India: Toward High-End Outsourcing

Indian info-tech companies that once specialized in basic work are now providing high-value tasks such as R&D and business transformation services

By Vivek Wadhwa

In recent months articles in The Wall Street Journal and Forbes.com have postulated that outsourcing information technology work to India was losing appeal. They said that high employee turnover in Indian outsourcing companies and rapid growth had reduced work quality and upset Western customers. These same articles argued that salaries in India were rising so quickly that Eastern Europe, British Columbia, and even Oklahoma would soon become competitive with India. I've just spent two weeks in Indian speaking to top executives at some of the largest outsourcing companies and I believe reports of the demise of Indian outsourcing have been greatly exaggerated.

To the contrary, the Indian outsourcing industry has entered a new era of growth. Infosys (INFY), Satyam (SAY), HCL, and other IT outsourcing majors that once specialized in lower-value tasks such as application maintenance and business process outsourcing are seeing increasing success in providing outsourced high-value tasks such as total IT outsourcing, R&D, and business transformation services. I believe that not even terror attacks and a global recession will deter an impending revival of Indian outsourcing or a reshaping of the industry into a provider of high-value, unique services. Here are six reasons why this is true.

1. Faced with high turnover, rising salaries, and a weak public education system, top Indian companies started investing heavily in workforce education and development. As a result, since 2000, Indian industry made dramatic improvements in the education levels, productivity, and quality of its technical workforce. These companies retrained tens of thousands of low-level IT workers in advanced product design and development techniques to give them more valuable skill sets required to crack higher-value service offerings and fill managerial ranks. These investments have started paying huge dividends. A few years ago, the Indian IT industry relied on experienced managers returning home from the West to fill mid- and high-level management ranks. Now, Indian HR managers say that they prefer to hire local talent rather than returnees.

2. Attrition rates have been remarkably low and are dropping. This is also related to investment in workforce education and development. As Indian IT companies have focused on keeping employees happy and promoting from within, turnover rates at top Indian outsourcing companies have been stable or dropping over the last few years. In 2007, attrition rates at Infosys, TCS, and Wipro (WIT)— three of the largest Indian outsourcing shops—were 13%, 11% and 17%, respectively. These compare favorably with most U.S. technology companies, which are often over 20%. Even the world's leading IT firm, Accenture (ACN) runs an 18% global attrition rate. Several Indian CEOs I have spoken with say that with the worsening global economic downturn, they expect attrition rates to drop into the single digits. In fact, the CEOs were worried turnover rates will be too low. They feel that some turnover is natural and good for the organization.

3. Rising salaries in Indian IT shops are no longer a problem. The global downturn and concerns about job growth on the part of applicants have actually allowed Indian IT outsourcing companies to offer lower salaries for new recruits and to limit increases for employees. Plus, the rupee has dropped 25%. This allows Indian IT companies to provide 25% more services for the same price in U.S. dollars. At the same time, real estate and other business costs have dropped. Keep in mind, these companies were highly profitable even before the rupee's decline. Now they have become much more competitive.