GOOD STUFF, CHEAP. That's the reputation of India's IT outsourcing industry, and it's both a blessing and a curse.
The blessing is that India has finally been able to seize the global stage by harnessing its greatest natural resource -- people -- and focusing on filling the world's yearning for IT skills and services. By becoming, as some call it, "the back office of the world," India has grown its IT exports in less than a decade from $150 million to more than $4 billion -- 10.5 percent of India's total overseas sales. And in so doing, India has built a solid record for developing IT talent as well as delivering top-notch legacy system maintenance and software applications.
The curse is that, despite what IT outsourcing has meant for India's economy, the country's top IT vendors have been typecast, and they're scared. Wipro, Infosys Technologies, TCS -- they all hear the approaching footsteps of Ireland, China and the Philippines, the up-and-coming IT service centers. What happens to India if any of these upstart countries learns to provide good stuff, cheaper? At the same time, these vendors feel the pressure of great expectations. They represent India's best hope to achieve economic prosperity in the 21st century, and so they push themselves to develop new products and services to meet projections that India's software exports will exceed $50 billion by 2008. But these companies already have grown so quickly that they now face their own staffing crunch. They compete with one another -- and with their foreign customers -- to recruit and retain thousands of young, restless programmers who want to get their hands on the hottest new IT projects. Yet how do India's IT vendors grow their businesses and create these hot, new projects when they're stuck with this label of "good stuff, cheap"?
"India has been branded as a country with a lot of cheap people available, and that's a lot of baggage to carry," says Soumitro Ghosh, general manager of worldwide marketing at Wipro, based in Bangalore. "We're trying to change that image. Getting work is not difficult; getting the right kind of work is difficult. We have to convince customers that they can outsource high-value work to India."
Toward that end, India's top IT services vendors are changing their marketing strategies. They're downplaying the legacy systems work, software debugging and "body-shopping" (sending Indian programmers overseas to work on assignment for customers) on which they built their businesses in the '90s. Instead, they're pinning their 21st century hopes on e-business development, new software products and end-to-end business/system consulting -- high-profile, high-paying projects that will improve their ability to stave off competition, grow their companies and retain staff. Fueling this shift is the fear that if India's vendors don't somehow escape the reputation for good stuff, cheap, then their good fortune will go away as quickly as it arrived. "Despite what companies -- even our own -- might say, we know that the work we currently do is work that someone else chooses not to do," says N. Lakshmi Narayanan, president and COO of Cognizant Technology Solutions, a Teaneck, N.J.-based IT services vendor that operates several software development centers throughout India. "Certainly these services are business-essential, but they are not business-critical. For us to really be at the leading edge, we have to get into business-critical systems."
The Indians make a strong argument. Nobody can beat their price -- software programming in India costs roughly $35 per hour, as opposed to $200 in the United States -- and their quality is world-class. In fact, of the 23 companies worldwide that have been awarded the United States-based Software Engineering Institute's Capability Maturity Model (SEI-CMM) Level 5 rating for fault-free software engineering processes (the equivalent of a perfect 10 in Olympic competition), 15 of those elite companies are Indian, among them Infosys, NIIT and Wipro.
There's only one problem with this scenario: What if their customers don't want to expand their offshore relationships? Indeed, some of India's best customers say their entire offshore strategy is based on the premise of good stuff, cheap.
"We're looking for lower prices and quality people," says Kelly Robinson, CIO and vice president of operations at E-Health Solutions, an Arlington, Texas-based health-care provider that outsources data entry to India. "If [Indian vendors] take away the low-end work, we'll start looking elsewhere."
As for the hot, new projects, those are the ones many CIOs reserve for their own restless staffs. "Those projects are the ones that keep the local superstars working for me and not somewhere else," says one manufacturing company CIO, who prefers to be anonymous. "I'm in deep trouble if I lose those folks."
Which isn't to say Indian vendors don't stand a chance of attracting higher-level, higher-paying projects. In fact, some market analysts believe that window of opportunity is open now. "In general, I'm finding a sense of hostility on the behalf of U.S. companies toward the Andersens, KPMGs and [other consultancies]," says Marty McCaffrey, executive director of Software Outsourcing Research, a Salinas, Calif.-based company that has tracked offshore outsourcing trends since 1996. "CIOs feel they're not getting their money's worth from these companies."
If Indian vendors suddenly appear with lower-cost, high-quality business services, then they will find an eager customer base, says McCaffrey. The key is developing those services within a matter of years, if not months. "They can be the equals of the best of our [business-service] companies in a very short period of time," he says.
Consider, after all, how quickly India built the entire offshore outsourcing industry.
Birth of an Industry
The offshore outsourcing industry as it's known today began in 1972. That's when TCS, founded by India's multi-industrial Tata family in 1968, sent its first technical staff overseas to work onsite for United States-based customers. "Body-shopping" is how the practice came to be known, and it was popular during the offshore industry's first 20 years, as foreign companies enjoyed the benefits of augmenting their own staffs with India's ready, willing and cheap labor.
But beginning in 1991, when ex-Prime Minister P.V. Narasimha Rao's government initiated a series of economic reforms to open India's borders to foreign trade, the offshore industry began a gradual transition from staffing to services. Suddenly, foreign customers, particularly those in the United States, realized that India wasn't just a source of cheap IT labor, it was a place where top-quality IT services could be performed effectively, inexpensively and in a time zone that gave Western companies nearly around-the-clock access to IT talent. Since 1991, scores of big-name companies (including General Electric, IBM, Microsoft and Texas Instruments) have outsourced ccertain back-office functions or, with help from the vendors, opened software development centers staffed and managed entirely by Indian programmers.
It's an understatement to say that the 1991 economic reforms changed the fates of several companies. In a decade's time, TCS, the first to outsource these services, has become India's biggest outsourcing vendor, exporting roughly $400 million in IT services annually. Wipro, which tried and failed to market its own project management software product in the early '90s, now is the nation's No. 2 IT services exporter and was the first company in the world to achieve SEI-CMM Level 5 status. Infosys, a software development company founded in 1981 by seven friends who borrowed startup money from their wives, now is No. 3 among India's IT outsourcing companies and No. 1 in polls ranking India's most admired companies.
It's equally an understatement to say that as these IT services companies have grown, so has the nation. Not only do IT exports account for more than 10 percent of India's total exports, but the Indian IT industry employs roughly 320,000 people -- and at a far higher standard of living than people earn in other professions. The average professional salary in India is equal to $4,000 to $6,000 per year, but entry-level software engineers can earn anywhere from $8,000 to $10,000. And the growth potential for the industry and its employees alike is tremendous. A recent industry survey by India's National Association of Software and Service Companies projects that the country's IT industry could earn $87 billion and employ 1 million people by 2008.
To the Indian mind, which reads math equations like poetry, these projections are nothing short of inspirational. "In the brick-and-mortar world, there were always limitations," says B. Ramalinga Raju, chairman of Satyam Computer Services, India's fourth-leading IT services exporter. "IT has brought an opportunity for this country to reach out to the world. In today's world, it doesn't seem to make much of a difference where I'm working. The world has become the marketplace for India."
In the early years, the biggest challenges for India's IT services companies were matters of perception and communication. Customers had a hard time getting past the image of offshore outsourcing companies as high-tech sweatshops populated by scores of Indian cybercoolies working for bread, rice and spare rupees. And if they did rise above that stereotype, then customers frequently became entangled in project management issues complicated by geographic and cultural differences. Once customers visited India and saw the truth for themselves, half the battle was won, says R. Ramanan, vice president of TCS in Bangalore. "No customer I've known has visited India and left without changing his perspective on what we can and can't do," Ramanan says.
But understanding what Indian companies can do is one thing; getting out of their way and letting them do it is quite another. The notion of sending IT work 9,000 miles offshore and to a time zone that's anywhere from 9.5 to 12.5 hours ahead of the United States (depending on whether the destination is on the U.S. East or West Coast) was so...well, foreign that customers had a hard time releasing the reins. Consequently, they tended to overmanage the projects to the point where some companies would even send their own staff to India to oversee the vendors' work. "That tendency to overmanage could make [cost] value disappear fast," Ramanan says.
There also were some cultural barriers to overcome. For one, Indians have a tendency to shake their heads from side to side to signnify yes -- a visual cue that means no in most Western countries. And when Indians want to say no, they aren't always explicit. As opposed to Americans, who generally are quite comfortable voicing their opposition to a proposal, Indians tend to keep their initial doubts to themselves and then express them later, when the project might be in full swing.
These initial challenges were overcome by two factors: successful outsourcing engagements, which built on one another, and the Y2K scare, which created more software programming than any company could handle in-house. Indian companies ended up taking on a lion's share of Y2K work (roughly $2 billion worth of work from 1996 to 1999), which helped cement their reputation for delivering good work, cheap.
The upside of offshore outsourcing's rapid ascent is that it has allowed the Indian vendors to enjoy unprecedented growth. In just the past five years, the offshore outsourcing business has grown from about $734 million to $4 billion. Meanwhile, outsourcing vendors such as Infosys and Wipro have grown from a few hundred employees to several thousand -- with no end of growth in sight. The downside of this explosive growth is that while Indian IT companies have been helping foreign customers mitigate staffing shortfalls, they've been developing a staffing crisis of their own. Even in India, after all, the IT labor pool is only so deep. Currently, each of the major IT companies has an attrition rate of 11 percent to 13 percent, which is below average by U.S. standards. But if you consider that these companies are growing on average by about 20 percent per year, you'll see the staffing challenge they face. The engineering schools and universities are turning out tens of thousands of IT professionals each year, and these become the primary focus of the vendors' recruiting efforts. Yet recruiting is only half the battle; retention is the next struggle. More than money, young Indian IT professionals want (not necessarily in this order) the opportunity to work overseas and the challenge of working on the highest-priority projects with the hottest new technologies. But there are only so many overseas opportunities, and for those who stay domestic, the most challenging projects are not the ones that traditionally get outsourced.