FT : Indian Outsourcers Climbing Up The Value Chain

Thursday, August 28, 2008

…..As India’s outsourcing companies try to grab more market share from their global information technology peers, they are seeking to differentiate themselves by moving further up the value chain.  “Now customers are not necessarily coming to us to save costs but more for value,” said Subu Subramanian, Satyam director and senior vice-president of the manufacturing and automotive solutions business unit.  India’s outsourcers started life as “body shops” – providers of programmers or call centre workers at a fraction of the cost of those in developed markets who could perform simple functions on the part of clients.  But with labour costs and competition rising, India’s outsourcing companies are increasingly seeking to compete directly with their peers at the large global IT consultancies, such as IBM or Accenture.  The aim is to get access to the client’s boardroom – to become an advisor to the customer on business-related issues, not just an IT project manager.  This trend was highlighted this week by the industry’s largest ever offshore acquisition. Infosys Technologies, the number two software services provider in India, acquired the Axon Group for £407m ($747m).  The acquisition of the UK-based company, which specialises in providing consulting services around the products of German software maker SAP, doubled Infosys’ capabilities in this fast-growing area.  Wipro, the number three firm in the industry, last year staged the Indian software sector’s second-biggest overseas acquisition, taking over Infocrossing of the US, a computer “infrastructure” management firm.


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The trend is to generate higher margins from the same number of employees.  This is being driven by the economic slowdown in the US, which has weakened demand for Indian outsourcing services.  “Firms are tightening costs with smaller salary hikes and radically cutting recruitment,” said Aniruddha Dange, analyst at India Infoline, a Mumbai-based brokerage.  One of the fastest growing new areas for Indian companies is engineering services outsourcing, the sort of offering that Satyam is proposing at its laboratory in Chennai.  Crisil Research, a unit of the Indian affiliate of Standard & Poor’s, the credit rating agency, predicts that engineering services outsourcing will grow from $2.4bn in total sales as of March this year to $7.5bn by March 2013 – a compound annual growth rate of 26%.  India’s share of this business will rise to 25% from 19%, it said.  “The Indian ESO industry will evolve from its current product portfolio and slowly but surely graduate to be the design services hub of the world,” the report said.  Many Indian outsourcers are already offering some engineering services outsourcing.  Vineet Nayyar, chief executive of Tech Mahindra, said the company is selling its telecoms clients security hardware and software products under its Ipolicy unit that remove spam from networks and prevent intrusions by hackers.  Wipro, for its part, has developed technologies and chips for use in clients’ mobile phones.  Satyam’s automotive and aerospace centre, however, might be one of the most ambitious attempts yet by an Indian firm to capture the engineering outsourcing market.  The company’s automotive practice employs 7,000 people and claims to work for most of the top automotive producers and their suppliers.  Rather than using physical mouldings to design a car, as remains a common practice today, for instance, this is all done online at AACE.  Greenfield factories are computer designed, right down to the operations of the robots and the flow of paint to the spray cans.  The idea is eventually to offer one-stop automotive design so that once the owner of a car brand name has done its market research and decided on the required features for a vehicle, it can hand over the entire process to the outsourcing house.  “What the industry went through with information technology in terms of outsourcing 20 years ago, engineering is going through today,” said Mr Subramaniam.

Reference : http://www.ft.com/cms/s/0/69462abe-73ce-11dd-8a66-0000779fd18c.html

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