How Developing Countries Survive Intellectual Drain Competition
How Developing Countries Survive Intellectual Drain Competition
Labor cost savings for U.S.-based companies operating in India could shrink from 80 percent to 40 percent within a decade, according to Andy Goodman, executive vice president of human resources at Islandia, New York-based CA Inc., formerly Computer Associates International, which employs 1,100 workers in its Hyderabad software development center. "But even so, India will still represent a significant economic value," he says. "It is really a question of exploiting the global talent pool wherever it exists."
Increasingly, that global talent pool lies outside the United States and Europe. Half of CA’s 15,800 employees work in foreign countries. Since 2000, U.S.-based multinationals have consistently reduced the number of workers employed in the United States and increased the number employed abroad.
Thirty-three million young professionals with university degrees and work experience now live in 28 low-wage countries, compared with 15 million in eight high-wage nations, including 7.7 million in the United States, according to McKinsey & Co. The number of university graduates from the low-wage countries is increasing at an annual rate of 5.5 percent, compared with just 1 percent in the high-wage countries.
This shift in the location of critical knowledge workers will continue to draw more developed-nation multinationals into developing-country labor markets. At the same time, relatively new multinationals based in the developing countries are dominating their local markets, expanding abroad and adopting the same global compensation and performance management systems used by developed-nation multinationals.
For both developed- and developing-nation multinationals, labor arbitrage is a fully formed corporate strategy, with the cost savings already built into profits. As wages rise in first-tier offshore cities such as Bangalore, Shanghai, China, and Prague, Czech Republic, U.S. and Indian multinationals alike are moving to Jaipur, India, Chengdu, China, and Kiev, Ukraine. Ho Chi Minh City is the new Manila.
The upshot for workforce management is that increasingly indistinguishable companies are following one another around the world, offering the same compensation packages to the same workers. Creating differentiation to attract and retain top talent is now the global challenge. And staying one geographic step ahead of the global competition on the arbitrage map means re-creating that differentiation again and again in different locations.
Global Systems Eighty-five percent of multinationals have a global pay strategy in place, and the remaining 15 percent plan to introduce one by 2007, according to a 2005 survey of 90 multinationals by Mercer Human Resource Consulting. These global strategies consistently include policies on positioning pay relative to the market, short-term and long-term incentive design and methodologies for job grading. More than half incorporate fixed guidelines.
CA’s global system includes an annual universal performance evaluation that captures value-based behaviors, role effectiveness and delivery of objectives. The company communicates performance management standards to all employees through its intranet; managers use an automated global repository for performance ratings.
The notable exceptions to CA’s annual compensation and performance management cycle occur in the emerging markets. "There, the competitive marketplace is moving so rapidly that an annual adjustment is not sufficient," Goodman says. "In particular, India is a very competitive marketplace because there are so many organizations focused there. Every company that comes in basically determines that it’s going to offer a 25 percent increase on the current levels. This drives everyone into the same competitive spin."
In Hyderabad, CA competes against India-based multinationals such as Zensar Technologies. Forty percent of Zensar’s 3,000 employees are based outside India in 18 countries, including the United States, Germany, China, Japan and South Africa. Yogesh Patgaonkar, associate vice president and head of human resources, manages Zensar’s workforce with the same global compensation and performance management reach that CA employs.
Getting Sticky Both Patgaonkar and Goodman use intangibles to create differentiation and retain talent in Hyderabad. "Our first task is to remain competitive and holistic in our compensation structures," Goodman says. "The second is to reinforce other retention vehicles such as training, work environment and career pathing." Those are the differentials, he says, that help CA stay "sticky."
"It can’t purely be a bidding war with business conducted on a mercenary basis," Goodman notes. "It is difficult to stand still and not be reactive to the marketplace, but the degree to which you need to do that is dependent on the other aspects you put in place to retain talent."
"It can’t purely be a bidding war with business conducted on a mercenary basis. It is difficult to stand still and not be reactive to the marketplace, but the degree to which you need to do that is dependent on the other aspects you put in place to retain talent."--Andy Goodman, CA Inc.
Zensar uses multiple strategies to retain workers, but Patgaonkar draws the line at biannual wage increases, even in the most competitive labor markets. "Every company has finite resources," he says. "We prioritize our budget to take care of our critical talent. But we also have to worry about the cost of operations."
Zensar aligns itself with the market for base salaries and sets variable pay at 20 percent to 25 percent, using a range of skill- or knowledge-based incentives and longevity bonuses. The company also uses stock option awards based purely on performance, with about 15 percent of employees qualifying.
Most important, with a roster of Fortune 500 clients that includes IBM, Fidelity and Accenture and key partners such as Oracle, SAP and Microsoft, Zensar can offer its employees the same career development opportunities as the large U.S. multinationals. "People want more than a brand," Patgaonkar says. "They want careers. We offer career building that makes us as competitive or more competitive than the U.S. companies. We have been operating in the global market for some time now, and we understand the motives that employees have in working for us. People from the great brands come and join us all over the world."
Patgaonkar is far more concerned about retaining the 30 percent of the workforce that the company categorizes as critical talent than he is about general turnover. "Our compensation philosophy is to differentiate, prioritize and reward performance--everywhere. We keep it extremely simple and extremely transparent." Managers use a global system to report results, with all information centralized at headquarters in Pune.
Both CA and Zensar work with universities in all their locations to help staff technical jobs, but filling managerial positions is even more difficult. Although the business press often notes the shortage of managerial talent in the developing countries, Goodman disputes that focus. "It’s difficult to find good managerial talent anywhere," he says. "Obviously there are some additional complexities when you start moving into the global landscape, but for the most part, management capabilities are a challenge in all locations."
For U.S.-based multinationals, the overall shortage of managerial talent is exacerbated by the fact that the developing-country multinationals now match the salaries and career opportunities offered by U.S. firms. To relieve some of the pressure, CA uses expatriates on a selective basis.
Zensar addresses the managerial talent shortage by partnering with business schools and connecting with MBA candidates as soon as they are admitted. "We call this program ‘catch them in the cradle,’ " Patgaonkar says. "When they graduate, they come straight to work for Zensar." Top managers spend a considerable amount of time at the schools.
In addition, Zensar identifies technical employees who want to move into the management domain and covers their expenses for completing an MBA program. "Outside of India, we run similar programs to recruit and train both technical and managerial talent," Patgaonkar says. "We recruit from all of the premier campuses and use our own training centers so that employees continue to grow."
Roaming Arbitrage Career development will become more important as multinationals push offshoring to the next stage. Offshoring is no longer under serious challenge anywhere in the world--the business case is simply too strong. Cost comparisons still drive most offshoring decisions, according to the Everest Research Institute, and will continue to do so for the next 30 years. With wages rising 6 percent to 15 percent a year in the first- and second-tier locations, multinationals are moving into a third tier.
"The cost advantages will remain, but the global reality is that the margins will become narrower and narrower," Goodman says. "At the same time, it must be remembered that we are getting better at remote and global management and developing global managerial talent, so the productivity coming out of locations such as India is growing. Even if the margins loss is there, there will be value gained."
Goodman notes that India’s strong talent pool and education system have attracted a number of global companies. "However, other emerging markets such as China are going to begin to take some market share and play a larger role in organizations looking to exploit the global talent pool and gain some economic leverage around the world," he says. "But organizations are not looking for an exit strategy from India. The demand will remain fairly consistent."
Still, multinationals will have to move farther afield as markets tighten in current offshore sites. McKinsey estimates that the supply of suitable labor will be squeezed in Prague as early as this year and in Hyderabad by 2008. In China, multinationals have been avoiding the first-tier cities for years in favor of second-tier locations such as Chengdu, Hangzhou and Nanjing.
Intel announced February 28 that it will open a $300 million semiconductor assembly and test facility with 1,200 employees in Ho Chi Minh City. Cost pressures pushed Intel to move into Vietnam instead of expanding existing capacity in China, the Philippines and Malaysia.
U.K.-based TalkTalk announced February 6 that it will open call centers in Cape Town and Johannesburg, South Africa, bypassing established hubs in Manila and Delhi. Junior customer service representatives average just $1.86 an hour in Manila, according to the Boyd Co., a site selection consultancy based in Princeton, New Jersey. But wage increases in the Philippines will top 9 percent this year. Wages average a low $1.91 in Delhi, but call center turnover has become too costly.
India certainly still has appeal for companies, which are seeking customers as well as workers there. Dell Inc. last month announced plans to double its number of employees in India in three years. The company currently has 10,000 employees there. Most of the new hires will be for the company’s call centers, but Dell also intends to hire for product testing and possibly manufacturing jobs.
At CA, the process for determining which work goes offshore and where it will be located is, of course, a strategic business decision.
Human resources "assists with information on labor markets and skill sets and the viability of sending work to a specific location," Goodman says.
"HR also helps to determine whether a particular body of work should be U.S.-driven and supported by an offshore workforce, or whether we’re moving the whole project offshore."
With 33 million reasons to move into labor markets in the developing countries, the offshore preference will grow as developed-nation multinationals continue to look for talent at the lowest cost. Signing on that talent, however, will be more difficult as global players proliferate and compete for technical, professional and managerial employees. Differentiating the firm on the basis of superior career opportunities and pushing into third-tier cities will form the core of global workforce management in the years to come.
How Developing Countries Survive Intellectual Drain Competition - To learn more about this author, visit Dr. Fathi El-Nadi's Website.
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workforce management is an extreme sport in Hyderabad, India, a first-tier offshore hotspot where foreign multinationals compete with Indian companies for software engineers and managers. In the mad scramble to recruit and retain employees, annual salary adjustments have turned into quarterly raises. The average wage increase for 2006 will top 12 percent.
Labor cost savings for U.S.-based companies operating in India could shrink from 80 percent to 40 percent within a decade, according to Andy Goodman, executive vice president of human resources at Islandia, New York-based CA Inc., formerly Computer Associates International, which employs 1,100 workers in its Hyderabad software development center. "But even so, India will still represent a significant economic value," he says. "It is really a question of exploiting the global talent pool wherever it exists."
Increasingly, that global talent pool lies outside the United States and Europe. Half of CA’s 15,800 employees work in foreign countries. Since 2000, U.S.-based multinationals have consistently reduced the number of workers employed in the United States and increased the number employed abroad.
Thirty-three million young professionals with university degrees and work experience now live in 28 low-wage countries, compared with 15 million in eight high-wage nations, including 7.7 million in the United States, according to McKinsey & Co. The number of university graduates from the low-wage countries is increasing at an annual rate of 5.5 percent, compared with just 1 percent in the high-wage countries.
This shift in the location of critical knowledge workers will continue to draw more developed-nation multinationals into developing-country labor markets. At the same time, relatively new multinationals based in the developing countries are dominating their local markets, expanding abroad and adopting the same global compensation and performance management systems used by developed-nation multinationals.
For both developed- and developing-nation multinationals, labor arbitrage is a fully formed corporate strategy, with the cost savings already built into profits. As wages rise in first-tier offshore cities such as Bangalore, Shanghai, China, and Prague, Czech Republic, U.S. and Indian multinationals alike are moving to Jaipur, India, Chengdu, China, and Kiev, Ukraine. Ho Chi Minh City is the new Manila.
The upshot for workforce management is that increasingly indistinguishable companies are following one another around the world, offering the same compensation packages to the same workers. Creating differentiation to attract and retain top talent is now the global challenge. And staying one geographic step ahead of the global competition on the arbitrage map means re-creating that differentiation again and again in different locations.
Global Systems Eighty-five percent of multinationals have a global pay strategy in place, and the remaining 15 percent plan to introduce one by 2007, according to a 2005 survey of 90 multinationals by Mercer Human Resource Consulting. These global strategies consistently include policies on positioning pay relative to the market, short-term and long-term incentive design and methodologies for job grading. More than half incorporate fixed guidelines.
CA’s global system includes an annual universal performance evaluation that captures value-based behaviors, role effectiveness and delivery of objectives. The company communicates performance management standards to all employees through its intranet; managers use an automated global repository for performance ratings.
The notable exceptions to CA’s annual compensation and performance management cycle occur in the emerging markets. "There, the competitive marketplace is moving so rapidly that an annual adjustment is not sufficient," Goodman says. "In particular, India is a very competitive marketplace because there are so many organizations focused there. Every company that comes in basically determines that it’s going to offer a 25 percent increase on the current levels. This drives everyone into the same competitive spin."
In Hyderabad, CA competes against India-based multinationals such as Zensar Technologies. Forty percent of Zensar’s 3,000 employees are based outside India in 18 countries, including the United States, Germany, China, Japan and South Africa. Yogesh Patgaonkar, associate vice president and head of human resources, manages Zensar’s workforce with the same global compensation and performance management reach that CA employs.
Getting Sticky Both Patgaonkar and Goodman use intangibles to create differentiation and retain talent in Hyderabad. "Our first task is to remain competitive and holistic in our compensation structures," Goodman says. "The second is to reinforce other retention vehicles such as training, work environment and career pathing." Those are the differentials, he says, that help CA stay "sticky."
"It can’t purely be a bidding war with business conducted on a mercenary basis," Goodman notes. "It is difficult to stand still and not be reactive to the marketplace, but the degree to which you need to do that is dependent on the other aspects you put in place to retain talent."
"It can’t purely be a bidding war with business conducted on a mercenary basis. It is difficult to stand still and not be reactive to the marketplace, but the degree to which you need to do that is dependent on the other aspects you put in place to retain talent."--Andy Goodman, CA Inc.
Zensar uses multiple strategies to retain workers, but Patgaonkar draws the line at biannual wage increases, even in the most competitive labor markets. "Every company has finite resources," he says. "We prioritize our budget to take care of our critical talent. But we also have to worry about the cost of operations."
Zensar aligns itself with the market for base salaries and sets variable pay at 20 percent to 25 percent, using a range of skill- or knowledge-based incentives and longevity bonuses. The company also uses stock option awards based purely on performance, with about 15 percent of employees qualifying.
Most important, with a roster of Fortune 500 clients that includes IBM, Fidelity and Accenture and key partners such as Oracle, SAP and Microsoft, Zensar can offer its employees the same career development opportunities as the large U.S. multinationals. "People want more than a brand," Patgaonkar says. "They want careers. We offer career building that makes us as competitive or more competitive than the U.S. companies. We have been operating in the global market for some time now, and we understand the motives that employees have in working for us. People from the great brands come and join us all over the world."
Patgaonkar is far more concerned about retaining the 30 percent of the workforce that the company categorizes as critical talent than he is about general turnover. "Our compensation philosophy is to differentiate, prioritize and reward performance--everywhere. We keep it extremely simple and extremely transparent." Managers use a global system to report results, with all information centralized at headquarters in Pune.
Both CA and Zensar work with universities in all their locations to help staff technical jobs, but filling managerial positions is even more difficult. Although the business press often notes the shortage of managerial talent in the developing countries, Goodman disputes that focus. "It’s difficult to find good managerial talent anywhere," he says. "Obviously there are some additional complexities when you start moving into the global landscape, but for the most part, management capabilities are a challenge in all locations."
For U.S.-based multinationals, the overall shortage of managerial talent is exacerbated by the fact that the developing-country multinationals now match the salaries and career opportunities offered by U.S. firms. To relieve some of the pressure, CA uses expatriates on a selective basis.
Zensar addresses the managerial talent shortage by partnering with business schools and connecting with MBA candidates as soon as they are admitted. "We call this program ‘catch them in the cradle,’ " Patgaonkar says. "When they graduate, they come straight to work for Zensar." Top managers spend a considerable amount of time at the schools.
In addition, Zensar identifies technical employees who want to move into the management domain and covers their expenses for completing an MBA program. "Outside of India, we run similar programs to recruit and train both technical and managerial talent," Patgaonkar says. "We recruit from all of the premier campuses and use our own training centers so that employees continue to grow."
Roaming Arbitrage Career development will become more important as multinationals push offshoring to the next stage. Offshoring is no longer under serious challenge anywhere in the world--the business case is simply too strong. Cost comparisons still drive most offshoring decisions, according to the Everest Research Institute, and will continue to do so for the next 30 years. With wages rising 6 percent to 15 percent a year in the first- and second-tier locations, multinationals are moving into a third tier.
"The cost advantages will remain, but the global reality is that the margins will become narrower and narrower," Goodman says. "At the same time, it must be remembered that we are getting better at remote and global management and developing global managerial talent, so the productivity coming out of locations such as India is growing. Even if the margins loss is there, there will be value gained."
Goodman notes that India’s strong talent pool and education system have attracted a number of global companies. "However, other emerging markets such as China are going to begin to take some market share and play a larger role in organizations looking to exploit the global talent pool and gain some economic leverage around the world," he says. "But organizations are not looking for an exit strategy from India. The demand will remain fairly consistent."
Still, multinationals will have to move farther afield as markets tighten in current offshore sites. McKinsey estimates that the supply of suitable labor will be squeezed in Prague as early as this year and in Hyderabad by 2008. In China, multinationals have been avoiding the first-tier cities for years in favor of second-tier locations such as Chengdu, Hangzhou and Nanjing.
Intel announced February 28 that it will open a $300 million semiconductor assembly and test facility with 1,200 employees in Ho Chi Minh City. Cost pressures pushed Intel to move into Vietnam instead of expanding existing capacity in China, the Philippines and Malaysia.
U.K.-based TalkTalk announced February 6 that it will open call centers in Cape Town and Johannesburg, South Africa, bypassing established hubs in Manila and Delhi. Junior customer service representatives average just $1.86 an hour in Manila, according to the Boyd Co., a site selection consultancy based in Princeton, New Jersey. But wage increases in the Philippines will top 9 percent this year. Wages average a low $1.91 in Delhi, but call center turnover has become too costly.
India certainly still has appeal for companies, which are seeking customers as well as workers there. Dell Inc. last month announced plans to double its number of employees in India in three years. The company currently has 10,000 employees there. Most of the new hires will be for the company’s call centers, but Dell also intends to hire for product testing and possibly manufacturing jobs.
At CA, the process for determining which work goes offshore and where it will be located is, of course, a strategic business decision.
Human resources "assists with information on labor markets and skill sets and the viability of sending work to a specific location," Goodman says.
"HR also helps to determine whether a particular body of work should be U.S.-driven and supported by an offshore workforce, or whether we’re moving the whole project offshore."
With 33 million reasons to move into labor markets in the developing countries, the offshore preference will grow as developed-nation multinationals continue to look for talent at the lowest cost. Signing on that talent, however, will be more difficult as global players proliferate and compete for technical, professional and managerial employees. Differentiating the firm on the basis of superior career opportunities and pushing into third-tier cities will form the core of global workforce management in the years to come.
How Developing Countries Survive Intellectual Drain Competition - To learn more about this author, visit Dr. Fathi El-Nadi's Website.
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