India's Talent Pool Drying Up: Tech Sector Suffers As Wages Surge And Multinationals Splurge by John Larkin, The Wall Street Journal, January 4, 2006; Page A9

India, despite its reputation as a bottomless well of back-office talent ready to scoop up American jobs, is having an increasingly difficult time finding qualified workers to fuel its booming services sector.

The cross-sector crunch is especially worrisome in the technology industry, where wages are rising 15% a year as call centers and software firms throw money at the increasingly shallow pool of youngsters who can hit the ground running. Consulting firm McKinsey & Co. says India's information-technology industry could face a deficit of 500,000 workers as soon as 2010, undermining its attractiveness as an investment destination.

Even if companies continue to find the talent they need in the near term, the rising wage bill is a troublesome long-term trend for India's competitive prospects -- and for foreign companies pumping money into the global outsourcing market. The emerging talent deficit is giving rivals such as Russia space to compete with India for high-end outsourced work such as software design and solutions, and allows aspirants such as the Philippines -- where English is widely spoken -- to better compete for call-center business.

"There are huge numbers of fresh [university] graduates who are just not hirable," says Anand Saraf, managing director of Iqura Technologies, a software firm in Bangalore, India. Mr. Saraf says he has lost contract work to other countries including the Philippines and Poland due to rising local wages. India, he adds, is becoming "an expensive place to do business."

At the heart of India's dilemma lies the subcontinent's antiquated higher-education system. It produces around three million graduates a year, but they are of such uneven quality that many aren't employable. This wasn't a problem when significant numbers of talented recruits were available to fill the first waves of jobs in the modernizing economy. But as the cream of each year's class becomes absorbed more quickly, companies are having trouble finding good, affordable talent -- from the lowliest phone jockeys to top executives -- as revenue and operations expand along with India's booming economy.

To be sure, some businesses are as yet untouched by the shortages. Marquee local software firms such as Infosys Technologies Ltd. continue to attract more than enough skilled applicants. The rest -- including large U.S.-based competitors -- have little option but to pay high wages to attract employees in fished-out talent pools in big cities such as Mumbai and Bangalore.

India isn't alone in suffering a skills shortage. The U.S. is sliding into one, due chiefly to early retirements by baby boomers and a lack of replacements. A skills drought in China is due partly to the fact that many of its graduates live long distances from the cities where jobs are being created and are unwilling to relocate, McKinsey & Co. says.

The demand for well-trained workers has prompted an explosion in wages for the most experienced Indian personnel. And attrition has reached epidemic proportions as workers job-hop to better salary packages. Pay for tech and banking executives, airline pilots, and engineers -- all sectors experiencing huge growth -- jumped between 25% and 30% in 2005.

Rather than hire ill-qualified graduates, companies are devising strategies to cultivate and retain valued workers. Software firm Sierra Atlantic, of Hyderabad, India, tries to discourage defections by taking midlevel managers to screenings of team-oriented war movies such as "The Dirty Dozen." Genpact, formerly General Electric Co.'s outsourcing arm, has opened store-front recruiting outposts in five cities.

Competition for talent is fierce. Larsen & Toubro Ltd., the subcontinent's largest construction company, loses 800 experienced engineers a year to software firms and multinational engineering companies, despite having doubled salaries over the past couple of years.

In response, the company has launched a global head-hunting campaign to woo back staffers lost to foreign rivals by offering salaries of as much as $100,000 -- a huge sum in India, where average annual income is just $620. As a hedge against losing more engineers, it started an in-house IT-solutions division, L&T Infotech, chiefly to give employees who want to expand their skills an option rather than resignation.

India produces a huge number of engineers, says L&T's chairman A.M. Naik, but most are graduates of mediocre private engineering colleges. "I spend more time on human resources than actually doing work," he complains. "The talent issue is going to decide who will win and who will lose" the race for profitability.

India's long-term challenge is to improve its higher-education system, say executives and educators. Fewer than 10% of high-school graduates opt for further education in India, compared with 64% in the U.S. Many of those who go to university find colleges that haven't evolved much from the British colonial era.

"Unless we drastically look at paradigm shifts in education, we won't get the numbers [of workers] we need for the future," says S. Ramadorai, chief executive of India's biggest software company, Tata Consultancy Services.

India's dozen or so top business and technology schools are on a par with U.S. Ivy League schools. They produce world-class graduates who form the subcontinent's corporate elite. But these people represent a rarified sliver of excellence in a system of 17,000 colleges and universities scarred by bureaucracy, substandard teachers and ossified curricula.

Politics is also shortchanging students, says Shiv Visvanathan, a professor at the Dhirubhai Ambani Institute of Information and Communication Technology at Ahmedabad. Many state colleges, he says, are controlled by local politicians who arrange for the necessary licenses and get a cut of revenue. As a result, the emphasis is on making money rather than on academics. Some colleges can't afford library books and don't have enough classrooms.

The Indian government has tried to make headway by launching programs to improve tertiary education. Some experts believe the system eventually will deliver the teaching needed to equip young minds for the global economy. But change isn't likely to come quickly.

In the meantime, an army of unemployed recent graduates, estimated at more than five million, is expected to grow. Mr. Saraf, whose firm Iqura also has an executive-search business, says most IT firms now won't touch anyone with less than two years of experience. He says he regularly receives graduate applicants who have learned outdated computer languages.

"I've even had to tell [new hires] they can't wear slippers to business meetings," he says.

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