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India's Looming IT Labor Shortage

No nation has benefited more from Corporate America's rush to outsource skilled work than India. Thanks to its seemingly limitless supply of low-cost engineers and other professionals, India now accounts for 65% of all information technology work performed offshore and nearly half of back-office tasks such as responding to computer help-desk queries and processing medical claims and credit-card bills. By 2010, India's revenues from such skilled work are expected to surge to $60 billion from $17.3 billion now.

There's just one wrinkle in those calculations. If India doesn't take urgent action to reform education and build modern infrastructure, the nation could fall far short of its potential as an outsourcing haven. That's the conclusion of a new study to be released Dec. 16 by McKinsey & Co. and Nasscom, India's influential information technology trade association.

The first inklings of a tightening talent supply are already visible in rising staff turnover and skyrocketing wages. If offshore outsourcing work grows as rapidly as expected, the study predicts, in five years India will have a shortfall of 150,000 IT engineers and 350,000 business-process staff. "The problem we are facing is huge," says Noshir Kaka, a McKinsey consultant who led the study. "The acute demand is leading to supply-side shortages."

SUPPLY AND DEMAND. What happened to that limitless pool of labor? India graduates around 350,000 engineers each year -- five times as many as the U.S. -- and a stunning 2.5 million university graduates overall. The country's entire IT and business process outsourcing (BPO) sectors now employ fewer than 700,000 people. So even the demand for such professionals doubles in five years, it would seem that India should have more than enough.

The problem, McKinsey argues, is that only about a quarter of India's college graduates are "suitable" for employment by multinationals or their Indian outsourcing partners. The chief handicaps are weak spoken-English skills, especially among graduates of non-elite schools, and the uneven quality of college curricula and faculty.

At the same time, the poor condition of India's roads, phone lines, airports, and railways is hobbling the country's international competitiveness. Its infrastructure is already strained to the limits. Unless India can unclog its arteries, it won't be able to handle its projected growth, and foreigners may look to invest elsewhere -- especially as costs in India start to rise.

BUILDING UP. Still, McKinsey says there's reason for hope. The problems are fixable if the government and companies embark on a crash program to improve education and public works. If the skills of another 10% of Indian college graduates can be raised to meet international standards, India's workforce will meet the projected demand. In fact, India's IT and BPO industries could grow by an additional $15 billion to 20 billion over the next decade if New Delhi and Indian companies cooperate in addressing the problems.

Among the study's specific recommendations:

Upgrade education. "This is the thing that India really needs to fix now," says Kaka. "The raw material is there, but the quality is low." For starters, McKinsey and Nasscom suggest, India's higher-education system should be deregulated over the next five to seven years. Today, there's little autonomy at Indian universities. Kaka says schools should be given greater freedom to develop curricula to better meet the needs of industry.

Also, many Indian colleges are facing an acute shortage of good faculty. That is partly due to low pay and limited opportunities for outside consulting work. Freedom to pay higher wages would help. And Indian universities could assign student graduate assistants to teach basic courses, as in the U.S., and make better use of e-learning programs.

Corporate training. Top Indian IT services firms such as Infosys, Genpact, and Tata Consulting Services already have impressive in-house training programs for new recruits. According to Kaka, these companies can put fresh college engineering graduates in a sort of boot camp for a few months to bring them up to the standards multinationals demand. Such intensive training programs can be implemented on a much grander scale.

Integrated townships. McKinsey/Nasscom suggest that up to a dozen new townships be built around India's biggest cities over the next five years to accommodate research and development campuses, call centers, and other outsourcing operations of Indian and foreign companies. These self-contained zones, covering about 150 million square feet each, would have first-rate roads, phone systems, colleges, health care facilities, and housing for staff and managers.

Currently, modern industrial parks have sprouted outside cities such as New Delhi, Bombay, and Bangalore. "But these are being built haphazardly around India, and they need a lot more than they have now to be successful," Kaka says. In the long run, he adds, this infrastructure work is even more essential than improvements in education, because private industry will find ways to help meet these needs.

Improve performance of Indian companies. So far, Indian IT and BPO services companies have done an impressive job of keeping their cost edge, despite rising wages, thanks to improvements in management and technology. But now foreign customers are demanding much more sophisticated services. And the quality of work among Indian companies can vary. To help these companies hone their competitive edge, Nasscom and McKinsey have developed performance metrics in 14 difference areas such as workflow management and staff training.

Is India up to the challenge? Everyone from Prime Minister Manmohan Singh to state officials to corporate CEOs agree on the need to get serious about infrastructure and education if the country is to continue moving forward as a tech and services powerhouse. The question is whether India's chaotic and corrupt political system can deliver before multinationals begin to find better alternatives to India.

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