Fashion india magazine

Eleven floors above the heat and noise of Mumbai's busy streets, Seturaman Mahalingam sits in the air-conditioned offices of Tata Consultancy Services (TCS) sipping tea. He looks relaxed, sanguine even, as he discusses his role as CFO of the biggest IT-services firm in India. Before long; he says, TCS will be among the biggest in the world.

Six hundred miles to the southeast, in an office campus outside Bangalore, Mohandas Pai, CFO of TCS's rival Infosys, is equally confident. He talks excitedly of growth, profitability, and overseas expansion.

So does Suresh Senapaty, finance director of nearby Wipro, which wildly exceeded analyst expectations in April by announcing a 43 percent increase in fourth-quarter net profits, and a 23 percent increase for the full fiscal year.

Who can blame them for their optimism? The accomplishments of India's rising IT stars are well known. "In 1994, we were a $10 million company. In 2004, we'll have revenues of more than $1 billion," says Pai. "We've grown 100 times larger in 10 years."

The records of most of India's other large IT-services firms, such as Satyam Computer Services and HCL Technologies, are equally impressive. Figures from India's National Association of Software and Services Companies (NASSCOM) show that the country's IT industry grew from $5 billion in 1997 to $16 billion in 2002.

That rosy picture plays nicely into Western fears of domination by India's IT firms. But scratch the surface of the industry, and one finds these companies facing challenges familiar to their U.S. counterparts; among them, currency fluctuations, wage inflation, and public grumbling over jobs moving offshore.

The biggest threat to Indian IT firms, though, is the threat of competition from such long-established IT and outsourcing consultancies as Accenture, IBM Global Services, and EDS. During the past 18 months, these behemoths have grown acutely aware of the threat posed by their Indian competitors, and are squaring off for a showdown. But any effort to pick a winner in the coming fight quickly reveals that the IT-outsourcing industry is far more complex--and global-than often suggested by the current U.S. political debate.

INDIA SHINING

It wasn't until 1991--when India began to liberalize its protected economy-that the IT industry really started to gather steam. Foreign businesses saw the potential of India's highly educated, English-speaking workforce and sent coding assignments there, where they could be handled for a fraction of their cost in the West.

At first, the work centered just on writing the proprietary software that companies used to automate internal processes. But as the Indian firms grew larger and honed their project-management skills, the assignments grew more complex.

Plummeting telecom costs during the 1990s made offshoring even cheaper, and soon Western businesses were relying on India not only for writing programs but also for installing such software packages as SAP, providing IT consulting, and even conducting research and development for new products.

Most recently, the Indian companies have added business process outsourcing (BPO) services to their menu of capabilities, and now handle all manner of back-office functions, from staffing customer call centers to analyzing tax returns. As Wipro's Senapaty explains: "We want to capture as much of the budget of our clients as possible."

The problem is that Wipro and its peers have done rather too well, according to Pramod Gupta, an analyst at ABN Amro Securities. While India's IT players have enjoyed compound annual growth rates of between 50 percent and 60 percent in the past decade, the IT-services industry itself has grown at a more sedate 5 percent to 6 percent. "The whole Indian IT-services story has been about taking market share," says Gupta.

At first, the big Western multinational IT-services providers didn't mind too much. After all, their Indian competitors were concentrating on relatively low-end, low-value work. During the past three or four years, however, India has moved up-market into the core businesses of its Western rivals--areas such as designing the architecture of IT systems, and acting as IT and business consultants.

A QUIET REVOLUTION

"It happened in a stealthy fashion," observes Jayant Sinha, a partner in the Delhi office of strategic-consulting firm McKinsey & Co. For a long time, he says, the likes of IBM, Accenture, and EDS ignored the Indian IT-services companies as "simply capturing the labor arbitrage between India and the West."

Then came the dot-corn bust, and the Western firms suddenly could not afford to be so cavalier. "They took their eye off the ball, and when they looked up, the Indian companies were suddenly right behind them," says Sinha.

Today, he adds, "these [Indian] companies are really starting to inflict some hurt on the global multinationals." That may be an overstatement, given the disparity in revenues between Indian firms and their rivals (see chart, right), but it is true that in addition to snatching some customers, the Indian firms are inflicting huge pricing pressure on companies based in the United States and Europe. "What we do is very disruptive for the global majors," says Infosys's Pai, with a grin. "It's a disruptive business model."

Other 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 billion-a-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."