Offshoring Evolves Beyond American vs. Indian

Thursday Sep 27th 2007 by James Maguire
Share:

As IT companies from both countries leverage each other’s workforce, the line between "American" and "Indian" starts to blur.

In John Lennon's "Imagine," he sang: “Imagine there’s no countries / It isn’t hard to do.” While that Utopian vision isn’t expected anytime soon, there is one area in which the borders between countries are starting to dissolve: offshoring technology projects.

In the popular perception, technology jobs are either shipped off to India (where labor is cheap), or kept here in the U.S. (which helps maintain American jobs). It’s a staunchly “Us vs. Them” outlook.

But the reality isn’t that simple. As American tech companies set up shop in India, and as India IT firms open American offices – staffed by Americans – the line between what’s “American” and what’s “Indian” is starting to blur. Mike Ford-Taggart, a Morningstar analyst who covers the IT sector, sums it up: “I think five years from now we’re not going to talking about Indian IT services companies, we’re going to be talking about global IT services companies.”

No matter what country an IT services firm is originally from, he says, “If they’re not global firms, they’re not going to be around.”

In this regard the tech industry bears something in common with the auto industry. In America, Toyota is considered a foreign brand. But what’s more American, a Toyota built in a Kentucky plant, or a Ford built in a Mexican plant?

IBM – very much an American company – employs 53,000 staffers in India. (The company has 127,000 U.S.-based workers.) And a recent IBM project for Texas-based CenterPoint Energy Project included six software developers based in India combined with dozens of staffers from across the U.S.

Accenture presents a similar international picture. “We think of them as an American firm, but it’s not, it’s based in Bermuda,” Ford-Taggart says. “The CFO is out of Frankfurt, and the marketing guy is in San Francisco. There’s no place where these guys sit together and share ideas.”

Indian Beachhead

As American firms hire more Indian workers, Indian companies are hiring more Americans. Indian IT giant Wipro (which is listed on the New York Stock Exchange), in August announced it would acquire Infocrossing, a U.S. infrastructure management firm with 900 employees. (The deal is scheduled to close in Q4.)

“More and more, Infosys and Wipro are moving people to on-site [in the U.S.],” Ford-Taggart says. “Because they have H-1B visa problems, they’re hiring Americans. They send them to Bangalore for six months to be trained, then they’ll send them back to the U.S.”

Wipro just announced plans to open a development center in Atlanta, with three more in the works. The new hires will be Americans. “They’re going to hire people who have associate’s degrees, or people out of the military,” Ford-Taggart says. In other words, lower cost U.S. workers. “And as they go along, they’ll separate the wheat from the chaff, and pay for the wheat to go get the bachelor’s degree – and not ship them to India.”

It is, to be sure, an idea that sounds strange to American ears: the Indian IT firm not as “job stealer,” but as “job provider.”

However, while this is not yet a common practice, it’s becoming common. “They started doing this about two years ago. Now they’re really starting to ramp it up,” he says. In the future, as IT outfits from each region take root in their competitors’ area, the tech industry can expect far more of this.

Next page: Globalize or Bust

Globalize or Bust

Not only will IT services be globalized to the extent that a firm’s home base becomes irrelevant, but only those services firms that are truly global will survive. The bottom line appears to be: adopt a fully international stance, or fade away.

“That’s my concern with Bearing Point right now,” Ford-Taggart says. “They’re not making any effort, because they can’t, to invest in their global delivery network. They have very little offshoring.”

Yet those with a fully international delivery system will continue to thrive. “When I look around 10 years from now, I see Tata, Infosys, Wipro, EDS, IBM, Accenture. That’s probably it, maybe CapGemini.” In Ford-Taggart’s view, the rest of the players will either be taken private, be acquired, or perhaps a seventh firm will emerge from an aggregation of current companies.

As the mega-size IT shops consolidate their hold, the smaller companies that do BPO (business process outsourcing, such as health or insurance claims), will proliferate faster than piles of papers on a claim adjuster’s desk. Like the bigger firms, these BPO firms will cater to a global market. “Those kinds of companies, it boggles the mind how many of them there are already: Filipino, Brazilian – anywhere,” Ford-Taggart says.

In the Driver’s Seat

Despite the fact that the future of IT will be less about America vs. India than about global firms competing globally, one fact remains clear: at present, it’s the Indian companies that are driving change. It’s the large pool of well-educated Indian developers who are the emergent force, and it’s Indian firms that influence even contracts they don’t win by providing a lower cost alternative.

At this point, offshoring is in its infancy, despite all the concern and headlines it generates. Estimates of the percentage of work sent offshore range from 4 to 8 percent – still a modest slice of the global pie. Based on rough calculations, perhaps some 30 percent of this total goes to India.

Yet it’s likely that these numbers will increase substantially. One factor suggesting deep growth for Indian IT firms is their pricing power with existing clients. Remarkably, they’ve been able to gain pay increases even on existing contracts.

For over a year this type of practice has been going on, explains Ford Taggart. “Infosys and Wipro will go back to their client and say, ‘Hey look, big multinational company that we do business for, [Indian] wages are increasing 15% a year, foreign currency fell 7% in the second quarter. We need to raise the price of that contract you agreed to.”

“Now a contract’s a contract, [but] these clients, on average, are letting prices be raised by 3 percent – on a signed contract.”

The reason? Partially because Indian companies, due to their surplus of cheap labor, are themselves generous with what they provide. By Ford-Taggart’s account, the Indian firms will often throw in some extra development work completely free of charge.

As Wipro’s head of enterprise solutions told him, “‘We’ll be working on a project and some little side project will come up, and we’ll say ‘So what, I’ll have some junior guy, who’s just going to be sitting there anyway, jump on it and get it done in a couple of days.” The clients will respond as if they’ve just been given a major, surprise gift. “It’s because they're so used to being treated bad by the legacy players," Ford-Taggart explains. With this kind of customer service, it’s not surprising that clients are willing to grant Indian firms some cost leeway.

What this suggests is that the room for growth in Indian market share is enormous. “If you believe that outsourcing is going to become bigger, that the offshoring part of that is going to become bigger, [then Indian IT companies] are going to be growing at these tremendous, tremendous rates.”

Share:
Home
Mobile Site | Full Site
Copyright 2017 © QuinStreet Inc. All Rights Reserved