India: Toward High-End Outsourcing

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4. Faced with brutal cost-control pressures caused by the global economic downturn, many companies are more desperate to outsource than ever before. Pramod Bhasin, CEO of India's largest business process outsourcing firm, Genpact (G), says that his customers are increasingly asking him to recommend what business functions they should outsource. They are desperate to achieve the 30%-40% cost savings he says his company can offer them. Equally important is the rapid growth in higher-value work being done by Indian outsourcers as companies from the developed world increasingly move offshore tasks that were once considered untouchable core competencies. As a result of this shift, India is becoming a global R&D hub in industries as diverse as aerospace, automobiles, and pharmaceuticals.

5. There has always been a trickle of highly skilled workers returning from the U.S. and Europe to their home countries for family reasons and because they felt homesick. Flawed immigration policies in the U.S., have however created a situation in which there are over a million skilled immigrants and their families in line for a yearly allocation of 120,000 permanent resident visas. There is also a per country limit of less than 10,000 visas. With over 350,000 Indians in the backlog, they are increasingly getting frustrated and returning home. All of the Indian company HR directors and CEOs I have spoken to say that they are flooded with résumés from Indians currently working in the West. They are able to cherry-pick those with the best skills. This influx of skilled labor is giving them the ability to expand services in new areas of finance and technology. With the layoffs occurring on Wall Street and in other industries, the trickle will likely become a flood and this will further strengthen Indian industry.

6. India has been dramatically increasing the output of its engineering colleges, and now quality is improving. In 2004, the country graduated just around 125,000 engineers with bachelor's degrees. In 2007, this number had doubled and will double again by 2011. I have always been skeptical about the quality of Indian engineering education. But after visiting several private colleges and talking to faculty, it is clear that there are dramatic improvements in quality in process at some institutions.

This is not to say that the global meltdown and other factors are not affecting the Indian outsourcers. Vineet Nayar, CEO of HCL Technologies, says the economic downturn has caused some customers to cut projects and reduce outsourcing budgets. But at the same time, he has seen an increase in new deals, particularly projects where the company is offering guarantees of 30% cost savings or sharing risk by accepting payment as a percentage of product sale rather than getting paid for product development. His pipeline for new business is bulging at the seams, Nayar says.

Similarly, S. Gopalakrishnan, CEO of Infosys, has lowered his short-term forecasts, but sees tremendous upside for his company once the economy begins to recover. He has decided to go ahead and add the 25,000 workers he had planned for this year. He says that smaller outsourcing companies could suffer more because they have fewer customers and therefore less flexibility to absorb customer shifts and cancellations in what promises to be a more unpredictable market for services. He also believes that companies like IBM (IBM), Cisco (CSCO), Hewlett-Packard (HPQ), and Microsoft (MSFT), which manage their own outsourcing operations will likely expand aggressively in India once the economy begins to recover.

Regardless, a wholesale exodus out of Indian outsourcing is not only unlikely, but the opposite is more likely to occur as companies on the Subcontinent take the outsourcing industry to a new level of expertise and competitiveness.

Business Exchange related topics:
India Offshore Outsourcing
India Innovation
Information Technology
Global Recession

Wadhwa is Senior Research Associate at the Labor and Worklife Program at Harvard Law School and executive in residence at Duke University. He is an entrepreneur who founded two technology companies. His research can be found at www.globalizationresearch.com. .