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The View from the East

India's upstart IT-services firms face their own challenges from their giant rivals in the West.

The problem is that Wipro and its peers have done rather too well, according to Pramod Gupta, an analyst at ABN Amro Securities. While India’s IT players have enjoyed compound annual growth rates of between 50 percent and 60 percent in the past decade, the IT-services industry itself has grown at a more sedate 5 percent to 6 percent. “The whole Indian IT-services story has been about taking market share,” says Gupta.

At first, the big Western multinational IT-services providers didn’t mind too much. After all, their Indian competitors were concentrating on relatively low-end, low-value work. During the past three or four years, however, India has moved upmarket into the core businesses of its Western rivals — areas such as designing the architecture of IT systems, and acting as IT and business consultants.

A Quiet Revolution

“It happened in a stealthy fashion,” observes Jayant Sinha, a partner in the Delhi office of strategic-consulting firm McKinsey & Co. For a long time, he says, the likes of IBM, Accenture, and EDS ignored the Indian IT-services companies as “simply capturing the labor arbitrage between India and the West.”

Then came the dot-com bust, and the Western firms suddenly could not afford to be so cavalier. “They took their eye off the ball, and when they looked up, the Indian companies were suddenly right behind them,” says Sinha.

Today, he adds, “these [Indian] companies are really starting to inflict some hurt on the global multinationals.” That may be an overstatement, given the disparity in revenues between Indian firms and their rivals (see chart, right), but it is true that in addition to snatching some customers, the Indian firms are inflicting huge pricing pressure on companies based in the United States and Europe. “What we do is very disruptive for the global majors,” says Infosys’s Pai, with a grin. “It’s a disruptive business model.”

Other commentators agree, for the Indian firms have done much more than simply harness cheap labor. In particular, they have developed a new generation of project-management skills that lets work be carried out from lots of locations in many different countries simultaneously. Core to this so-called global delivery model that links on-site engineers in the West with cheap labor in India is a heavy emphasis on quality standards.

Take TCS. The company currently has 26,000 engineers — more than any other company in the world — assessed at the highest level of Carnegie Mellon University’s SEI-CMM scale, the industry benchmark for software quality. Other Indian companies are equally dedicated to SEI-CMM, as well as to such other quality standards as ISO and Six Sigma. The result is often not just a cheaper service in India, but a better and timelier one, too.

East vs. West

No longer wasting time in responding to the threat, Western businesses are now building or expanding their own cheap back-end operations in India and other low-cost locations.

Just look at EDS, the Plano, Texas-based IT-services firm with $22 billion in annual revenues. Speaking at a Lehman Brothers investor conference in March, CFO Bob Swan acknowledged the pricing pressures that EDS faces. “We need to take 20 percent out of our cost structure over the next three years…not in order to expand the operating margin but to improve our win rate for new business,” he explained.

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