Top outsourcing customers, including Amex spinoff Ameriprise and Capital One, are raising concerns over the increasing number of new engineering graduates employed by Indian and foreign tech firms in IT projects.
People familiar with the discussions said customers, especially in the banking and financial services sector, are worried that a high proportion of freshers may affect quality in what they call critical back-office functions.
Already, customers such as Capital One—theVirginia bank that outsources to some of the top tech firms based in India and overseas—are demanding more scrutiny on the ratio of freshers working on critical projects. A person familiar with TCS' engagement with Ameriprise said the outsourcing firm had to pay a penalty of around $2 million towards errors in updating a brokerage system at the financial firm last year.
'TCS did not use 'liability insurance' to pay up this fine to avoid getting this documented and instead had to reduce cost of different contracts,' the person added. For the over $100-billion US IT outsourcing market, these concerns are an early warning signal as rivals TCS, Infosys, IBM, HP and others push to maintain profitability by increasing the proportion of fresh graduates at lower salaries in locations such as India.
Customers such as Amex, Citibank and JPMorgan are demanding more with less, or the same IT budget, forcing firms to seek ways of sustaining their profit margins through the use of freshers at lower salaries. Ameriprise spokespersons Benjamin Pratt and Stacy Housman did not responded to an email query sent by ET last week.
The Pyramid model
A questionnaire sent on May 12 to the TCS office was not answered till Wednesday. When contacted initially on May 12, the TCS spokes-man had said he would get back on the query in a day, but did not re-spond later. A US-based analyst who consults customers on working with vendors such as TCS says, 'We are aware of certain big players having to pay fines based on poor quality, and these are actual costs. It's (the labour-based model) going to catch up with them.' Ameriprise and Amex together are one of the top customers for outsourcing and offshoring globally.
TCS, Infosys and Cognizant derive nearly $100 million every year from these two customers. For long, outsourcing firms have been perfecting a model wherein they hire thousands of freshers every year, accounting for nearly 95% of overall recruitment. These fresh hires, after up to six months of training, are pushed into the system to ensure that offshoring remains cost effective despite a 10-15 % wage inflation every year. Growing concerns at large outsourcing customers about the profile of workers assigned to their projects is an early warning for all tech firms following the so-called 'pyramid model', which is based on a high proportion of fresh engineering graduates recruited from campuses and managed by a few middle to senior-level managers at the top.
At least three top executives at five of the biggest tech firms said while most customers are only interested in the output and not necessarily the profile of the staff, some have started becoming more watchful. 'You can't single out only the Indian companies,' said the CEO of one of the top Indian tech firms. 'I don't think it's such a big problem, we have been increasing the training period before they are put on live projects, and while these complaints are rare, many multinationals are now increasing the proportion of freshers in India.'
Already, customers such as Capital One—theVirginia bank that outsources to some of the top tech firms based in India and overseas—are demanding more scrutiny on the ratio of freshers working on critical projects. A person familiar with TCS' engagement with Ameriprise said the outsourcing firm had to pay a penalty of around $2 million towards errors in updating a brokerage system at the financial firm last year.
'TCS did not use 'liability insurance' to pay up this fine to avoid getting this documented and instead had to reduce cost of different contracts,' the person added. For the over $100-billion US IT outsourcing market, these concerns are an early warning signal as rivals TCS, Infosys, IBM, HP and others push to maintain profitability by increasing the proportion of fresh graduates at lower salaries in locations such as India.
Customers such as Amex, Citibank and JPMorgan are demanding more with less, or the same IT budget, forcing firms to seek ways of sustaining their profit margins through the use of freshers at lower salaries. Ameriprise spokespersons Benjamin Pratt and Stacy Housman did not responded to an email query sent by ET last week.
The Pyramid model
A questionnaire sent on May 12 to the TCS office was not answered till Wednesday. When contacted initially on May 12, the TCS spokes-man had said he would get back on the query in a day, but did not re-spond later. A US-based analyst who consults customers on working with vendors such as TCS says, 'We are aware of certain big players having to pay fines based on poor quality, and these are actual costs. It's (the labour-based model) going to catch up with them.' Ameriprise and Amex together are one of the top customers for outsourcing and offshoring globally.
TCS, Infosys and Cognizant derive nearly $100 million every year from these two customers. For long, outsourcing firms have been perfecting a model wherein they hire thousands of freshers every year, accounting for nearly 95% of overall recruitment. These fresh hires, after up to six months of training, are pushed into the system to ensure that offshoring remains cost effective despite a 10-15 % wage inflation every year. Growing concerns at large outsourcing customers about the profile of workers assigned to their projects is an early warning for all tech firms following the so-called 'pyramid model', which is based on a high proportion of fresh engineering graduates recruited from campuses and managed by a few middle to senior-level managers at the top.
At least three top executives at five of the biggest tech firms said while most customers are only interested in the output and not necessarily the profile of the staff, some have started becoming more watchful. 'You can't single out only the Indian companies,' said the CEO of one of the top Indian tech firms. 'I don't think it's such a big problem, we have been increasing the training period before they are put on live projects, and while these complaints are rare, many multinationals are now increasing the proportion of freshers in India.'
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