VideoOther commentators agree, for the Indian firms have done much more than simply harness cheap labor. In particular, they have developed a new generation of project-management skills that lets work be carried out from lots of locations in many different countries simultaneously. Core to this so-called global delivery model that links on-site engineers in the West with cheap labor in India is a heavy emphasis on quality standards.
Take TCS. The company currently has 26,000 engineers — more than any other company in the world — assessed at the highest level of Carnegie Mellon University's SEI-CMM scale, the industry benchmark for software quality. Other Indian companies are equally dedicated to SEI-CMM, as well as to such other quality standards as ISO and Six Sigma. The result is often not just a cheaper service in India, but a better and timelier one, too.
East vs. West
No longer wasting time in responding to the threat, Western businesses are now building or expanding their own cheap back-end operations in India and other low-cost locations.
Just look at EDS, the Plano, Texas-based IT-services firm with $22 billion in annual revenues. Speaking at a Lehman Brothers investor conference in March, CFO Bob Swan acknowledged the pricing pressures that EDS faces. "We need to take 20 percent out of our cost structure over the next three years...not in order to expand the operating margin but to improve our win rate for new business," he explained.
And how does EDS plan to cut costs? By ramping up its Best Shore strategy, whereby it locates workers in low-cost countries. Currently, EDS has 8,700 staffers in offshore centers — a quarter of them in India — but it plans to increase that number to 20,000 during the next 18 months.
Accenture, a $13.4 billiona-year rival to EDS, has a similar story. In December, it announced that it would be increasing its head count in India from 4,300 to 10,000 by the end of 2004.
Also in December, IBM announced that it would move 5,000 software development jobs from the United States to India this year. And in February, Bearing Point — formerly KPMG Consulting — revealed plans to hire 2,000 staff in India in the next two years.
The Sincerest Flattery
It's all very flattering for the Indian firms, but it's equally worrying. At Mphasis, CFO Ravi Ramu acknowledges the issue. "The fact that the global multinationals are coming to India certainly means that some, if not all, of our cost advantage will be whittled away," he concedes.
Nonetheless, Ramu remains confident that the global delivery model Indian firms have perfected gives them an advantage. "Offshore isn't just about hiring a bunch of guys, putting them in a room, and getting them to write code or answer phones," says Ramu. "It's a completely different way of working, of selling a service." That model, he reckons, will take the Western multinationals three or four years to master — a valuable window in which the Indian firms can grow and gain critical mass.
At Wipro, Senapaty is equally confident. "Because we developed our project-management skills and our commitment to quality while we were small, we've grown up with it," he says. "It's in our DNA."
But good DNA won't help with the appreciating rupee, an emerging headache. "A rising rupee would have a serious impact on profitability," admits Neeraj Bhargava, CEO of Mumbai-based WNS Global Services. "And there are certain scenarios that suggest the currency could rise a lot further."
Then there's the question of rising wages. The rapid growth of India's IT industry creates huge demands for new staff. Wipro hired 10,651 new employees in the six months leading up to December 2003, increasing its workforce by 65 percent.
Inevitably, such large-scale recruitment has led to rampant wage inflation for certain jobs, especially experienced project managers. NASSCOM reports that the average salary for an IT project manager rose 50 percent in 2003 from a year earlier.
Put it all together, says ABN Amro's Gupta, and "the cost advantage for Indian firms won't last long." He's calculated that the labor arbitrage between the United States and India has already fallen by 18 percent in the past two years.
To make matters worse, Indian firms have started putting pricing pressure on one another. At the low-value end of the market, a raft of second-tier companies has piled in, sending prices tumbling. Venu Reddy, research manager in the Asia Pacific for IDC, an IT market-research group, observes: "The traditional offering of Indian vendors — application development and maintenance — has become a commodity, and prices are falling."
The Grass Is Greener
It is in response to all these challenges that India's leading firms are desperately trying to move into the higher-value-added areas of IT services. For example, Infosys, Wipro, and TCS are starting to mix broad industry-consulting skills with IT in order to deliver "business outcomes" rather than just IT services.
The irony, of course, is that while Western firms rush to create a cheap offshore delivery capability, the Indian companies are racing to build a sophisticated front-end consultancy in the West.
Many industry watchers foresee tough times ahead for the Indian firms. The global majors have a worldwide presence capable of serving multinational clients, and plenty of resources. Revenues at IBM Global Services alone, for example, are $43 billion — almost three times the size of India's entire IT sector.
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