Offshoring Evolves Beyond American vs. Indian: Page 2

Posted September 27, 2007

James Maguire

James Maguire

(Page 2 of 2)

Globalize or Bust

Not only will IT services be globalized to the extent that a firm’s home base becomes irrelevant, but only those services firms that are truly global will survive. The bottom line appears to be: adopt a fully international stance, or fade away.

“That’s my concern with Bearing Point right now,” Ford-Taggart says. “They’re not making any effort, because they can’t, to invest in their global delivery network. They have very little offshoring.”

Yet those with a fully international delivery system will continue to thrive. “When I look around 10 years from now, I see Tata, Infosys, Wipro, EDS, IBM, Accenture. That’s probably it, maybe CapGemini.” In Ford-Taggart’s view, the rest of the players will either be taken private, be acquired, or perhaps a seventh firm will emerge from an aggregation of current companies.

As the mega-size IT shops consolidate their hold, the smaller companies that do BPO (business process outsourcing, such as health or insurance claims), will proliferate faster than piles of papers on a claim adjuster’s desk. Like the bigger firms, these BPO firms will cater to a global market. “Those kinds of companies, it boggles the mind how many of them there are already: Filipino, Brazilian – anywhere,” Ford-Taggart says.

In the Driver’s Seat

Despite the fact that the future of IT will be less about America vs. India than about global firms competing globally, one fact remains clear: at present, it’s the Indian companies that are driving change. It’s the large pool of well-educated Indian developers who are the emergent force, and it’s Indian firms that influence even contracts they don’t win by providing a lower cost alternative.

At this point, offshoring is in its infancy, despite all the concern and headlines it generates. Estimates of the percentage of work sent offshore range from 4 to 8 percent – still a modest slice of the global pie. Based on rough calculations, perhaps some 30 percent of this total goes to India.

Yet it’s likely that these numbers will increase substantially. One factor suggesting deep growth for Indian IT firms is their pricing power with existing clients. Remarkably, they’ve been able to gain pay increases even on existing contracts.

For over a year this type of practice has been going on, explains Ford Taggart. “Infosys and Wipro will go back to their client and say, ‘Hey look, big multinational company that we do business for, [Indian] wages are increasing 15% a year, foreign currency fell 7% in the second quarter. We need to raise the price of that contract you agreed to.”

“Now a contract’s a contract, [but] these clients, on average, are letting prices be raised by 3 percent – on a signed contract.”

The reason? Partially because Indian companies, due to their surplus of cheap labor, are themselves generous with what they provide. By Ford-Taggart’s account, the Indian firms will often throw in some extra development work completely free of charge.

As Wipro’s head of enterprise solutions told him, “‘We’ll be working on a project and some little side project will come up, and we’ll say ‘So what, I’ll have some junior guy, who’s just going to be sitting there anyway, jump on it and get it done in a couple of days.” The clients will respond as if they’ve just been given a major, surprise gift. “It’s because they're so used to being treated bad by the legacy players," Ford-Taggart explains. With this kind of customer service, it’s not surprising that clients are willing to grant Indian firms some cost leeway.

What this suggests is that the room for growth in Indian market share is enormous. “If you believe that outsourcing is going to become bigger, that the offshoring part of that is going to become bigger, [then Indian IT companies] are going to be growing at these tremendous, tremendous rates.”

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Tags: offshoring IT, india outsource, indian tech firm, wipro, Infosys

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