Indian outsourcers using slump to get bigger

Take a walk through the sprawling Infosys Technologies campus on the far edge of Bangalore, and you'd never think the outsourcing industry is in a funk. At all hours, buses disgorge hundreds of software engineers too young to buy a beer, the sidewalks are filled with twenty-somethings carrying backpacks bulging with laptops, and the 24-hour cafés are jammed.
Yet there is no shortage of bad news in Bangalore. The value of new outsourcing contracts fell 22 percent globally in the first half, to about US$19 billion--the lowest level since 2001--and the second half looks grim, too, according to TPI, an advisory firm in Houston that tracks deals. That means many of India's 2,000 smaller info tech companies may shut down, while the industry's giants expect sales barely to budge this year.
"We have to prepare ourselves for unknowns," said Infosys CEO Kris Gopalkrishnan.
Some companies, though, see the hard times as an opportunity to boost productivity and prepare for the next big uptick in the US$800 billion global IT business. Top players such as Tata Consultancy Services, Infosys, Wipro, and HCL Technologies remain profitable and are loaded with cash; Infosys has US$2.2 billion, and the others have US$1 billion-plus.
So even as the industry suffered, the five biggest companies added a total of some 80,000 employees in the 12 months through March--a third less than the previous year but still sizable. And the outsourcers are all cozying up to customers, reinventing how they price and sell their services, and investing millions in training and research to help them take on more complex jobs.
"I believe the industry will emerge much stronger," predicted Wipro Chairman Azim Premji. "We certainly will as a company."
Savvier engineers
In effect, Bangalore is trying to emulate big Western rivals. India's outsourcers live almost entirely hand-to-mouth, with short-term projects providing about 90 percent of their revenues. Now they want to win more of the massive, multiyear deals that provide predictable work.
Natarajan Chandrasekaran, chief operating officer of Tata Consultancy Services, said: "We will increasingly do what IBM and Accenture do."
That means weaning themselves off of a reliance on relatively simple jobs carried out by legions of fresh college grads. Among its 90,000 or so workers in India, IBM has far more PhDs and experienced engineers than the domestic players do. These people can handle more sophisticated projects, which helps IBM earn three times as much revenue per employee as Indian leader Wipro. The U.S. company has used its muscle to grab such lucrative deals as a five-year, US$800 million contract to provide billing and other IT services for Vodafone Group's fast-growing network in India.
So far the Indians have struggled to win complex consulting jobs. Infosys, Tata, and others acknowledge that less than 5% of their revenue comes from the highest-level work, while analysts say it's about half at the Western giants. Kapil Dev Singh, India chief for researcher IDC, noted: "To sustain the kind of growth they had in the past, they cannot just play around in plain vanilla services."
One way to make the shift is to hire outside India. That would help the outsourcers acquire the expertise and close-to-the-client presence that advanced IT consulting requires. Wipro paid US$600 million two years ago for New York's Infocrossing, with 1,000 workers managing data for United States companies. Infosys said it is interested in doing something similar, and all of the companies are stepping up hiring overseas.
More Consultants
Customer relations is key, too. HCL, for instance, is willing to risk losses on some contracts to cement ties with clients. In its most advanced deals, HCL helps corporations rethink the way they do business. While this often requires a substantial investment of time to understand a company and suggest ways to transform its operations, HCL will now throw extra consultants at problems such as tracking a retailer's products or keeping its Web site operating 24/7.
HCL can gain by helping the client boost efficiency, which cuts HCL's own costs when it takes over managing the customer's IT systems. But HCL stands to lose money if it cannot deliver the expected savings.
The approach seems to appeal to clients. In the past nine months HCL has won US$1.5 billion worth of such contracts from the likes of Reader's Digest, Nokia, and Viacom, which all want to come up with new efficiencies in the recession. At Reader's Digest, HCL is helping to improve distribution, marketing, and digital publishing.
Mary Berner, Reader's Digest's chief executive, said the financial deal offered by HCL was attractive, but she was also impressed with the company's track record at taking over and running corporations' computing operations.
Wipro, meanwhile, now assigns dedicated managers to each of its 75 top customers. These executives act like mini-CEOs, running teams of consultants and software architects as if they were separate companies. But these teams share development work with each other, allowing Wipro to take the new ideas it dreams up, tweak them, and sell them to other clients. That has helped boost annual productivity from US$38,000 per employee in 2008 to US$44,000 now.
Problem is all of these initiatives are expensive. If the global economy does not bounce back in a year or so, India's outsourcers could find themselves saddled with legions of employees who have little to do. Infosys offered jobs to 18,000 college graduates last year and plans to hire more this year. But with scant work to give them, the company is doubling the length of their training to six months and assigning them mock projects to hone their skills.
Though that's not cheap, Infosys said it is worth the investment. "Our margins will go down," said Vibin Balakrishnan, Infosys' chief financial officer. "But when the economy picks up, I would rather have the problem of too many people than too few."
Another worry is that adding foreign workers or hiring more-experienced Indians dilutes Bangalore's cost advantage. So the Indian companies may have to say goodbye to the 25 percent to 30 percent margins they've grown accustomed to, said Sid Pai, a TPI analyst.
"They can continue to be the best offshore operator and accept that there will eventually be some atrophy in growth," Pai added. "Or they can say, 'I am going to be a global player.' That means changing the way they do business and hiring lots of expensive talent."