In 2003, IBM had a modest Indian outsourcing operation with 9000 Indian employees (representing 2.9% of their total workforce). It was one of the most innovative companies of all time with record number of patents in its name. Slowly, steadily the Indian workforce grew (mostly in line with the Indian IT boom). Then in March 2012, IBM suddenly stopped publishing its US and Indian headcount separately. ~45% of its total employees were from India. Today various estimates peg IBM’s India headcount at ~50-55%. This is shocking for a company that has always remained a prominent US corporate, and where most employees have always been American citizens. Moreover, nothing in IBM has changed. Its pace of patent filings, and innovation has only got better or remained the same. So has IBM effectively transitioned from an American company to an Indian ? All within a decade ??

The management principle working behind this development is known as ‘sinking skill ladder’. Let me explain by taking a example. Between 2003-2006, managements across Western countries (primarily US) decided to outsource R&D labs to India. They like their manufacturing and accounting counterparts believed that Indians were good enough and cost effective to take care of low level tasks in the R&D value chain. 750 American companies established R&D labs in India with nearly 400,000 Indian employees. Problem came up when the top managements wanted to ramp up R&D value chain, increase productivity and generate more products for global marketplaces.The R&D skills required for the same existed only in a far away office in India. In order to advance R&D efforts,they had two choices – either immigrate the employee to their home office or outsource more work to him. Given the restrictions on immigration during the last decade (especially after 2008), companies decided to outsource more work. Slowly a substantial portion of mission critical projects were driven out of India. With R&D went support operations, routine tasks,and even product development.

The result is fascinating for India in the long term and disastrous if the US does not change immigration policy. India has now become second largest headquarter for a number of US companies. This growing club includes Google, AstraZeneca, GE, Philips, Boeing etc.

This is in sharp contrast to the ‘World is flat’ theory advanced by Thomas Friedman. In his book, he postulated that India and China would eventually handle lower levels of work and the West would engage in higher levels of innovation. That is how he explained outsourcing was a boon for the west. But does this not seem a short sighted, less studied view ? There can be many reasons why this may not eventually hold , I will advance two hypothesis (mostly why it will not hold from the Indian people side):

First, Indians are among the most creative, enterprising and scientific communities (if not all Indians then include most South Indians + Biharis + Gujaratis+ Assamese and Punjabis who end up studying; for non – Indians these are ethinic communities within India) on the planet. Evidence – 40% of the silicon valley workforce is Indian (refer Eric Schmidt recent interviews). Our hinterlands possess some of the most fantastic innovators in the world (refer Dr. AK Gupta, IIMA).

Second, an average educated Indian professional still wants to begin his career with a call center/KPO/analytics firm (Dun include IIMA,B, C slot zero recruits and 5 people from SRCC that apparently get a INR 32 lakh package from DB each year). Soon they get bored of their work. In most cases, they innovate or push their leadership into process, management, and product innovation. Over time, they make tasks more sophisticated, increase productivity and pull more complex work from outside.

May be the reason is not that important for this article’s audience. The trend is. Many of my readers must be thinking if this phenomena is limited to the tech services industry. The answer is no.The phenomenon is becoming increasingly evident in many other industries including financial services, management consulting, and automobiles.

For example, Goldman Sachs created a global support center in Bangalore to outsource operations and IT support. Slowly, they decided to outsource basic research and asset management support to India. Currently, several stocks, bonds,& economies are being covered from the office and independent funds are being researched and advised by Indian teams with only an overlooking portfolio manager sitting in the US. You know where this is going next.