally, friendship), which is run by the spouses of TCS employees, it helps recruits who are relocating find a new home or even schools for their kids.

"Talent is getting scarce these days," said a TCS spokesperson. "As long as we can promise them better career prospects and give them opportunities to make their [resumes] look better, TCS employees stick on."

Indeed, as the global demand for IT services and products is a boon for India's IT outsourcing industry, the industry is now facing its biggest shortage yet of skilled technology talent. The result: Not only has competition for new recruits become cut-throat between local and multinational IT services companies, but the dearth of workers has also resulted in a sharp rise in salary levels. In the short term, that threatens the margins of the services companies; in the longer term, if outsourcers raise their rates to compensate and/or can't find the right people to hire, customers may find the country a less attractive place to do business.

Those dark days are not yet here. (See related story.)

After a three-year drought following the dot-com bust and the global economic slowdown, India's IT outsourcing sector is booming. While the industry is inching up globally, the Indian IT-business process outsourcing (BPO) industry, including domestic revenues, grew by 32% during 2004-2005, registering revenues of $22 billion, up from $16.7 billion in 2003-2004, according to India's National Association of Software and Service Companies (NASSCOM), the local software industry lobby. The Industry forecasts growth of another 30% to 32% in 2005-2006.

Encouraged by this increased demand, local companies, as well as those in multinational IT services, are all looking to beef up their Indian operations and are on a hiring spree. For instance, IBM, which is cutting 13,000 jobs mainly in Europe, plans to hire 14,000 workers in India by year's end. Electronic Data Systems (India), a 100% subsidiary of EDS Corp., plans to scale up its head count from the present 2,400 to 5,000 in a year. Accenture, which employs about 10% of its global workforce in India, said recently that it plans to hire between 30,000 and 50,000 new employees in China, India and the Philippines during the next three years so that it can increase the amount of software development and other work done offshore. Other multinational companies such as Microsoft, Dell Inc., Cognizant and SAP AG have announced equally ambitious growth and hiring plans. Likewise, local companies are expected to hire over 120,000 IT professionals in the next two years.

NASSCOM figures indicate that supply is about on pace to meet a doubling of demand for IT talent through 2008, from the industry's 1 million employees today to over 2.1 million by 2008. But many industry sources fear that the recent recruitment fervor indicates that demand will far outstrip supply soon.

"The basic problem is that in the IT industry, hiring is growing much faster than the supply of manpower," said Milind Jadhav, vice president of human resources at Patni Computer Systems Ltd., a $342 million IT services company based in Mumbai, India.

The direct fallout of this shortage is fatter paychecks for employees, which translate into higher costs for companies. The larger IT companies in India said their salary costs have increased by 15% to 20%, while smaller and multinational companies have experienced an even higher rise. But a bigger problem is "the issue of labor scarcity, which if not given prompt attention, would turn into a serious issue in the future," said S. Gopalakrishnan, COO of Nasdaq-listed Infosys, India's best known IT services company.

Despite India's huge population, the looming staffing shortage stems from the fact that "the Indian education system is not churning out enough computer science and electronics grads," Gopalakrishnan said. For instance, though India's 272 universities and nearly 14,000 colleges churned out almost 22 million grads in 2004, only about 300,000 entered the workforce as engineers. "And out of that," Gopalakrishnan said, "maybe just 30% are suitable for the software and IT services industry."

And with the booming Indian economy, IT services companies must compete for those graduates with other sectors, such as construction and automotive. "Although the IT industry is trying to take away their fair share from such other industries, there is a pull for engineering grads from other sectors," Gopalakrishnan said.

One reason that India doesn't produce more IT students is that IT requires a strong knowledge of English. About 70% of the Indian student population lives in rural or semi-urban areas and undergoes the 15 years of pre-college education in either Hindi or local languages. Moreover, the Indian school system emphasizes non-science subjects, such as literature, history and geography, for the first 10 years in school, when science- or technical-related subjects can be optional (although mathematics is compulsory). Thus, arts and commerce end up as the favorite subjects for most Indian students entering college.

The IT industry and the government are taking steps to encourage more students to become engineers. Almost all of the large and even a few smaller IT companies have embarked on what the industry calls "campus connect" programs, where they offer training, provide books and resources, and even train teachers at the 100 top universities around the country to teach the latest concepts and ideas not just in IT but also in science, engineering and other subjects. These efforts, according to NASSCOM, "will go a long way in improving the quality of technical education and increasing the number engineering students in the country."

The government has also promised to expand engineering programs to increase both the supply and quality of engineering graduates in India. Efforts will include introducing engineering and technical courses at institutions that do not teach them yet, and/or increasing the number of courses and teachers in existing programs.

Because of these initiatives, Sunil Mehta, vice president of NASSCOM, feels that this sudden shortage of IT workers is just a "temporary imbalance, which should go away in about four to six quarters." Many in IT industry, though, are keeping their fingers crossed.

Indrajit Basu is a contributing writer to from Calcutta, India.

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