Indian IT Firms: Is the Future Theirs?

In the old days – say, five years ago – Indian IT firms existed in a kind of tech ghetto. Prosperous American IT companies were the stars of the show, the go-to companies that clients hired when they had mission critical assignments. The Indian companies were the low-cost choice, the place to ship non-essential work to if you needed to shave costs.

But what a difference a few years can make. Many American (and international) IT companies have opened facilities in India, while several India IT firms have opened offices around the world, including in North America. Location matters less and less. And when big bucks clients send out a request for proposal, Indian firms bid right alongside blue chip U.S. firms.

At this point, Indian IT outfits like Infosys, Satyam, Wipro and Patni stand as equals – in some eyes, at least – to any IT solution provider on the planet. In fact, in a development that causes deep heartburn in a segment of the American IT community, some observers view the Indian tech companies as a step ahead of their international competitors – including those based in the U.S.

How, exactly, did this situation come about? And more importantly, will it continue in the future?

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In the early ‘90s, much of the work that Indian IT firms did was of the bargain-basement variety. Staffing call-center help desks, application maintenance: Indian firms landed these outsourced assignments by offering deep discounts. While U.S.-based IT companies leveraged a network of personal relationship to help them land contracts, Indian companies were on the outside looking in.

The Indian firms took a step up in the world as Y2K loomed. Companies scrambled to find programming talent, and many hired Indian companies. By the time the dust settled around 2001, the leading Indian IT firms had gotten their toes into plenty of doors.

Moreover, the Indian shops had proven themselves to be truly competent. It turned out that shipping work to Indian wasn’t like buying a low quality product for low cost; the offshore companies produced solid code. Still, there remained a cultural reluctance to send work to Asia. When the job really counted, it tended to stay in the U.S.

Then came a big change, says Mike Ford-Taggart, a Morningstar analyst who tracks Indian IT outfits.

“I would argue that something happens in 2002 and 2003, where they [the Indian firms] reach some sort of a tipping point,” he says. The buyers of IT services, big American companies, were suffering badly in the bear market, and shareholders were demanding cost cuts. Since the Indian shops typically work for 25-35% less, their offers suddenly looked quite attractive.

Instead of being a choice of last resort, the Indian firms got a chance to bid on many projects, stepping up the value chain. And even on bids they didn’t win, they tended to be “disrupters,” forcing U.S. and European tech companies to shave their bids.

Fast forward to 2007, and the Indian shops are becoming a major force in the IT business. According to a report from TPI, over the next 18-24 months, some $100 billion worth of IT contracts around the world is up for grabs. It’s expected that Indian companies will be invited to bid on these contracts. “At which point, that $100 billion automatically becomes $65-70 billion,” Ford-Taggart says. Clients will invite the Indian firms to the table to – at the very least – squeeze the U.S. vendors on price.