Archive for January, 2006

India’s Talent Pool Drying Up

January 6, 2006

WSJ writes:

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.

Business Week writes:

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.”

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Economic Moats

January 6, 2006

Morningstar writes:

We begin with the premise that all highly profitable firms attract competitors, and only firms that are able to keep competition at bay will earn above-normal profits for a long time. An economic moat–or competitive advantage–allows a company to fend off competitors and earn sustainable excess economic profits. We look at return on invested capital (ROIC) relative to the company’s cost of capital to determine profitability, because ROIC shows us the cash return on the capital invested in the business. We think that ROIC is the best measure of a firm’s true economic profitability.
Of course, we have to examine ROIC relative to a firm’s cost of capital because money isn’t free–those who have capital charge companies for the right to use it, and they charge some companies more than others. A firm that operates pipelines or sells beer has a low cost of capital because it has a stable business, so investors don’t ask for much in the way of returns. A small semiconductor or biotech firm would have a very high cost of capital because it’s entirely possible that investors might not get their money back, so they ask for a high return to compensate for the higher risk. For example, an ROIC of 14% would be spectacular for a pipeline company relative to its 8% cost of capital, but would barely clear the bar for a small tech or biotech firm.