FT : India Outsourcing Turf Wars

Tuesday, June 5, 2007

…IBM, the world’s largest technology services company has rapidly built up its presence in the subcontinent.  Today India is IBM’s biggest centre by headcount outside the US, with more than 53,000 employees.  The strategy is not isolated to IBM.  As India emerges as the undisputed low-cost hub for global outsourcing, all of the leading western information technology services companies are setting up operations in the country on an unprecedented scale.  India is this year expected to become the biggest employment base for Accenture, the global IT consultancy, and the biggest within the next one or two years for Capgemini, the leading European computer services consultancy.  The eastward migration of the IT services giants is challenging the predominance of India’s aggressive domestic companies on their home turf, opening a new chapter in the battle for control of an industry worth $1,500bn (€1.1bn, £753bn) globally last year.  “If you look five years from now at the big five global companies, who are they going to be?  That’s the game right now,” says Salil Parekh, head of Capgemini in India.  “That’s why everyone is scaling up offshore.”  For India, the outcome of this struggle will be critical.  The IT outsourcing and IT-enabled services sector has become an important driver of the country’s economy, generating about $48bn in annual sales last year, according to Nasscom, the industry body.  Most of the global technology services companies have had a small presence in India for years, many of them for decades.  But it was not until the Y2K boom in the late 1990s that they began to stand up and take notice of the country’s potential.  India’s homegrown computer services outsourcing companies were able to prepare western clients’ IT systems for the so-called “millennium bug” at a fraction of the cost of their global peers…..

Among the first to see the benefits was Accenture, which has had operations in the country since 1985.  Essentially a high-end business strategy consultancy, Accenture has also begun pushing into the Indians’ stronghold of low-cost project work for foreign clients.  Accenture calls this strategy, ominously for Indian operators, “defend and extend”.  Others, such as IBM, were regarded by analysts as slower off the mark.  But in recent years, the group has begun to obtain critical mass in India.  In 2004, it bought a business process outsourcing unit and in 2005 it acquired a network management business.  It then began a recruitment drive, last year alone hiring more than 1,000 people a month.  Most of IBM’s global business units are now represented in India and the company has begun to target more closely India’s emerging domestic technology services market.  IBM has also boosted its research division in India, putting some of its best minds to work at improving the so-called “global delivery model”, the process by which outsourcing companies in India provide services to clients overseas.  Among the research division’s innovations was voice recognition technology that filters applicants for call centre or business process outsourcing positions based on their presentation skills over the phone, says Guruduth Banavar, programme director of IBM’s services innovation and research centre in Bangalore.  But the attempt to match the Indian companies at their own game is viewed with scepticism by some.  For a start, global companies are still burdened with armies of expensive consultants in developed markets, while their Indian peers draw heavily on locals in their mid-20s whose salaries, while rising, are still well below their overseas rivals.  “Indian companies are starting from a low cost and working out.  Western IT consultancies are starting from a high cost and moving low cost,” says Egidio Zarrella, a partner at KPMG.  The Indian IT outsourcing companies may be tiny compared with their western adversaries – the biggest, TCS, had annual sales of $4.3bn last financial year, slightly less than Accenture’s quarterly sales.  But while the Indian companies’ market share is only about 5%, this has risen fivefold in three years.  Says Nandan Nilekani, executive chairman of Infosys, the second-largest Indian outsourcer: “It’s not about size, it’s about the future, it’s about who’s got momentum, it’s about new business models replacing old business models.  We are growing at a compounded rate of 40% and the legacy players are growing at 5-6%.”  Indian companies argue that western consultancies, particularly front-end salespeople, have a cultural dislike for outsourcing.  “They will always see India as just a back office,” says S. Ramadorai, TCS chief executive.  “But for us this is the mainstream.”  The western companies retort that their Indian rivals are still largely confined to the middle to lower end of the business.  The Indians are barely present in business strategy consulting, the industry’s most lucrative work, in which consultancies will help a retailer such as Wal-Mart to set up a supply chain management system or a telecommunications company to roll out a billing system…..With both sides trying to invade each other’s territory, some wonder why there has not yet been a large-scale merger between an Indian company and a western consultancy.  The Indian companies have the currency.  Infosys’ sales may be a fraction of those of Accenture but its market capitalisation is about $31bn, compared with the US company’s $23bn.  “The IT industry hasn’t had a breakthrough acquisition yet and that is something that should happen,” says Pradeep Udhas, a partner at KPMG.

Reference : http://www.ft.com/cms/s/3f44ee40-1302-11dc-a475-000b5df10621.html

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