Hard to hold back India
IT providers there exploit more than low-cost labor while reducing total computing costs
By Erik Keller, contributing editor -- Manufacturing Business Technology, 12/1/2004 7:00:00 AM
India is quickly moving from being simply a wellspring of inexpensive outsourced talent to a principal source of IT cost and process advantage. Taking lessons from manufacturing quality programs, many Indian companies are moving up the value chain in ways their U.S. competitors only talk about. While the country faces significant infrastructure challenges, its strong work ethic and entrepreneurial spirit mean its impressive growth will continue for the foreseeable future.
U.S.-based executives and managers are recognizing only slowly this change. Those who have, however, have taken the leap. These include technologically savvy manufacturers and technology sellers alike:
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Much of SAP's Business Warehouse and NetWeaver development resides in India.
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Oracle has more than 6,400 people employed in India and plans to have nearly 10,000 by the end of 2005.
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Venture capital companies will not fund software or other technology suppliers that can't set up most of their service and support operations in India or a similar country.
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General Electric(GE) spends nearly $300 million annually with Indian IT suppliers Tata Consultancy Services and Patni Computer Systems.
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United Technologies has engaged Indian companies for more than 10 years. Wipro Technologies created a market-leading remote-service solution called e*service for United Technologies' Otis Elevator division.
Fast growth
While India's burgeoning economic power has gotten plenty of press recently, it has barely scratched the surface when it comes to taking a bite out of total U.S. information technology spending. U.S. corporations will spend slightly less than $900 billion total this year.
The latest figures from Nasscom, a trade association of Indian software and service companies, says the Indian market for IT-based goods and services sold in the U.S. for the year ending March 31, 2004, was $12.5 billion, and will increase by 30 percent to more than $16 billion by March of next year.
This projection seems actually a bit bearish, however, given the latest financial reports of Indian IT providers Infosys, Tata Consultancy Services, and Wipro Technologies. These companies reported respective revenue growth of 51 percent, 44 percent, and 47 percent over the same quarter a year ago.
In addition, all three companies had margin growth in excess of revenue growth during the same period. Even more remarkable is that in the midst of margin growth, the companies hired a combined total of more than 15,000 workers between July and September. These companies have management on par or better than their U.S. and European counterparts.
NASSCOM, working with McKinsey & Co., recently released a study saying India will have more than 3.2 million IT employees by 2012, generating $119 billion in revenue. Revenue will come not from rapid price inflation, but rather, increasing growth in services.
Many companies in India—including Tata, Infosys, Wipro, and Cognizant—say one big challenge is keeping costs constant. To toe that line, they combine low-cost labor with ongoing process improvements. For example:
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Indian software companies hold the highest number of Level 4 and Level 5 capability maturity model certifications from the Software Engineering Institute. This is the software equivalent of Six Sigma certification for quality assurance in manufacturing. Few U.S. or European system integrators can claim the same.
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Business applications being developed in India are designed for reuse and easy configurability to client needs. Older applications were built to customer specification, and then jury-rigged to fit the needs of others.
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Buyers are given a choice between semi-custom and packaged applications. For example, Wipro delivered an algorithm specialist ILOG-based supply chain solution to a customer for 60-percent less than one based on i2 Technologies software would have cost.
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Unlike in the U.S. or Europe, upwards of 50 percent of all systems integrator or business process outsourcing jobs are profitably taken on the basis of a fixed-price bid.
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The high stock price of many Indian offshoring companies, as well as pre-tax margins in excess of 20 percent, illustrate the management expertise and quality of execution specific to these companies.
It's not just a matter of India having considerable pools of low-cost labor. Labor is inexpensive, but quality is high. This phenomenon is not widely understood, as U.S. and European companies continue to ignore India's potential.
Another business practice—new to the IT industry and emanating from the offshoring companies—involves ongoing price reductions for steady-state operations or jobs. GE and United Technologies look to their offshoring partners to deliver IT service productivity gains over time, thus lowering each provider's costs. Some of that benefit is passed to the client in the form of a price reduction.
For example, one of Tata's clients contracts for services—and pays for them—as they would from any manufacturing supplier: each year the price of a given service must decline. Gains follow primarily from periodic companywide evaluation of services execution and implementation of open-source technologies.
When it comes to development efforts, to maintain profit margins despite demand for decreasing costs, the offshore companies have increased productivity by means of new development tools, as well as project and knowledge management programs. Tata has a proprietary software tool called MasterCraft to help customers increase IT productivity.
Higher-end assignments
To say India is capable only of low-cost, tactical work is like saying Japanese cars of the 1980s were just cheap U.S. knockoffs.
Establishment of low-cost offshore centers in India by "traditional" IT service providers and systems integrators is well under way, as are business processing outposts for financial, telecommunications, legal, engineering, and other type services. But along with enhanced productivity come opportunities for enhanced delivery of value.
Tata's engagements and focus are typical of the higher-end offshore companies.
According to managers there, three years ago a typical engagement focused on bespoke application development, maintenance, and support functions. Today it's more likely to involve mission-critical application creation and around-the-clock support, as well as working with larger clients to automate and optimize key processes. Part of this is accomplished through purely custom applications; others take the proprietary route.
All this moves the company one stage ahead in its evolution. Tata today has a banking application and analytic tools for small to medium-size banks. These companies are loath to call these efforts "enterprise applications," because that would put them in competition with customers and partners—i.e., the largest enterprise vendors in the world.
Largest changes yet to come
Within the next three years, depending upon what vertical industry is under discussion, offshoring companies will offer even more competitive software and business-process optimization services, right up there with the big boys.
Inexpensive availability of reliable network and computing technology implies that any work that doesn't require the physical presence of an actual person can be offshored.
India is becoming a leader in IT services by supporting the creation of a pool of highly specialized and educated workers who have the ability and willingness to deliver high-quality, low-cost work. It will be difficult to slow India's 30-percent annual growth in IT services provision.
Political rhetoric and implied threats will not make U.S.-based companies any more secure either. EDS Chairman Michael Jorden told an industry forum in mid-September that U.S. software and service providers must offshore to be competitive. A few days later, EDS announced lay-offs of 20,000 employees, mostly in the U.S. and Europe.
Labor rates: domestic and foreign providers
Per-hour personnel cost (in $U.S.)
| Labor pool | 2002 | 2006 |
| High-end U.S. (IBM, Accenture) | $175 | $110 |
| Regional U.S. (Keane, Crowe Chizek) | 125 | 90 |
| Independent contractor | 80 | 50 |
| Internal IT staff (burdened cost) | 45 | 45 |
| On-site, Indian offshore (TCS, Infosys) | 50 | 60 |
| Off-site, Indian offshore | 15 | 20 |
| Emerging offshore (BridgeQuest, Russia; ASTI, Shanghai; SPI Technologies, The Philippines) | 10 | 15 |
| Source: Jetstream and Wapiti LLC | ||
