The average Indian IT professional earns about $850 a month. Will these low-wage tech experts become the global leaders?
In the old days say, five years ago Indian IT firms existed in a kind of tech ghetto. Prosperous American IT companies were the stars of the show, the go-to companies that clients hired when they had mission critical assignments. The Indian companies were the low-cost choice, the place to ship non-essential work to if you needed to shave costs.
But what a difference a few years can make. Many American (and international) IT companies have opened facilities in India, while several India IT firms have opened offices around the world, including in North America. Location matters less and less. And when big bucks clients send out a request for proposal, Indian firms bid right alongside blue chip U.S. firms.
At this point, Indian IT outfits like Infosys, Satyam, Wipro and Patni stand as equals in some eyes, at least to any IT solution provider on the planet. In fact, in a development that causes deep heartburn in a segment of the American IT community, some observers view the Indian tech companies as a step ahead of their international competitors including those based in the U.S.
How, exactly, did this situation come about? And more importantly, will it continue in the future?
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A Tiger Cub Awakes
In the early 90s, much of the work that Indian IT firms did was of the bargain-basement variety. Staffing call-center help desks, application maintenance: Indian firms landed these outsourced assignments by offering deep discounts. While U.S.-based IT companies leveraged a network of personal relationship to help them land contracts, Indian companies were on the outside looking in.
The Indian firms took a step up in the world as Y2K loomed. Companies scrambled to find programming talent, and many hired Indian companies. By the time the dust settled around 2001, the leading Indian IT firms had gotten their toes into plenty of doors.
Moreover, the Indian shops had proven themselves to be truly competent. It turned out that shipping work to Indian wasnt like buying a low quality product for low cost; the offshore companies produced solid code. Still, there remained a cultural reluctance to send work to Asia. When the job really counted, it tended to stay in the U.S.
Then came a big change, says Mike Ford-Taggart, a Morningstar analyst who tracks Indian IT outfits.
I would argue that something happens in 2002 and 2003, where they [the Indian firms] reach some sort of a tipping point, he says. The buyers of IT services, big American companies, were suffering badly in the bear market, and shareholders were demanding cost cuts. Since the Indian shops typically work for 25-35% less, their offers suddenly looked quite attractive.
Instead of being a choice of last resort, the Indian firms got a chance to bid on many projects, stepping up the value chain. And even on bids they didnt win, they tended to be disrupters, forcing U.S. and European tech companies to shave their bids.
Fast forward to 2007, and the Indian shops are becoming a major force in the IT business. According to a report from TPI, over the next 18-24 months, some $100 billion worth of IT contracts around the world is up for grabs. Its expected that Indian companies will be invited to bid on these contracts. At which point, that $100 billion automatically becomes $65-70 billion, Ford-Taggart says. Clients will invite the Indian firms to the table to at the very least squeeze the U.S. vendors on price.
Another trend thats increasing the influence of Indian IT providers: outsourced contracts now tend to be shorter, and more divided between multiple providers.
In the past, companies used to award IT outsourcing contracts that were longer, 7-10 years. They would hire one firm to do it, and that firm would have subcontractors, Ford-Taggart says. Now, big clients split up major projects and request bids on individual components. Then theyll say, Look, we can have this portion done in India for 30% less.
This might cause more managerial headaches for the client company, but in fact its less risk: clients have fewer eggs in a basket with any one IT firm, so if a projects goes bad or creates cost overruns, the entire project wont take such a big hit.
A certain cultural stigma continues to cloud the perception of Indian IT companies. As we often do in America, we equate low price with low quality, Ford-Taggart says. Throughout the 90s (and still somewhat today) outsourcing to India was like buying a product from Japan in the 1950s a cheap price for shoddy goods.
Some of this stigma comes from the experience of American consumers who get routed to Indian call centers. Frustration is a constant. These phone operators are at the bottom of the training rung and are equipped to solve only minimal problems.
People take their personal experience with the call center and extrapolate that to anything else coming out of India, he says. But in fact, the Indian call center workers and the Indian IT workers are two very different groups of people.
The Secret Sauce
Indian IT firms are more likely than U.S. firms to benefit from centralized process control, Ford-Taggart says.
From their origins in the 80s, Indian companies have developed standardized processes that they use for all clients, honing these processes over many, many projects. In contrast, U.S. companies often work on a partnership model. In the partnership culture, in New York it could be very different from the way [the office] operates out in San Francisco, which could be very different from the way a partnership of the same firm operates out of Miami, he says.
This model creates a challenge for U.S. IT providers. You have all the U.S.-based firms claiming they have a global delivery system because theyve set up facilities in India, and maybe in Eastern Europe, [but] its much harder to create a global delivery model when you dont have the centralized processes in hand.
Thats why I think the Indian firms can be so disruptive, because as the U.S. firms turn around and try to create a global delivery model by opening up facilities in lower cost areas, theyre still looking at those lower cost areas as a cost center move. And they have to kind of recreate the processes to put them on a global platform to deliver them from around the world.
In terms of the quality of work done by Indian firms versus that of their American counterparts, I would argue that if it [the Indian work] isnt higher quality, than its high quality, Ford-Taggart says. Theyre doing best practices, and thats exactly why this growth is not going to stop.
He points out the Indian firms are now winning some big contracts, assignments that are too important to the clients to shovel off to second-class providers. Youre not going to trust the Indian firms to
redesign your software architecture just because its going to save you 30%, if its going to create a total disaster down the road, he says.
Indeed, most of the revenue growth of Indian shops comes from existing clients, not new business even though theyre adding new clients all the time. Most of the growth comes from the fact that their existing clients work with them and say, Holy cow, this stuffs good and give them more business. In this way the Indian shops have taken on increasingly more sophisticated jobs.
Every year, you hear, Oh, this kind of growth cant continue, and then it does. And in fact in the last couple years the revenue growth of Indian companies has accelerated.
In the last few years, many American and European IT firms have opened facilities in India. These companies know that they can hire Indians engineers for about one fifth to one eighth of what theyd pay for American tech pros. The typical first-year Indian IT trainee makes $450-500 per month. The average salary for experienced IT staffers is $850-900 a month.
This influx of new employers has upped the demand for Indian talent, which in turn has upped the wage pressure on Indian IT employers. Indian firms have been forced to boost compensation about 15% per year, squeezing their profit margins.
In theory, these hefty increases suggest that, at some point, the wages of Indian IT workers and American IT workers will reach parity. The math works like this: assuming that wages in the U.S. increase about 3% a year, it will take 19 years for Indian and U.S. IT salaries to converge.
This would indicate that, within 20 years, the engine driving Indian IT low wages will run out of gas. Not true, says Ford-Taggart. First, its unlikely that Indian wages will continue to spiral up 15% a year; that wage growth will almost certainly moderate.
Also, Indian firms are continuing to scout for still cheaper workers. For instance, one Indian IT shop recently opened up an office in Malaysia to take advantage of lower labor costs. (Which creates the specter of Indian IT staffers someday complaining that jobs are going offshore in search of cheaper labor an odd thought, indeed.)
Media reports say that Indian public schools arent graduating enough students to supply the countrys rapidly burgeoning tech industry. Yet even this concern doesnt seem to cast too much of a cloud. The leading Indian companies accept less than 2% of applicants into their trainee programs. Yet if they needed to accept, say, the top 5-7%, theyd still be working with top talent.
In truth, the lack of employees is not yet the concern that the media makes it out to be for the Indian firms, Ford-Taggart says.
A Mere Sliver of the Pie
Perhaps the most surprising aspect of the Indian outsourcing discussion is how small a slice of the pie the Indian firms currently own. Offshore outsourcing gets a lot of headlines, and generates a lot of concern, but doesnt actually attract that many dollars in relative terms. Estimates vary, but only about 4% of global IT projects are outsourced offshore, with much of this going to Indian companies. Clearly, the Indian IT presence is in its infancy.
And for all their growing strengths, theres no guarantee that the upward trajectory that Indians firms have enjoyed will continue at the same pace. The global nature of the IT market works both ways: as Indian companies open offices from Eastern Europe to the Middle East to the UK, they face entrenched local competitors in all these markets.
And companies from all these locations open offices in India seemingly on a weekly basis, using cheap Indian labor as leverage to combat the Indian-owned firms. Still, the Indian companies are showing no ill effects from this increased competition, Ford-Taggart says. In fact in a way its legitimizing their model.
Where the future of global IT competition is headed isnt precisely clear, but one things for certain: the Indian IT firms will be a major factor.