From CIO Today
s the Party Over for Indian Outsourcers? By Manjeet Kripalani

The tech industry in India is so pampered by New Delhi, and so admired by ordinary Indians, that it has been lagging behind the competition. Industry trade group Nasscom recently released a report on the necessity of Indian companies to begin to innovate to survive, and suggested an ecosystem for innovation, helped by policy initiatives.

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In late July, rumors swirled that Infosys Technologies might be readying a takeover offer for Cap Gemini or another major tech-services player in the U.S. or Europe. So on July 25, when the company alerted the press and the markets that it had a major announcement, there was a great deal of anticipation.

Instead, Infosys unveiled a $250 million outsourcing contract with Royal Philips Electronics of the Netherlands. It was an acquisition of sorts, the company said, at least of the outsourcing centers that belonged to Philips. "We're taking the model to a newer level," said Chief Executive Kris Gopalakrishnan.

Landing a new contract certainly isn't bad news, but the development was somewhat deflating for those who believe that Infosys needs to redefine and reposition itself in the multibillion-dollar arena for global outsourcing services. In fact, Infosys and other Indian outsourcers are facing a raft of competitive challenges that will require some dramatic new strategies.

Adversities Add Up

True, India's biggest outsourcing firms continue to rake in the profits, at least judging by the latest earnings season. The top five players -- Tata Consultancy Services, Infosys, Wipro, Cognizant, and Satyam -- reported robust profits in the quarter ended June, 2007. And executives generally forecast strong growth ahead.

"We're very happy with having beaten the forecast," said CEO and Managing Director S. Ramadorai of the $3.1 billion Tata Consultancy Services in Bombay. "TCS, as the leader, is doing well." Ramadorai predicts $60 billion in tech-services exports for the industry by 2010, nearly twice the current $35 billion, plus $20 billion in revenue from domestic business.

Yet behind this show of supreme confidence lurks deep unease. A confluence of adversities is at play. They include an appreciating rupee that is cutting into earnings, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats.

Diminishing Returns

On top of that, there is the end of preferential industry tax benefits at home and the growing success of multinational competitors such as Accenture and IBM on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting Relevant Products/Services, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term.
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