Growth Plans

Aging infrastructure, low-cost competitors, and worker shortages could clip India's IT boom. Here's how the country's tech leaders are coping. Second of three parts in the Inside India series.

Aaron Ricadela, Contributor

February 4, 2006

6 Min Read

Acquisition Binge
All three of India's tech leaders are expanding beyond India. To get a leg up on new markets, they're focusing heavily on acquisitions. Wipro in December paid $28 million for mPower Software Service, a Princeton, N.J., vendor of software development for payments processing. That same month, it acquired NewLogic Technologies, an Austrian chip-design company whose customers include German chipmaker Infineon Technologies, for $56 million. The acquisition will add to Wipro's business developing wireless Internet and RFID systems.

One of Wipro's next moves is to take on R&D projects for large companies, Mangalath says.Photo by Mahesh Bhat/Getty Images

At Infosys, "acquisitions are definitely on the table when it comes to growth," Pratt says. But "we're very picky," he adds. Infosys could use acquisitions to enter new vertical markets, particularly in Europe, where trade regulations, labor laws, and a multitude of languages make it difficult to do business. "It's a complicated place, and entering certain markets is probably best to do through acquisition," he says.

Infosys also is rapidly expanding its two campuses in China to serve a growing market on the mainland, plus Taiwan, Hong Kong, and eventually Japan and Korea. The company's Chinese subsidiary posted just $1.9 million in sales last year, says Infosys China CEO James Lin, but that could double this year. The company also plans to increase head count from 400 to as many as 1,400 by the end of the year.

Most U.S. companies aren't yet comfortable outsourcing work to China or Eastern Europe, says Infosys customer Christopher Osentowski, a director at Ingram Micro, a $25 billion-a-year computer-products distributor. But that could change. "Those things are coming, but they're still a few years down the line," he says. "The Indian companies that try to get in there early will have a distinct advantage because they have this learning from the last five or 10 years."

Back Home
Acquisitions and global expansion are ways India's IT companies can expand the pool of skilled workers--a pool that's growing far too slowly back home. The country is staring at a shortfall of 500,000 IT workers by 2010, the Nasscom-McKinsey report predicts. At that point, India's tech economy will employ 2.3 million workers.

Only a quarter of the 400,000 engineering and computer science graduates of Indian universities each year "are suitable on an as-is basis," Nasscom president Kiran Karnik says. The rest have subpar technical skills, a poor command of English, or are unwilling to relocate to India's tech centers. Even factoring in 15% growth of the 100,000 qualified grads produced each year, "if we stick at that number, it's going to be a constraint," he says.

Particularly in demand are workers with three to seven years of experience who can work independently or manage a small team, Infosys' Gopalakrishnan says. They keep clients' costs down by requiring less supervision. Yet expansion of consulting and other specialized areas means further wage inflation at a time when IT workers' salaries already are climbing 10% to 15% a year.

There's an upside to hiring experienced people, though. As Infosys moves into new consulting areas such as equity research, process engineering, order management, and human resources administration, it has leeway to raise prices by combining expensive consulting with cheap Indian IT labor, Infosys Consulting's Pratt says.

Legal Hurdles
As India's outsourcers add more sophisticated services to their portfolios, questions about the legal environment also could choke growth. Among them: foreign companies' concerns about protecting intellectual property and enforcing intellectual-property laws in India's often slow-moving courts. That issue is enough to cause some U.S. companies looking for lower labor costs to establish their own operations in India rather than hire an outsourcer, even though it may cost more, says Michael Mensik, a partner at law firm Baker & McKenzie, who advises companies about outsourcing.

Regulatory compliance also could become an issue, Mensik adds. "I don't need to know a whole lot of law to manage your network or fix your legacy system," he says. But for work like payroll management, benefits, or accounting for a public company, "then India is right smack dab in the middle of my Sarbanes-Oxley accountability."

Recent and pending changes could make this less of a threat. India's Parliament this month plans to amend a law on data protection to encompass computer networks and mobile devices, as well as data that lives on individual machines. And on Jan. 18, Nasscom launched a "national skills registry" database of IT pros in India that includes employees' professional and educational histories to reduce the cost of background checks.

Less under India's direct control is new tech competition from China, Russia, Eastern Europe, South Africa, Egypt, and others looking for a piece of the outsourcing action. Language skills give some of them an edge. India lacks large numbers of German, French, Spanish, and Japanese speakers, which makes Eastern Europe and China more attractive for certain customers.

When Ingram Micro outsourced customer service and order management functions to Infosys subsidiary Progeon last year, it moved back-office paperwork to Bangalore but phone support to an Infosys facility in the Philippines. Filipinos' better English skills were the deciding factor. "Indian outsourcers are trained with a global accent," which can sound "disjointed" to North American customers, Ingram Micro's Osentowski says. "It seems to be based more on the Queen's English."

Language parochialism is just one more reason for Indian IT companies to push for global growth. India's long-term success depends on its top tech players' willingness to move beyond what they already do well and take risks with new technologies and in other emerging countries, while building up shaky resources at home. If that approach succeeds, they could be partying at Davos for a long time to come.

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