November 7, 2005

Let's learn from Silicon Valley's experience

By Krishna Mohan

   The recent conflict between the government and businesses is symptomatic of not just the state of the local infrastructure that has led to this bickering but the fractured relations between these two key constituents. The IT- and now BPO-led boom in economic activity has been primarily driven by businesses whose prosperity has been headcount driven. While this has been a boon in terms of employment in these industries, it has placed a tremendous strain on the infrastructure (e.g. roads, traffic) that has become exponentially worse in a short interval of time. For instance, according to recent Nasscom figures, the incremental increase in employment by just the BPO industry this year is about the same size as the total employment in that industry three years ago. Considering that the local infrastructure was below par even in 2002 with a significantly smaller employment base, this exponential and unplanned growth would choke any system worldwide.
   Not a week goes by without an announcement of hiring thousands, most commonly by businesses whose core value creation and scale is predominantly dependent on headcount growth. It is hard to believe that these businesses can be naive about the fact that while they hire several thousands in a quarter, the city infrastructure to support this growth even under a perfect scenario of adequate public works funding and superior project execution would lag by several quarters. This is exacerbated by the poor initial state of the infrastructure in the first place caused by cumulative neglect over several years. The pursuit of better infrastructure is forever in catch-up mode.
   One reason for this disconnect in infrastructure and growth is because sizeable investments needed to fulfil this have not been identified. Current budgets are likely to be deployed for short-term band-aid solutions in response to periodic industry and citizen backlash. It is time for private-public partnerships to go into resolution of details such as identification of respective funding contributions from government and businesses to bridge the significant funding shortfall for key projects.
   There are several reasons why local businesses should contribute: The perceived reticence by industry to take a more activist and proactive role in cooperatively solving this with the government in power is damaging the very brands that visionaries, especially in the IT sector, have worked long and hard to create. The longevity of the biggest and most successful local companies far exceeds the tenure of any local government. It is not surprising for democratic governments anywhere in the world to spend taxpayer monies in a manner that maximises their chances of getting re-elected. It is however surprising for the largest and most successful companies in a market economy to be myopic and blase in dealing expeditiously and effectively with shortcomings that affect their long-term competitiveness.
   Several of the largest companies today have benefited from preferential government policies at the Centre and the state (e.g. long-term tax holidays, land use) that nurtured them through their fledgling years. Now that these businesses are mature and thriving, the time is ripe for payback in proportion to the benefits they have accrued.
   Businesses in the dominant local industries of IT/BPO can scale down their activities due to local reasons (e.g. access to more cost-effective talent in another location) or global realities (e.g. demand for offshoring services) in a few quarters. However, large-scale infrastructure spending by the government to support them cannot be planned solely on the current state of these businesses. Would ordinary citizens be responsible for retiring a World Bank loan used to fund expressways to large employment hubs far from city centre if a
sizeable number of these businesses relocate to a more cost-effective location? This situation is not inconceivable for large headcount cost-centric businesses such as callcentre BPOs who are worrying about staff shortages caused by severe staff attrition.
   Having established itself as a pre-eminent global destination for value-based world-class IT services, it is critical for Bangalore to rapidly move up the value chain to consolidate its position. Lessons from the enduring success of Silicon Valley despite multiple economic boom/ bust cycles are instructive. Innovative start-ups and technology companies in the Bay Area have focused on creating businesses that have the potential of generating high value (revenues, margin) and market capitalisation per employee.
   The more labour intensive, lower margin or cost-sensitive parts of the businesses (e.g. manufacturing) moved out of the Valley to lower-cost locations worldwide. Local government policies supported this migration actively with the result that firms or their divisions that remain tend to focus on high value creation activities to justify the significantly higher costs of executing that activity. This has led to a significant concentration of Intellectual Property-led businesses such as product development in technology and drug research in biotech propelling California to rival the GDP of some developed countries.
   This has not come at the cost of busting the existing infrastructure due to reliance of large headcounts to drive business growth, as was the case for a brief period during the heyday of the dotcom boom in Silicon Valley. Future Tense One might extrapolate the current scenario with regard to infrastructure and economic development to speculate on the prospects awaiting businesses and citizens in the headcountcentric businesses in Bangalore. For a variety of reasons, predominant among them the low-lying fruit, several businesses have relied too heavily on a cost-based value proposition leveraging wage arbitrage as opposed to one that is less dependent on headcount scale.
   There are two implications arising from this choice: As a recent McKinsey study indicates, contrary to trade estimates on industry growth trends, local constraints on growth in places such as Bangalore on large supply of cost effective talent already exist. Competition from lower cost global destinations will put pressure on several current businesses to transform by moving up the value chain in a manner that reduces dependence on large headcounts and/ or migrate to destinations with access to lower cost skilled manpower (within India and other international locations).
   It would be prudent for state to undertake policy decisions that support incubation and growth of businesses that have potential to generate significantly higher value per headcount input in places such as Bangalore. Examples include product, productised solutions and IPcentric businesses in IT and drug research in pharmaceutical industries. An accompanying policy decision would be to actively encourage (through incentives) migration of predominantly cost-driven businesses (such as call centre BPOs) to lower-cost locations such as Mysore.
   Capturing preeminent global status in industries such as IT services and now BPO is a testament to leadership by visionaries and pioneers of the local IT industry. However, as the recent strain on the system (employee retention and spiraling hiring costs, infrastructure breakdowns) indicate, scaling growth from this point on would demand extraordinary bold and new thinking from businesses and government to go to the next level. Basing business and industry models on perceived limitless access to skilled and less expensive headcount, the mantra for the rapid exponential growth over the last several years, has fostered complacency leading to neglect and poor planning of the key engines for growth people and infrastructure. Local businesses and government are faced with a stark choice: evolve to higher value activities or lose out in the future.
   (The writer is the founder/CEO
   of Fifth C, a high-end analytics technology company in Bangalore)

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