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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.

And how does EDS plan to cut costs? By ramping up its Best Shore strategy, whereby it locates workers in low-cost countries. Currently, EDS has 8,700 staffers in offshore centers — a quarter of them in India — but it plans to increase that number to 20,000 during the next 18 months.

Accenture, a $13.4 billion­a-year rival to EDS, has a similar story. In December, it announced that it would be increasing its head count in India from 4,300 to 10,000 by the end of 2004.

Also in December, IBM announced that it would move 5,000 software development jobs from the United States to India this year. And in February, Bearing Point — formerly KPMG Consulting — revealed plans to hire 2,000 staff in India in the next two years.

The Sincerest Flattery

It’s all very flattering for the Indian firms, but it’s equally worrying. At Mphasis, CFO Ravi Ramu acknowledges the issue. “The fact that the global multinationals are coming to India certainly means that some, if not all, of our cost advantage will be whittled away,” he concedes.

Nonetheless, Ramu remains confident that the global delivery model Indian firms have perfected gives them an advantage. “Offshore isn’t just about hiring a bunch of guys, putting them in a room, and getting them to write code or answer phones,” says Ramu. “It’s a completely different way of working, of selling a service.” That model, he reckons, will take the Western multinationals three or four years to master — a valuable window in which the Indian firms can grow and gain critical mass.

At Wipro, Senapaty is equally confident. “Because we developed our project-management skills and our commitment to quality while we were small, we’ve grown up with it,” he says. “It’s in our DNA.”

But good DNA won’t help with the appreciating rupee, an emerging headache. “A rising rupee would have a serious impact on profitability,” admits Neeraj Bhargava, CEO of Mumbai-based WNS Global Services. “And there are certain scenarios that suggest the currency could rise a lot further.”

Then there’s the question of rising wages. The rapid growth of India’s IT industry creates huge demands for new staff. Wipro hired 10,651 new employees in the six months leading up to December 2003, increasing its workforce by 65 percent.

Inevitably, such large-scale recruitment has led to rampant wage inflation for certain jobs, especially experienced project managers. NASSCOM reports that the average salary for an IT project manager rose 50 percent in 2003 from a year earlier.

Put it all together, says ABN Amro’s Gupta, and “the cost advantage for Indian firms won’t last long.” He’s calculated that the labor arbitrage between the United States and India has already fallen by 18 percent in the past two years.

To make matters worse, Indian firms have started putting pricing pressure on one another. At the low-value end of the market, a raft of second-tier companies has piled in, sending prices tumbling. Venu Reddy, research manager in the Asia Pacific for IDC, an IT market-research group, observes: “The traditional offering of Indian vendors — application development and maintenance — has become a commodity, and prices are falling.”

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