Are Indian Outsourcers Losing Their Edge?

Companies like Infosys are still profit machines, but rising wages, a strong rupee, and stiff competition from IBM, Accenture, and EDS pose challenges

by Nandini Lakshman

The rise of ultra-efficient and low-cost Indian outsourcing firms such as Infosys Technologies (INFY), Tata Consultancy Services, and Wipro (WIT) is one of the most interesting stories behind India's economic ascendancy this decade. This trio used to terrify high-cost IT consulting operations like IBM (IBM), Accenture (ACN), and Electronic Data Systems (EDS) that didn't seem to have a prayer of matching the brainpower or low-costs of Indian software programmers and engineers.

India's national outsourcing champs are still a formidable bunch but they are finding, much to their consternation, that Western firms have no qualms about going on massive talent raids in India to lower their cost equations—and are starting to land some sizable contracts right in the local companies' backyard.

Make no mistake: Infosys, Tata and Wipro are still outright profit machines with stellar growth prospects for managing IT networks and testing or developing software products at home and abroad. On Apr. 13 Infosys Technologies (India's second biggest computer services company) reported a record 70% jump in net income to $267 million for the fiscal fourth quarter ended in March. "There's a lot of momentum driven by all points of value creation," says Alok Shende, director of the technology practice at researcher Frost & Sullivan.

No Shortage of Growth

Though it undershot its fourth quarter revenue target, for the full fiscal year sales grew by 46% to $3.6 billion, and the company is forecasting 25% revenue growth for the upcoming year. Infosys has the right global brand awareness, global footprint, and talent to ride the global outsourcing mega-trend for quite some time, says Nandan Nilekani, managing director and chief executive of the Bangalore-based outsourcing firm. "We were $1 billion in 2004," Nilekani said in an interview with BusinessWeek, "and will be $4 billion in 2007 and 2008."

Nilekani surprised analysts by recently agreeing to move into a new role as co-chairman of the board in June. Infosys Chief Operating Officer and President Kris Gopalakrishnan will assume day-to-day management, while Nilekani will focus on the broader strategic direction of the company and client relationships.

That's probably a wise move, given the fresh challenges facing Infosys even while it is still undeniably in high-speed growth mode. For one thing, wages are spiraling in many IT job categories thanks to a hiring frenzy by IBM, Accenture, and EDS.

Huge Investment By IBM

IBM has more than doubled its India staff to 53,000, has spent $2 billion there since 2004, and plans to spend another $6 billion by 2009. IBM has major research labs on the ground that delve into everything from nanotechnology to chip design. It is also raking in considerable revenue (sales clocked 37% year-on-year growth in 2006) from its servers, software, and consulting business in India.

Meanwhile, by this August, Accenture is expected to have 35,000 of its 160,000 employees in India, where labor costs are less than half those in the U.S., compared to a meager level at the start of the decade. In short, IBM and Accenture are making big strides in lowering their cost base to take on Indian tech companies that still lack some of their technology expertise and consulting experience (see BusinessWeek.com, 4/23/07, "How Accenture One-Upped Bangalore").

EDS acquired Indian player MphasiS BFL in June, 2006, and is expected to double its 17,000 software engineers and outsourcing jobs in the next two years. This is creating competition for quality talent, and leading to higher wages and turnover problems for Indian tech companies.