Skip the navigation

India Inc., Still Going Strong

Other countries are nipping at its heels, but India remains the premier offshore destination.

September 15, 2003 12:00 PM ET

Computerworld - An abundance of low-cost labor and a reputation for high-quality work will, for the next several years, continue to make India one of the top outsourcing destinations for U.S. companies looking to cut IT development and maintenance costs.


But a lack of industry-specific consulting skills and market presence in the U.S. could limit the appeal of Indian vendors for upstream IT consulting work in the future, observers say.


"India Inc. as a brand has become very visible," says Pavan Kumar Maddali, a vice president at Hyderabad, India-based Satyam Computer Services Ltd. "No vendor needs to have a 'Why India?' slide in their PowerPoint presentations any longer."


Even so, "Indian companies are still positioned primarily as a cost-efficiency play" and not as upstream consultants, says Debashish Sinha, an analyst at Gartner Inc. "Though the top-tier companies are spending a significant amount on branding and marketing, they still don't have the same [name recognition] as the U.S. majors do," he adds.


Satyam and other Indian IT services companies have enjoyed tremendous growth in recent years by delivering cheap labor and quality work. The National Association of Software and Services Companies (Nasscom), India's software trade association, projects that the country's IT services industry will grow nearly 28% this year to more than $12 billion in revenue, at current exchange rates. More than 70% of that revenue will come from U.S. companies, with some contracts exceeding $40 million, according to Nasscom.


Major Indian vendors such as Tata Consultancy Services (TCS), Wipro Ltd. and Infosys Technologies Ltd. routinely sell to Fortune 500 companies, and they are now able to begin competing with IT services giants such as IBM, Electronic Data Systems Corp. and Accenture Ltd.


Despite rising costs and increased competition, India's low-cost labor pool, which has fueled much of this growth, will continue to be a magnet for U.S. companies desperate to shed costs in a down economy, Sinha says.


U.S. firms that outsource to Indian vendors can typically reduce project costs by 50% to 70% compared with doing it at home, says Jim Honerkamp, CIO at Clopay Corp., a $1 billion, Mason, Ohio-based manufacturer of commercial doors.


For less than 30% of what it would pay in the U.S., Clopay is getting Hyderabad-based Sierra Atlantic Inc. to develop and maintain its Oracle Corp. environment. Even projects that require staff to be located at Clopay's U.S. facilities are about 50% cheaper, under the fixed-price contract that Clopay has negotiated with Sierra.


Outsourcing to Sierra has allowed Clopay to double the resources it can bring to bear on a project, even as the number of internal IT employees at the company has dwindled from 95 to 35 over the past couple of years, according to Honerkamp.


"We've been asked to do more with less," says Honerkamp, explaining that Clopay's management team has asked him to reduce his budget—or at the very least keep it flat year over year.


"At the same time, our application portfolio has been increasing. The only way to look at this was through an offshore solution," Honerkamp says.


But cost isn't the only reason why outsourcing to Indian companies is an attractive option, insist users and analysts. Companies in countries such as Russia and China have begun offering better rates than Indian companies.


The difference lies in the scalability of major Indian vendors, their strong focus on quality and their experience delivering a wide range of services, says John Blanco, senior vice president at Cablevision Systems Corp. in Bethpage, N.Y.


When it comes to software development and process methodologies, all top-tier Indian vendors are certified at CMM Level 5, which is the highest level on Carnegie Mellon University's Capability Maturity Model. Major Indian vendors have also developed more of a global services delivery capability than their counterparts in other countries.


A $900 million company, Wipro, for instance, has more than 18,000 employees and operates software development centers in the U.S., Canada, the U.K., Germany and Japan. India's largest exporter, $1 billion TCS, employs more than 24,000 people and has nine development centers outside India, including one in China.


India's workforce also offers the largest pool of technical skills in the world, and the country's universities add 180,000 engineering graduates to its ranks annually.


Indian companies started by maintaining legacy applications and writing code for small projects, and they have steadily moved up the value chain into areas such as systems integration, network and infrastructure management and system planning and design work.


"I'm a complete nonbeliever that other countries can do this as well as India today," says Vivek Paul, chairman of Bangalore-based Wipro. "Anyone can set up a low-cost 200-person center in Uganda. The difference is in the investment in quality processes and global delivery capabilities" that Indian firms offer, he adds.


Such attributes were crucial to Cablevision's decision to select two Indian vendors—from an original field of 50 offshore companies in six countries—for an offshore pilot project.


The goal is to eventually use Indian vendors as strategic IT partners, both to augment internal IT development capabilities and to help Cablevision plan, design and implement new projects, Blanco says.


"We're not looking for just the lowest dollar [cost]. We are looking for vendors that will help us mature technically and from a process standpoint" as well, Blanco says.


New York-based financial services giant Lehman Brothers Holdings Inc. has begun strategic relationships with Wipro and TCS after an evaluation exercise in which many offshore vendors were ranked using Lehman's 15-criteria evaluation model.


"India was in a quadrant by itself" in terms of the labor pool, quality levels, process methods and government support for IT initiatives, says Peter Nag, vice president and global program management officer at Lehman.


Under its contracts with Wipro and TCS, Lehman has begun outsourcing several of its applications to India, according to Nag. "Cost is one of the expected benefits but not the primary reason," he says.


For all their success, one area where Indian companies still need to build their capabilities is in upstream IT consulting services, says Rusi Brij, the Jamesburg, N.J.-based CEO of Hexaware Technologies, an offshore software development company based in Mumbai.


Indian companies are strong in software development and maintenance but not so strong at understanding the business needs behind IT projects, Brij says. "Indian vendors typically don't see business users as a client; they see the IT organization as their client," he says.


Now with U.S. services companies such as EDS, Accenture and IBM beginning to expand their operations in India, vendors there are scrambling to acquire upstream IT consulting capabilities of their own.


Wipro last year boosted its energy and utility practice by acquiring the global energy practice of American Management Systems Inc. for $26 million. And HCL Technologies Ltd. in Uttar Pradesh has set up a joint venture with Answerthink Inc., a Miami-based business consultancy.


In the long term, there are some clouds on India's horizon.


While the top five Indian companies have been galloping along at growth rates in excess of 25% per year, the vast majority of smaller vendors are struggling along at a much slower pace. The trend could result in a consolidation of the midtier, predicts Gartner's Sinha.


Meanwhile, the growing presence of IBM, EDS and Accenture is putting the squeeze on pure-play Indian vendors. The U.S. companies not only have the ability to lure the best talent away from the Indian majors; they also have deeper pockets and can undercut Indian prices, says Brij. The presence of these companies will also have the effect of increasing salaries across the board, says Satyam's Maddali.


In the short term, the increased competition could mean better prices for U.S. customers. But over the long term, continued pressure on margins could begin to affect service delivery, says Sinha.


On Top of The World
Survey respondents say they’re currently outsourcing IT work to the following countries:
India38%
China6%
Mexico5%
Ireland5%
Canada5%
Malaysia4%
Philippines4%
Russia4%
Singapore4%
Base: Survey of 252 corporate IT managers in the U.S.; multiple responses allowed

Source: Computerworld and InterUnity Group Inc., Concord, Mass., April and May 2003


Special Report

Offshore Buyer's Guide
Stories in this report:

Read more about IT Outsourcing in Computerworld's IT Outsourcing Topic Center.



Our Commenting Policies