Offshore projects help companies buck downtrend

n the last one year, Indian software service companies have seen it all - slow ramp-up of new customers, excruciatingly long sales cycles, cut-throat pricing wars and plunging profits. As India's galloping software exports growth slows because of belt tightening measures adopted by clients in the US, Indian IT service companies are compelled to redefine their business models. With a range of US companies shopping for low cost destination to cut costs, Indian software companies are leveraging the opportunity strengthen their offshore models. US onsite business continues to be the prime driver of growth but offshore services are on the rise. Consider this:

For the year ending 31 March 2002, Wipro's offshore revenue was up 48 per cent with fixed price accounting for 28 per cent of the revenue as against 15 per cent

Polaris' Software offshore centric revenues climbed by 45 per cent to Rs 177 crore. The company has projected a 50 per cent growth rate for the current fiscal on account of the current offshore model.

Satyam's offshore business gained momentum and grew to 69.8 per cent as compared to 51.9 per cent in previous years.

Aztec Software and Technology Services Limited recently reached an agreement with Asera Incorporated to expand its engineering services to include development and support of solution applications that utilise and extend Asera's e-business offerings.

Syntel, envisaging a huge demand in offshore outsourcing, moved out of body shopping. The gamble paid off with the company now realising 87 per cent of its revenues through outsourcing activities in verticals such as finance, automotive, retail and health care. The company today has an impressive clientele like Ford and DaimlerChrysler.

Courtesy: McKinsey

A recent McKinsey study rightly proclaimed that India was on the cusp of an offshore outsourcing wave. According to Noshir Kaka, McKinsey principal "There is a dramatic increase in the willingness and intent to do business in India. Not only in the number of customers, but the kind of services and size of deals." US companies overspent up to $250 billion on IT in the last five years and are now being more careful about how they spend money and are looking for greater return on IT investments." Consequently, India has witnessed an increasing interest in prospective customers including visits from CEOs/CIOs during the last quarter. With two out of five Fortune 500 companies currently outsourcing operations to India, the industry is witnessing the emergence of new outsourcing models.

Global corporations are either setting up independent offshore development centers or increasingly allying with Indian companies for offshore development. In March Wipro Technologies tied up with Carona Networks a leading developer of next generation network-based edge aggregation and intelligent IP service platforms for the setting up of a Global Development Center. As part of the contract, Corona will get the dual benefit of leveraging on Wipro's technology expertise for product development and ensuring significant cost savings. Polaris Software Labs recently clinched strategic offshore partnerships with two billion-dollar clients. The company has bagged an order from an un-named large financial services company in the US with assets of approximately $81 billion. The other major deal the company has struck is with the Euro 6.7-billion French aerospace company Snecma Moteurs. HCL Technologies Ltd, India's fifth largest software exporter, has formed a joint venture with US-based Answerthink to boost outsourcing from its development centers in India. The new company, HCL-Answerthink, will outsource the IT requirements of these clients to HCL Technologies offshore development centers, leveraging its expertise across a host of verticals and domains.

The focus of Indian software firms on offshore projects seems to be paying. Traditionally outsourced projects were 70-80 man-year projects, but there is an increasing trend to outsource to the scale of 300-400 man-year projects. Mascot Systems recently announced that it had entered into a three year $1.5 m contract with a leading international operation in Singapore. The average size of contracts from global companies is now expected to jump 10-fold from the current $2.5 million to around $30 million. While Indian companies earlier got a small piece of the pie, the prospects of their bagging entire projects is real now. Wipro, for instance, bagged a $70 million order from the telecom subsidiary of Lattice Group, the largest offshore contract ever. The obvious driver of the growth are strategic cost advantages offered by India. In the US, labour constitutes seventy-five percent of the cost of developing software. In India per hour offshore development rates are currently pegged at $20 to $25, but industry sources say that margin pressures in a multi-vendor market are driving rates to $6 low in some cases. Industry is rife with rumours of Satyam Computer Services clinching a deal with a Detroit-based auto major at $6 per hour. According to a Mckinsey study, a 100-person setup in India can result in net savings of US $7-15 million per annum.

Added to this, India technical skills and delivery model are now recognised by global corporates as a part of the efficiency solution in a volatile global market. Indian software exporters, hit by weak demand, are looking towards wholesale management of technology services of firms, under which clients house both their hardware and software needs with an external partner to cut costs. Indian IT services companies are aggressively adopting global project delivery methodologies to be able to make the shift. For instance, 22 out of the 37 SEICMM Level 5 certified software companies are in India. In addition, India boasts of 140 ISO 9001 certified software development companies. Consequently there has been a rise in the complexity of projects outsourced to India, although the bulk of the work continues to be in areas of maintenance and support. Also Indian companies have access to 120,000 trained IT professionals to its talent pool yearly compared to 25,000 in the US. Over 62 per cent of this Indian technical workforce has more than four years of experience and over 70 per cent have an engineering degree. Eastman Chemical Company recently expanded its business relationship with Infosys precisely for these reasons. Having realised significant benefits including time-to-market, higher predictability and cost savings as a result of these projects, Eastman decided to enter into a larger, more value-added relationship," an Eastman company official said. MindTree, similarly, entered into an alliance with Silicon Wave Inc., a leading designer and provider of RF communication system components and software based in San Diego. As part of the alliance MindTree Consulting will function as an authorised design center to rapidly develop and market complete Bluetooth solutions using Silicon Wave components.

According to a McKinsey report, despite the obvious advantages, US majors have under-leveraged India's offshore outsourcing potential. India low cost mantra glosses over the quality of service Indian software service providers can offer. By marketing cost rather than quality, Indian firms are facing stiff competition from countries like Ireland, Phillipines and China, The speed at which a recent rumour that Oracle was shifting office to China spread is an indicator of fear of competition catching on. In addition faced with an extremely harsh operating environment, a shrinking local talent pool and rising complexity in technology and customer requirements, US majors are by passing Indian software service providers and shifting development centres to India or scaling work done from India. For example, two years ago, SAP's Bangalore center accounted for a mere one per cent of total development spend. Today, the center accounts for over 8 per cent of development spend and is projected to grow to 15 per cent in the next two years. Companies such as Intel, Sun Microsystems and General Electric are upping investments in India. In the long-term, Indian companies will win by distinguishing themselves by branding services in niche verticals. CII is setting up office in the US to certify and provide a quality stamp for India software service companies to help them win bigger contracts. Indian companies needs to move doubly fast on that.

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