India Inc. heaves at US' Onward India mantra

he US economy has taken a battering, the weak players (largely constituting the dotgonners) have dropped out of the race and the strong ones to conserve energy are changing course and making a dash for India. Cornering a giant share of H-1B visas (43 per cent), traditionally India has been a supplier of cheap manpower for US tech companies. Tech titans, having assayed the skills of India's knowledge workers, are aggressively stepping into Indian soil or outsourcing select IT operations to trim operational costs and shore up sagging bottom-lines. Consider this: In the last one month, Solectron handed pink slips to 200 workers in the US office and launched its development center in Bangalore; Novell transferred a $50 million revenue-earning project to its development center in India and Carly Florina, CEO of HP, recently announced: "aggressive expansion of HP's position in India". Earlier this year, Cisco and IBM announced plans to invest $1 billion in India. Additionally, companies like Oracle have doubled their scale of operations in the country, while others like Dell, i-Mode and GE are moving their customer service centers wholesale to India.

Considering the cost advantage India offers over many Western counterparts, the scale of investment is not surprising. Depending on the size of the project, cost cutting can be as high as 55 per cent. Kalyan Mohan director at Cognizant Technologies admitted: "The trend is that US companies are looking seriously at outsourcing." We are seeing an increase in the number of clients over the past few months and just in the last week we have got four new clients from the States. In fact, Nasscom, the apex body of the Indian software industry predicts Indian IT firms will be able to earn as much as $50 billion from outsourced projects by 2010. And the prediction is showing signs of emerging from mere realms of prophecy, with more than a little help from the declining US economy graph.

Indian companies can, however, draw little comfort from this. The reason: increased investments in India means greater pressure on onsite billing rates, which in certain cases like Infosys account for 50 per cent of revenue. Earlier, companies like Infosys quoted rates as high as $75 an hour for onsite development work for projects whose actual cost was between $25 and 30. Indian service giants like Satyam, Infosys and Wipro were, hence, able to post 100 per cent growth in profits quarter after quarter. The downturn, has compelled US companies to scale down costs and has had a domino effect on Indian software service providers. Onsite projects have dried up and crisis-ridden Indian companies are falling over each other to hold on to existing projects. Price war, so far restricted to the battle between the two Colas, is now a reality for Indian software companies. Today, companies quote rates as low as $15 per person hour to keep afloat, making onsite projects unviable. Recently, Infosys CEO Narayan Murthy admitted to an Indian business magazine that the company pulled out of a $7,000 per man month project when a rival quoted $4,500 per man month for then same project.

This is just the beginning. The price wars are only bound to get more. Hard hit by the competitive undercutting of rates for onsite development work, forward-thinking Indian IT managers to buck the downtrend are fast altering their onsite-offshore mix in favour of the latter. Taking advantage of the client's need to keep costs low, Indian IT companies are now repositioning themselves as "virtual software organisations." At $25 an hour, companies doing onsite development stand to make marginal or no profits. In India, even at $15 an hour, companies stand to gain $7, after paying a two-year experienced software professional and factoring management and other costs. The quarterly profits may not show an 100 per cent increase, but even a growth rate of 30 to 40 per cent in times of slowdown is impressive. While this has been the general trend, some companies relying solely on offshore development have posted an impressive rise in profits. Infotech enterprises, for instance, posted a 98 per cent growth in total income for the first quarter, which ended 30 June, 2001 by latching on to the "offshore development with onshore responsibility mantra."

A comparative study of employee expenses between onsite and offshore development also points to the reasons for Indian companies turning their energies towards getting work offshore. According to a recent First Global report on the IT industry, expenses for offshore jobs have gone up by 0 per cent and 5 per cent from financial year 1998-1999 to 1999-2000, while onsite expenses have been increasing at 6 per cent and 10 per cent per employee each year. In the past, onsite billing rates were commensurate with the costs but a continued scaling down of billing rates has made onsite work unattractive.

Outsourcing projects may not be an unmixed blessing for Indian companies, pampered by the high rates of the boom time but it will definitely help companies to post profits between 30 per cent and 40 per cent. But India now being referred to as "The Taj Mahal of Outsourcing" needs to watch out. There are inherent dangers in being a service economy whose only advantage are low costs. China and Russia are already threatening India's eminence. Certain Indian companies like Infosys and TCS are getting part of their work done in China. Before long the clients may decide to interact directly with the Chinese.

Even more dangerous is the threat the MNC development center presence in India could pose. For instance Satyam Computers gets approximately 15 per cent of its revenues from GE. With GE opening a development center in India, there is no long-term guarantee that the company will continue to outsource work to Satyam. Mr. Guru of Kelsar.com, an online company which helps Indian and US companies to come together and monitors projects believes that although the fear of large companies withdrawing at any point of time is real, the outsourcing market will continue to grow. "The real players in the market are not the giants but the middle sized industry. Recently we helped a firm in Pune bid 4 projects for $400 each, a large amount for a small company. They are many mid-sized companies in the US, who would like to outsource projects. Large companies like Stayam, Infosys will not touch these projects but mid-sized companies stand to gain." The $50 billion outsourcing market will be powered by small and medium firms."

Another direct result of loss of onsite work is that Indian software companies are reverting to mundane work like maintenance and systems integration to keep the order books flowing, adversely impacting efforts to move up the value chain. When the going was good companies trying to move higher up on the value chain by developing applications like embedded software for telecom equipment firms and software for wireless technologies. Now the focus has shifted to volumes. Wipro Ltd., India's third largest software exporter, drove home that harsh reality when it touted last week its $70 million systems integration order - matching software and hardware requirements for a telecom company of UK's Lattice Group. Satyam Computer Services, India's fourth largest software exporter, said its first-quarter business mix indicated an increase in maintenance and re-engineering projects. These accounted for 30 per cent of revenue in April-June, up from 23 per cent the previous quarter."

Most companies feel that the downturn is temporary and these disadvantages will be a subject of the past once the market revive. But the wait could be long and the growth may be marginal. Indian Software service giants must rethink their long-term strategies, even as US companies croon their new-found love for India.

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