Outsourcing Staff Shortage?
We have long been impressed with the ability of Indian outsourcing firms to hire enough new employees to sustain their tremendous growth rates. As we noted in May, 2006:
Think about it. A company that already had a large number of employees (17,050 at March 31, 2005) grew its employee base by 57 per cent in one year. Plus, if the 11 per cent annualized turnover the company experienced in the latest quarter is typical (by our recollection it seems on the low side) that means they would have lost 2,400 employees to attrition during the time (11 per cent of the average number of employees during the year.)
So to add 9,700 employees the company had to hire 12,000. Almost 50 new hires every working day. Even if they hire a quarter of all applicants that means interviewing 200 per day. And if they want to grow another 50 per cent next year they will have to hire 75 new employees each workday this year. By all accounts there are plenty of graduating software engineers in India to hire. But that is still one heck of a logistical exercise. And someday it will be too much to handle and the company will trip up.
If we had to point to one specific risk factor as being Cognizant’s greatest, it would be managing all of that growth. We don’t think it will happen this year, but it could. Or, just as likely, they could continue to coast for several more years. And in the meantime, it is a nice problem to have.
Since then, the stocks have continued to soar.
Unfortunately, the “one specific risk factor” has also grown in importance. Infosys turnover rose to 12.9% in the third quarter, and Cognizant said it was something management was monitoring. Now, based on Infosys’ fourth quarter report, “monitoring” may translate into “watching it get worse.”
Infosys faces quality problems in staff : HindustanTimes.com
Can there be problems when a company is surging a wave of plenty with $1 billion in cash? Apparently, yes.Infosys Technologies may be rich and hiring by the thousands, but has to compete with giants like IBM and Accenture in wooing engineers and programmers, and staff attrition is a looming problem.
The company’s attrition rate rose to 13.5 per cent in the latest October-December quarter compared with 10 per cent during the same period last year. But not all of them left on their own.
About 1.3 percentage points of the 13.5 per cent attrition are attributed to poor quality of work by trainees who could not match up to expectations.
Despite the recent rally, P/E multiples have remained near their recent averages (the stock price rise has been backed by fundamentals.) However, at the current rates of attrition the recent growth rates will soon prove unsustainable.
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[...] The company also appears to have done a good job managing employee turnover (though that remains our biggest concern.) According to the release, the company added a net total of almost 4,500 employees in the fourth quarter and more than 14,500 employees in 2006 overall, bringing their total employee count to more than 40,000. That means that during 2006 the employee count grew by 14,500/(40,000-14,500)=57%. This is important because Cognizant is a consulting firm, and increasing headcount is the primary way such firms can increase future revenues. [...]
Why not use Poland at an outsource center?
Many offshore software development failures are due to instability in the workforce in geographies such as India and China. The demand is much greater than the supply, with engineers moving from job to job in time periods measured in months. Competition for engineers and programmers with specialized expertise is fierce, and turnover is high, with some firms in India reporting turnover as high as 40 percent annually. In India they are providing “shadow engineers” — engineers who are not billable but are tracking a project to replace the next engineer who leaves. In many case the “shadow engineers” are fully 20% of the engineering headcount on a project.
This situation almost guarantees project failure.
By contrast, Polish engineers value job stability and as a result provide a stable work force. For example, one group in Katowice Poland has achieved zero attrition amongst their 58 engineers in three years. This is common in Poland but yet unheard of in other countries.
The short answer is probably “volume.” The 58 engineers you mention would only replace one day’s worth of hiring for Cognizant, let alone the Indian outsourcers as a group.