Dexteyra Consulting Group Inc.

Trends in the Economics of SAP Consulting Business

M.S. Oberoi*

February 22, 2010

Overview

Considering the 2007-08 economic recession, Federal Regulations have been revised that will impact all businesses in North America. This article discusses in particular how revised Federal Regulations will impact the economics of SAP consulting business.

Post 2002-03 recession, there was a considerable shift in the information technology (IT) Business model as North American businesses increased off-shoring work to cheaper destinations such as India, China, and the Philippines. At this time in 2010 though, the North American (NA) Governments are very cautious about the trend while industry regulations are being tuned to reverse this model that had impacted North American job markets considerably over the last five years. Among the regulatory derivates, US President Barack Obama?s administration is moving the country?s Tax legislations to penalize businesses which outsource jobs or augment their overseas income by selling work in the US and delivering this work remotely from India. Indian IT industry that was estimated to be around USD 24 billion in 2004 stands out to a whopping USD 60 billion in 2010. It has to be noted than 90% of Indian IT revenue is derived from the outsourced US business.

Impacts of new work VISA regulations

Another regulatory derivate is President Obama administration?s stance to close loopholes in the portability and sponsorship of US work VISA (also known as H1B VISA). Over the last 10 years, scores of small companies which had mushroomed in the US manipulated these regulations to import cheaper IT consultants from India and sell their services on an hourly basis to clients in the United States. Interests of IT practitioners as well as clients were jeopardized due to this manipulation. Now, stricter vigilance as well as improved regulations will reverse this trend. As an outcome though, around 30% of current H1B VISA holders in USA are projected to return to India within one year. This number is high because United States Citizenship and Immigration Services (USCIS) is now very strictly enforcing its policy to require letters of engagements from end-clients to approve extensions on H1B VISAs for staffing assignments. While each time it costs around USD 3000 to file an extension that includes the filing fees and the lawyer?s fees. And given the current economic situation, reduced pricing as well as lower utilization rates are adding to the stress levels of the otherwise hard-working H1B IT practitioners.

The impact will be that there will be less availability of Indian and Chinese IT consultants? onsite. This is good news for North American IT Practitioners because they will witness a sharp price rise when the job market revives, hopefully by 2012.

A Smart Tip to CIOs

A lot of SAP work has been on hold for last few years due to the economic circumstances. It is projected that as demand for consulting builds up, there will be a shortfall of experienced consultants. Currently, it is a very good time to focus on training SAP personnel in-house to reduce high fees to be paid to the consultants. It is observed that SAP Analysts who have worked with end-clients for years are trained only on one template. So it will be rewarding to rotate those personnel within different business units or with other friendly companies on tenures. Those SAP Analysts who get exposure to multiple templates will be more confident when new functionalities are added and to address Change Management.

A unique SAP opportunity for small to mid level businesses

As of first quarter of 2010, North American SAP market is flooded with a huge inventory of branded SAP consultants who were laid off by the big five consulting firms. These experienced consultants are scattered randomly and are currently available for half of their earlier billable rates that were being charged by their celebrated employers. Therefore this is the best time to implement SAP or exercise functionality enhancement for smaller and medium size corporations which have not used SAP in the past due to higher consulting cost or have lived with limited functionality applications of SAP. This is the right time to integrate their businesses to achieve their long term supply chain goals at lower cost. All these Businesses need to do is to engage a small, but experienced consulting partner who has lower overhead cost to build a team out of laid off SAP Consultants from the big five consulting firms.

Direct Impacts on SAP Consulting Business

Due to the regulations around US Work VISAs, SAP consulting business will have huge impact. Because unlike other IT utilities, SAP functional consultants are required to work from client?s sites for 100% of their billable time. The reason is that due to the nature of their work, close business-to-business interaction is mandatory to gather true functional requirements. Therefore, SAP functional consultants who are already known to be the ?big buck? earners will witness their demand and utilization rates go up very arbitrarily in NA.

On a real-time basis, developing a true SAP solution involves understanding the business requirements and then mapping those with SAP options based on functionality available in the software. Usually, the nature of SAP work that is delivered remotely from India relates to development and configuration and does not involve interaction with the client on a day-to-day basis to address their design. Therefore, junior-level consultants can do this job, though more experienced consultants are needed to design solutions.

Canadian Perspective

One exception is due to President Obama?s concession to allow Canadian business to bid for work under the ?Buy America? program and due to the strength of the North American Free Trade Agreement (NAFTA), considerable business will move to Canada instead of moving to third-world nations. But this trend will not impact pricing because Canada does not have the low cost advantage as compared to the Asian countries. This will simply be a load-sharing or capacity-augmentation arrangement.

Independent Consulting Model

Independent consulting is another trend that we have witnessed during the current recession, and due to the commutative impact of above Government regulations. Experienced SAP consultants will continue to find it more profitable to work as independent consultants rather than being hired by the big five companies. This will lead to reduced profitability of the big five SAP Consulting firms, at the same time, reduce the availability of experienced consultants to work under their brands. This scarcity will be fulfilled by on boarding Indian consultants on L1 VISAs (also known as inter-company transfer VISAs) as against the conventional H1B VISAs. It has to be noted that L1 employees are much cheaper for these companies as compared to H1B employees, because the companies are bound to pay true market price to H1B holders, a condition that does not truly apply to L1 VISA holders. Due to large numbers of returning expats in India, the supply of experienced SAP Consultants will boom in the captive development centers of these large companies, though as mentioned earlier, 90% of the demand is derived from North America. This situation may exacerbate a necessity for outsourcing at higher cost, despite unfavorable Tax regulations in the USA.

A Broader Economic Perspective

The manufacturing and services industry is still recovering from its worst economic downturn after the Great Depression of the 1930s. The unemployment rate in the USA has actually gone up to 10.6% as of February 2010, though the political torchbearers have been talking about the revival. A true economic revival in North America does not seem possible in the first quarter because home the foreclosure rate has gone up by 15% in January and 20 banks have already closed shop to hand-over their keys to the US Federal Deposit Insurance Corp (FDIC). In the bottom line, we are continuing to witness everything that led the world economy to a standstill over the past two years.  Though European economies had seen some signs of revival derived from their respective Government?s economic stimulus packages, the first quarter news as of February 2010 is not very encouraging. The world definitely has the risk of heading into a double dip recession.

An Asian Job Perspective

Fortunately, news from the third world countries such as India and China has been very encouraging. As far as the job and hiring scenario is concerned, it seems likely that Asia has started creating more jobs ahead of the curve, whereas we are still witnessing higher job losses in North America. Another trend that we are witnessing right now is that North American IT businesses and consulting personnel have dropped their prices by as much as up to 300% which was unbelievable for many. This was not the case in 2002-03 recession which was comparatively much milder in impact. If this trend continues, the utilization rates will take a positive turn in North America as well, though it will impact profitability. But it can definitely reverse the trend favorably to create more jobs in North America.

We had seen during the 2001-03 recession that India had started creating enormous IT jobs much ahead of the USA when the market turned around. Infact, the end of 2003 and late 2004 timeframe was a period when the USA was actually shedding jobs while tech jobs rained in India. A reason for that was that by end of 2003, the US corporates had finally accepted the recession as a reality. And sending jobs to India appeared to be the best option for American businessmen to become more competitive and also profitable. The downside to this trend was that the North American corporate lost enormous jobs. But the advantage was that those businesses were able to deliver goods and services at much cheaper rates to their end-customers, thus promoting higher value to the share-holders who helped to turn around the economy eventually.

What is impending?

US President Barack Obama is yet to announce his administration?s policies relating to immigration reforms. Most importantly, it will be of interest to readers of this paper to know about reforms relating to the conversion of US Green cards from work VISAs. Once that information is available, we will update this section.

Conclusion

This is a tough market economy. And due to newer Government regulations in North America, the IT consulting business model will change during the next few years. The trend will be more favorable to IT consulting personnel based in North America in general, while SAP functional practitioners in particular will benefit the most. Businesses that are doing well financially are also waiting before they would spend any IT dollars. Newer outsourcing markets such as Argentina and Brazil will continue to evolve. Rates will continue to decrease for the next two years except for the very specific skills. The good news is that there will always be work available, as IT is required by businesses which aim to succeed.

 

*Mandeep S. Oberoi works as Director & Principal Consultant with Dexteyra Consulting Group Inc. He has also worked with large consulting firms such as Hewlett-Packard Canada’s Business Consulting Group and Capgemini USA LLC, among others. Some of his key past clients include Canada Revenue Agency (CRA), Bank of Canada, MolsonCoors Brewing Company UK, Winnipeg Regional Health Authority, Ministry of Works - Government of Trinidad & Tobago, and Bacardi Rum, among others. He specializes in designing SAP Best Practices based banking, finance, public sector management, and supply chain solutions. Mr. Oberoi has worked on projects across North America, Caribbean, Europe, and Asia Pacific. He was awarded a Medallion by the Indian National Academy of Engineering (INAE) in 2001.

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