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Headline is too strong I think. This article, written by one of my favorite blogger Sramana Mitra, is apparently too high-level. Looks like some editor did a hack job to insert generalizations to make it more appealing to mainstream audience. I am surprised by lack of analysis in this particular post. This is surprising to me as I am a big fan of her strategy posts on her own blog.

I have been on both sides of outsourcing equation, enjoyed hands-on experience and know where it succeeds (or sucks!). Let me try to use my experience to counter broad generalizations made in Forbes article.

Jobs that are low value-added and easily automatable should and will disappear over the next decade.

There are jobs which appear/disappear in every economy. Definition of what constitutes “low value-added” also changes every now and then. Decade is a long time for any company to ignore stock market pressure. Labor-arbitrage element of outsourcing might see slow-down but to say that all these companies do is a low value-added task is a wide brushstroke. Market will pressure these companies to extend labor-arbitrage benefits to more structured and automated-driven labor-arbitrage designs ( Innovative tools in much-ridiculed call center industry is one example. Front end of call center is a fodder for Colbert show but back-end is seeing interesting tools and processes. )

My prediction is as more business functions get “social”, companies will need more manual processes to manage things. Take a simple example of community management. Take a combine toll of Myspace, Facebook, Digg, GetSatisfaction, Yelp, and Techmeme (and not to talk about thousands of niche community sites) on your business bottom line. How are companies going to “man” these destinations to manage their sales and marketing function. I doubt anybody can completely “automate” this task in near future. New jobs will get created here and they will require more people. That’s just one example of how each industry cycle creates new jobs.

However, the reality is that wages are rising in India. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. Attrition is scary

Attrition is really scary. It has hurt us in the past. Cost/margin squeeze will continue just as it will continue for Google or Microsoft. It’s a business cycle phenomena. Blame Schumpeter for that. In outsourcing context, attrition problem goes beyond IT industry, it’s as much a cultural problem. Pavan Verma’s excellent book will give more clue on the attrition problem.

SaaS impact is very interesting. As Sramana mentioned in her previous post. Zoho can beat Salesforce with nearly 1/3rd cost advantage. Combining Amazon EC2/S3 infrastructure with other emerging cloud services, infrastructure part of SaaS will eventually become a commodity. Not very long ago this infrastructure building used to be high value-add activity. Very soon all these offshore companies (not just Indian but rest of the countries as well) will start leveraging SaaS architecture to move into business function. KPO is one example. Companies like GridStone, Amba Research and Zyme Solutions are good examples of next generation outsourcing models.

Attrition is going to make lure of starting outsourcing business in India less appealing. Which is a good thing as other sectors will get well deserved attention.

Yet, India, for all its glory, is still the world’s back office. India’s tech industry is a “services” industry. The Indians don’t do the thinking. The customers do. India executes.

As a result, India has not learned to invent technology products of its own. Barring a few exceptions, the huge amount of venture capital chasing India finds it difficult to be deployed. There is way too much money, way too few deals. Instead, tech-sector VCs are now diverting capital to retail, real estate, hotels and other non-tech sectors.

Broad generalization? Outside Silicon Valley and in some parts of Seattle, Boston (and Israel), world of high tech innovation is just that - world of exceptions! Venture capital business is largely risk capital and it’s still centered around cultures which promote and reward risks. Venture capital deals in India are mostly late stage business deals. One can say they are more like private equity deals. Next generation VCs will see opportunity in emerging cloud architecture economics and find new bets to place.

I am not blindly defending outsourcing industry and I think fear of “creative destruction” should be more prominent . Right now there is lot of complacency. Few months ago I had commented that outsourcing is not right for every company and not many people were happy with that article.

Outsourcing business model is long due for overhaul but to say that they are heading for a cliff is a big stretch. Reality is lot more boring and headline won’t be very attractive. I will keep checking Sramana’s blog for detailed analysis on same topics.

Email hasn’t changed significantly in years. As I’ve written previously, there’s a huge opportunity in building a next generation address book. (Doc Searls calls this Vendor Relationship Management. I prefer the term Personal Relationship Management.) I want tools that augment my ability to remember, manage, and communicate with all the people I deal with every day, in both personal and business contexts.

If Microsoft does consummate this merger (and I understand from the scuttlebutt that Yahoo! does consider it a hostile takeover), the surest way NOT to profit from it is by focusing on the areas where Google is already the strongest. Microsoft needs to invest in the future of applications where Microsoft and Yahoo! are strongest, and where there is significant opportunity for innovation. Email and other messaging platforms meet these criteria.

Email is a simple tool which everybody understands. Big companies go for volume play in whatever initiatives they undertake. That’s another reason why smart money will stay away from concept-of-the-week (read Google Social Graph API - I am keeping it next to Google Base API, Search API and Open Social API!) and focus more on volume play based on real adoption. When it comes to volume play, email is still the king!

To me this reminds me of another Google service. Anyone remember Google Base? Back in 2005 big promise was something like this:

Google Base is Google’s database into which you can add all types of content. We’ll host your content and make it searchable online for free.

Google probably recovered it’s Base investment in search dollars but end user enthusiasm didn’t match initial projections. As always adoption test is key.

Fast forward to 2007. Google is attempting to out-open Facebook with different kind of promise and with apparently cannibalized jotspot codebase.

Unlike other folks I see bigger impact of this news on the third party app market (Om is right on target here). Widget makers like iLike, Rockyou etc will have to take sides now. More effort on widget maker part should be rewarded by platform owners with better data-sharing and better ad economics. That to me is a bigger story here. There will be category of widget makers like premium, enterprise, basic and great unwashed long tailers. They will get access to data and APIs based on their level of allegiance to the platform god.

Battle for openness is like deja-vu all over again. Not sure how many folks out there remember Powerbuilder, X-windows, Oracle Forms, Visual Basic etc. Time and again you see major players  using big words like OPEN, INTER-OPERABILITY, PRIVACY, DATA PORTABILITY, USER EXPERIENCE etc to exert their platform influence.

At the end of the day promise of open has to be as honest as disclosing actual dollar value companies place on user data. Monetization is not open and it’s not even portable. Get real.

“Companies always need to separate valuation from strategic and performance issues, and this is obviously a valuation we need to grow into and we hope we will, But we know it is an aggressive valuation.” - Jim Breyer.

[Hat tip Kara Swisher]

Technorati Tags: Facebook Breyer Valuation

Timing and news coverage is bit fishy here.

Redhat launched RedHat exchange and further solidified their perceived leadership role in open source. Fud like the one Microsoft is raising can send mixed signal to companies hoping to join RedHat exchange. Who knows what might happen and who is trolling for what.

Second interesting aspect is about Fortune breaking this news. Fortune had been critical of open and free software in the past. Mostly by taking a stand that OSS/FOSS movement is anti-business.

Last point is more interesting and that concerns Google. Depending on how scared Microsoft is about Google and knowing Google runs all their data center servers on Linux this can have potentially interesting dimensions. Again this is all theory but lawyers tend to think very differently from engineers so we shouldn’t be surprised about the broad direction of fud, whereas Microsoft’s intended target could be very specific.

Blogosphere will wake up on Monday with full of anti-Microsoft posts. Diggers and Slashdotters will have field day with this.

The top 50 IT services vendors employed 1.7 million employees at the end of their most recent reported financial years. This is an almost an increase of 13% of the comparable total of 1.5 million from the previous year. Much of this growth has been driven by the major offshore sourcing suppliers, with the top five players adding 88,000 new staff last year taking their combined total headcount to 307,500. TCS, Wipro, Infosys, Satyam and Cognizant are poised to add a further 100,000 new recruits between them in fiscal 2007.

Top five players will have roughly 400,000 engineers by end of 2007!

I see 400,000 free agents by 2010. Call me crazy but growing aspiration and massive broadband penetration will make free agent model popular in all offshore locations. Even if somebody shoots for 10% of this market there is a sizeable opportunity to empower this audience.

Redhat is by far the only big pure-play open source success story out there. They have perfected their subscription based revenue model and now it seems they are intent on putting more and more components to add incremental revenue. Complete SOA stack strategy is designed to shift enterprise budget from licensing model to the subscription model.

They are marching up the stack. This became clear when they announced the acquisition of MetaMatrix, a proprietary integration framework which acts as a data glue between business applications and different data sources. Sort of like Tibco for data. MetaMatrix competes with big companies as well as innovative startups such as Composite Software.

This acquisition has a potential to cause lot of disruption among existing integration players. People have already started talking about “shorting” Tibco and BEAs of this world. Ashlee Vance recently reported about seismic changes taking place in the mid-market enterprise software segment. Ray Lane of Oracle fame making  a chilling prediction of carnage coming in the mid-market. Companies will loose lot of their pricing power when caught between three giant forces changing the economics of software industry - consolidation at the very top, move towards software as a service and popularity of open source model.

Redhat is ideally positioned to scale out their subscription model with more and more interesting components in the mix. They will make more acquisitions to expand vertically.

[Cross posted on OpenAppDotOrg]

The second question is, we tracked your revenue per employee on a
gross basis. Up until the fourth quarter of 2005, gross revenue per
employee had been growing in the single-digit range. Since then it has
been declining, in fact down 12% year-over-year this quarter. I
recognize that is because you’re adding more new employees that are not
productive. At what point do you think your existing employee base is
large enough that your new employees do not cause your gross revenue per employee to decline?

Eric Schmidt

An interesting series of questions. We don’t approach the questions quite
the same way that you phrased them. Our primary focus is on end user
happiness, end user traffic, end user growth. So what we look at is we
look at what will drive even more end users using our product globally.
So, for example, if we could bring out a product that will cause people
to use Google and its various applications that much more and they
spend more and more of their day using Google services, that allows us
to eventually monetize that. So we do not insist on a direct link from
say a product that does not get revenue to one that does. In the cases
that you cited, we look at the revenue contribution. But the primary
focus and the primary management focus is around end user happiness,
end user growth, end user everything.

With respect to the revenue per headcount, again we are not very focused on that. We are much more focused in total growth of the platform, total growth of the
number of advertisers, total growth of the monetization. It is easy
enough for us to dial any particular metric like employees per gross
revenue up or down as we see fit. It is more important to focus on end
user happiness. A lot of the people we are talking about are, for
example, coming in for customer service globally. We are also way, way
investing in engineering because we believe this is a time where our
model is scaling that products that we are going to bring out in a year
or two are going to have huge impacts to the investments we’re making
in data centers, and we need the engineers to build the great products
to do so.

I thought this question betrayed how little this analyst understood Google culture.

Atleast product managers now have to have a serious line item in their PRD. They should label it “connecting the Google dots”.

 If done correctly Jotspot acquisition will help Google take application building to the next level and firmly establish advertisement model on it.  This will flush out lot of commodity application startups from the market. This will have some consequences for the productivity software market.