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It has become practically conventional wisdom on the subcontinent: India will do in IT what Japan has done in the auto industry—dominate it. But to make that happen, Indian companies will need to reinvent themselves: Call it India 2.0.
Executives at Indias top technology services companies know their extraordinary ride of recent years wont last forever, so theyre hard at work coming up with new ways to turn a profit without relying on the wage advantage that has allowed them to operate at a mere 30 percent of costs in developed countries such as the United States.
That edge has enabled companies such as Infosys Technologies, Tata Consultancy Services and Wipro to lead an industry that has grown 200 times in revenue in the last 15 years.
What will India 2.0 look like? Customers can still look to India for high-quality code at low prices, the hallmark of India 1.0. But, increasingly, theyll see Indian companies setting up shop down the street in the customers own countries in offices staffed with local employees.
Customers also will see Indian companies eager to develop, patent and license their own IP (intellectual property), instead of just working on projects where their customer retains rights to newly formed ideas. More customers may even see Indian companies beginning to sell software products.
In the meantime, Indian outsourcing companies need to convince customers that they can do more high-level work.
“India does what it does best: low-cost, high-quality coding,” said Paul Coby, CIO of British Airways, in Harmondsworth, England, adding that he intends to retain control of IT architecture decisions.
Mitchell Habib, CIO for Citigroups North America consumer operations, in New York, added that he will “go to India for application development but not for security.”
The recent Nasscom conference in Mumbai served as a forum for Indian companies to express their collective aspirations.
Two key themes of India 2.0 emerged: the need to innovate and the need to globalize. Both themes have parallels with the Japanese automotive success story.
Once dismissed as creators of cookie-cutter economy cars, Japanese automakers have innovated a host of new designs in luxury, sport utility vehicle, sports car and hybrid vehicle markets, even as they have built assembly plants around the world. The Indians aim to do no less in IT.
What follows are the seismic shifts facing Indian outsourcing companies and what they mean for customers.
Next Page: India eyes innovation.
India Eyes Innovation
India Eyes Innovation
Talk to any offshore outsourcing company and the importance of cost savings increasingly gets pushed to the background.
“The cost advantage got our foot in the door. Then we added quality. Now we need innovation,” said S. Ramadorai, chairman of Nasscom and CEO and managing director of Mumbai-based Tata Consultancy Services.
Ramalinga Raju, chairman of Satyam Computer Services in Hyderabad, India, said, “The last 15 years is the end of the beginning.”
The need to innovate has led Indias top services companies to select key technologies for R&D and to dedicate more of their profits to R&D than ever before.
For instance, Infosys has several major initiatives under way in grid technology. In addition, the company has developed significant practices in .Net technologies, VOIP (voice over IP) and RFID (radio-frequency identification) technologies. Efforts like these, most company officials said, will lead to more patent applications, where there is plenty of room for improvement. (Wipro, for example, has only 28 patents to its name.)
However, retaining more IP in India will alter current relationships with customers.
In the past, Indian companies would often do work under contract to customers who would retain IP rights on the work. That should change, according to one major customer of Indian companies.
Habib told a Nasscom audience that Indian companies should develop and market products and services that contain home-grown IP.
“Find IP you are creating. Use domain knowledge to bring products to market,” said Habib.
He said Citigroup would have no objection in principle to Indian companies selling products based on technology developed originally for Citigroup.
“We need your products,” said Habib. Since 1997, Citigroup has done about $1 billion in business with Indian outsourcers.
“Nobody would challenge that I am a believer in this community,” said Habib.
Michael Cusumano, MIT professor and author of the book, “The Business of Software,” said the most successful software companies have a hybrid business model that consists of both software products and services.
He said Indian companies should expand beyond their services-only approach and incorporate products and what he called “semi-products,” such as tools or reusable platforms, into their portfolios.
In the past few years, Wipro has made progress in this direction using its so-called factory model, in which it has consolidated the needs of large customers into a “demand repository,” from which common applications are developed to suit many similar needs for a large client.
This process innovation cut costs by 10 percent and reduced the time to deliver software by 10 to 15 percent, according to a Harvard Business School case study of the practice.
Next Page: The offshore outsourcer next door.
The Offshore Outsourcer Next
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The offshore outsourcer next door
The twin target that must be struck for India 2.0 to become real is for the players to become global, rather than just Indian, companies.
As a result, services provided by Indian outsourcing companies may be located around the corner instead of across the globe. That strategy will go hand in glove with the desire of many customers to be global as well.
“Youve got to be globally sourced and not have a single point of failure, whether in the U.S. or in India,” said Louis Rosenthal, executive vice president for IT at ABN AMRO Bank, in a Nasscom presentation.
Scott McKay, senior vice president and CIO of Genworth Financial, agreed.
“In business process globalization, you want to move beyond a regional footprint, to cover every zone where you have customers.”
In response, Indian companies have been building worldwide operations.
“We want to be a well-respected global company, with a more diverse mix of employees,” said Infosys CEO Nandan Nilekani.
He said Infosys will make acquisitions of foreign companies and bring their employees into the Infosys fold.
“We need to make sure we become a global employer of choice,” said Nilekani.
Infosys is already well on its way to globalization. The company will spend $65 million over the next five years to build two software development centers in China.
Infosys already has established five centers in the United States—in Phoenix; Lisle, Ill.; Fremont, Calif.; Quincy, Mass.; and Berkeley Heights, N.J.—along with one center each in Canada, the United Kingdom and Japan.
Habib voiced support for the push.
“Indian companies should recruit, train and deploy students from U.S. colleges in the U.S. It creates political capital,” said Habib. “Todays hires are tomorrows customers. Look at Toyota.”
India 2.0 is likely to be active in areas beyond the United States and the United Kingdom.
Moving into non-English-speaking countries such as Germany and France will require not only new language skills but also knowledge of legal systems that are highly protective of displaced workers.
As Indian companies become more skillful in addressing these issues, the larger ones will try harder to get work in Germany and France, said Vijay Khare, executive vice president and global delivery coordinator for Patni Computer Systems, in Mumbai.
Despite the challenges, Deutsche Bank has been outsourcing successfully with several Indian companies for several years, said Simon Fanning, strategic sourcing program director for Deutsche Bank, in London, who declined, however, to name the companies.
“There are huge opportunities for Indian companies in Europe, but only those with a strategy will win,” said Fanning.
He said he has a program to teach project managers how to deal with Indian companies.
“But we also need to teach Indians about Germany and Deutsche Bank culture. The culture shock goes both ways.”
Next Page: Wages and turnover hurdles.
Wages and Turnover Hurdles
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Wages and turnover hurdles
To rise to the next level, Indian companies will have to become expert at managing explosive growth.
They have done well so far, but it doesnt get any easier to double in size, and there are still existing cultural barriers for every new employee to overcome.
Companies are bringing on as many as 7,000 new workers per year. To keep a fair percentage of them, raises must be awarded regularly, a practice that, while necessary, erodes Indias chief selling point—low-cost labor.
Most companies report that annual raises are anywhere between 10 and 20 percent.
But Indian companies manage attrition to their advantage, often shedding 2,000 workers per year.
“Wage inflation is here to stay,” said S. “Kris” Gopalakrishnan, chief operating officer and co-founder of Infosys, in an interview at the companys Bangalore headquarters.
“At 10.8 percent, we are one of the lowest,” he added. He said his company continues to be committed to its core hiring practice of targeting college graduates right out of school for its entry-level positions, which pay about $5,000 per year.
As Indian companies look at the larger world, established companies are looking at India and, in so doing, may provide the Indians with their biggest competitive challenge.
IBM, for example, is in the midst of an aggressive expansion in India, with a total of 38,000 employees in India, up from 23,000 just two years ago. Key to the expansion was IBMs acquisition in 2004 of Daksh, an Indian provider of business process and business transformation outsourcing services.
What the Indian companies covet—a robust IP portfolio and international presence—IBM already has. And it may be easier for IBM to grow in India than for Indian companies to globalize and cultivate innovation.
Whats more, the Indian educational system, which feeds the IT players with tens of thousands of new hires annually, may not be up to the task of providing increasing numbers of qualified applicants, according to Indian IT executives .
And cultural differences arent going away any time soon, either. “Indians have a difficult time saying no or that youre doing it the wrong way,” said Gopalakrishnan.
“Indians are more hierarchical and might not say anything unless asked. Infosys teaches culture lessons in its training program for new hires, which lasts three and a half months and includes 10 days on communication skills alone.”
When young Indians go abroad, they often face an adjustment period.
“It is challenging for a lot of youngsters to go to a U.S. environment. Many people are vegetarians. There are also different sports such as football and baseball. We want to reduce the trauma as much as possible,” said Gopalakrishnan.
Still, he said, the United States, because of its openness to different cultures and to business change, remains the top destination.
“The U.S. gets excited about change because they see that as an opportunity to improve,” he said.
Indias social problems could slow the advance of the IT juggernaut. With between 200 million and 400 million people living on $1 per day, some Indians look to the burgeoning IT sector to improve the lot of all citizens, including its poorest.
While these problems are daunting, leaders of the Indian industry are not about to believe they will prevent India from achieving its destiny as a global IT hub.
Japan, they know, overcame similar obstacles. During a session at Nasscom, an audience of several hundred was asked whether it believed that Indian companies could achieve the highest market capitalization among IT companies in 20 years. Nearly all voted yes.
But Japan benefited from corporate arrogance on the part of Detroit automakers, which repeatedly overestimated their own strengths while underestimating those of Japan.
If its different this time, it might be because with Japan as an example, no established IT player can say it did not see India coming.
Stan Gibson can be reached at [email protected].