Indian IT Firms: Is the Future Theirs?: Page 3

In terms of the quality of work done by Indian firms versus that of their American counterparts, “I would argue that if it [the Indian work] isn’t higher quality, than it’s high quality,” Ford-Taggart says. “They’re doing best practices, and that’s exactly why this growth is not going to stop.”

He points out the Indian firms are now winning some big contracts, assignments that are too important to the clients to shovel off to second-class providers. “You’re not going to trust the Indian firms to…redesign your software architecture just because it’s going to save you 30%, if it’s going to create a total disaster down the road,” he says.

Indeed, most of the revenue growth of Indian shops comes from existing clients, not new business – even though they’re adding new clients all the time. “Most of the growth comes from the fact that their existing clients work with them and say, “Holy cow, this stuff’s good’ and give them more business.” In this way the Indian shops have taken on increasingly more sophisticated jobs.

“Every year, you hear, “Oh, this kind of growth can’t continue, and then it does. And in fact in the last couple years the revenue growth of Indian companies has accelerated.”

Invading India

In the last few years, many American and European IT firms have opened facilities in India. These companies know that they can hire Indians engineers for about one fifth to one eighth of what they’d pay for American tech pros. The typical first-year Indian IT trainee makes $450-500 per month. The average salary for experienced IT staffers is $850-900 a month.

This influx of new employers has upped the demand for Indian talent, which in turn has upped the wage pressure on Indian IT employers. Indian firms have been forced to boost compensation about 15% per year, squeezing their profit margins.

In theory, these hefty increases suggest that, at some point, the wages of Indian IT workers and American IT workers will reach parity. The math works like this: assuming that wages in the U.S. increase about 3% a year, it will take 19 years for Indian and U.S. IT salaries to converge.

This would indicate that, within 20 years, the engine driving Indian IT – low wages – will run out of gas. Not true, says Ford-Taggart. First, it’s unlikely that Indian wages will continue to spiral up 15% a year; that wage growth will almost certainly moderate.

Also, Indian firms are continuing to scout for still cheaper workers. For instance, one Indian IT shop recently opened up an office in Malaysia to take advantage of lower labor costs. (Which creates the specter of Indian IT staffers someday complaining that jobs are going offshore in search of cheaper labor – an odd thought, indeed.)

Media reports say that Indian public schools aren’t graduating enough students to supply the country’s rapidly burgeoning tech industry. Yet even this concern doesn’t seem to cast too much of a cloud. The leading Indian companies accept less than 2% of applicants into their trainee programs. Yet if they needed to accept, say, the top 5-7%, they’d still be working with top talent.

In truth, the lack of employees “is not yet the concern that the media makes it out to be for the Indian firms,” Ford-Taggart says.

A Mere Sliver of the Pie

Perhaps the most surprising aspect of the Indian outsourcing discussion is how small a slice of the pie the Indian firms currently own. Offshore outsourcing gets a lot of headlines, and generates a lot of concern, but doesn’t actually attract that many dollars in relative terms. Estimates vary, but only about 4% of global IT projects are outsourced offshore, with much of this going to Indian companies. Clearly, the Indian IT presence is in its infancy.

And for all their growing strengths, there’s no guarantee that the upward trajectory that Indians firms have enjoyed will continue at the same pace. The global nature of the IT market works both ways: as Indian companies open offices from Eastern Europe to the Middle East to the UK, they face entrenched local competitors in all these markets.

And companies from all these locations open offices in India seemingly on a weekly basis, using cheap Indian labor as leverage to combat the Indian-owned firms. Still, the Indian companies are showing no ill effects from this increased competition, Ford-Taggart says. “In fact in a way it’s legitimizing their model.”

Where the future of global IT competition is headed isn’t precisely clear, but one thing’s for certain: the Indian IT firms will be a major factor.