June 06, 2007

 

Free Markets and Exit Barriers

According to an article in Economic Times, Infosys has asked its employees to sign non-compete agreement. This essentially means, if an employee of Infosys cannot join its competitors - TCS, Wipro, IBM Global Services, Cognizant & Accenture - within six months of resignation. According to an Infosys executive "Infosys may be one of the last few to initiate this," indicating this might be a industry-wide practice. (I haven't heard of such agreement, actually.)

I find this wrong at two levels.

First and real big one. The Indian IT industry is the flag-bearer of the free-market philosophy. When US reduced the the H1B visa grants, the entire industry stood together and termed the move as protectionist and against the free market, of which, in turn, US is a great admirer. They are lobbying hard to ensure "adequate" number of visas.

But, the non-compete clause flies in the face of the free market argument. When these six companies together employ almost 50% (guesswork, but should be close to that) of the total workforce in industry, non-compete agreement is nothing but forming a cartel. I vaguely remember various BPO companies coming together to curb the astronomical attrition rate, by not recruiting each others' employees. (I don't know what's the current status.) So, just when the free markets start hurting, the IT giants are taking the shelter of oligopoly. How convenient! And if the company actually cares about Intellectual Property (IP), competitive advantage, yada, yada, they should show their solidarity by paying 3 months salary for 6 months cooling-off period. Moral? As universally known, free markets are not one way street.

Second thing which is wrong with this agreement. As much as the HR department would term this as an exit barrier, to me, this is very much an entry barrier. Another shady exit barrier is to signing an agreement which says, the employee has to compensate the company if he/she leaves before a stipulated period - usually one year. Now, think of an analogy. One bank offers you 8% interest pa on the 1-year term deposit and 11% pa on 3-year term deposit. But if you withdraw money before the term, you get 0% interest. Now, even if you have slight doubt that you may have to break the 3-year term, you will quickly grab the 8% option. In the same way, if a person has two options - signing the non-compete agreement or not signing the agreement and taking a small hit on compensation (or some other parameter) - chances are high that the person will choose the second option. Which essentially means, after the entire hiring process is complete, the candidate worth hiring decides not join for some silly legal clause. Such entry barriers achieve nothing but shoo off good people. When you want to hire 37% of the crowd who can pronounce C# correctly, it is not wise to build such barriers.

And those who are still stuck in the walled gardens? Well, they are making sure others know about it in unequivocal terms.

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2
Comments:
Shashi,

I slightly disaggree with your understanding of the situation.

ITES companies are gonna get hit due to Ruppee Appreication. They have a clear Revenue Growth opportunities but their margins are being hit. Slow down in US may also affect them for next year or two.

A slow down is expected and you cannot keep the same Salary Hikes each year.

During the boom period all these ITES companies were hiring.. They even reduce their Fresher Entry criteria's like 60%, Engg Backgound, etc.

Now its time to shove off all the bad/feable minded people who had just joined for easy money and easy Onsite oportunities.

All the crap related to signing aggrement and stuff like that is not legally valid. Nothing was done on a Stamp Paper.

Its just a simple Psychological game to drive off bad people who have joined just for easy money.

You cannot grow an organization with such bad Employees. They will dump the organization at the slightest bad news.

Managing growth is very hard. You need people with good values to drive this business. Values is far more important than your technical knowledge.
 
1. The exit barrier is for good people. The bad people will just be happy to stay with the company.

2. Agreement drafted by corporate lawyers is not legally valid? I would think twice before violating an agreement written by lawyers.
 
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