Offshorers find rich opportunities—and tough critics—onshore

Offshorers find rich opportunities—and tough critics—onshore

Oct 22nd 2009 | DELHI | From The Economist print edition

EyevineThey really are on the caller’s side

INDIANS are rightly proud of their information-technology firms. But although the industry finds its biggest fans at home, it finds its best customers abroad. It earns $3.75 in exports for every dollar it earns in India. Infosys, the country’s most celebrated IT company, collects only 1.2% of its income from the domestic market. The leading provider of IT services to Indian companies is not a home-grown champion like Wipro or Tata Consultancy Services (TCS), but IBM.
As global IT spending has faltered, however, India’s outward-looking firms have turned inward. “India has been around for the last 5,000 years; most of Indian IT seems to have discovered it in the last couple of years,” says Rajdeep Sahrawat of NASSCOM, an industry body. It expects the domestic market (including call centres and other kinds of “business-process outsourcing”) to expand by 15-18% in the year to March 2010, compared with export growth of just 4-7%.
One big domestic buyer is the Indian government. At the height of the financial crisis, TCS bagged a large contract to automate the issuance of passports. The company has a long history of what it calls “nation-building” projects, but Infosys has got in on the action too, winning the government’s eBiz initiative, which will allow businesses to register themselves, file tax returns and apply for permits online.
The rest of the market is a mixed bag. Many Indian businesses get by without a calculator, let alone a data centre. At the other end of the spectrum are firms that have shown the world how to profit from IT by palming it off. Bharti, India’s biggest mobile-phone company, handed over most of its IT to IBM five years ago and repeated the trick last year with a new supermarket venture. Telecoms and finance account for over half the market, but the fastest growth is in health care, utilities, and transport and logistics, according to Sudip Saha of Springboard Research.
Like many delayed homecomings, though, the return of Indian IT is bittersweet. Indian customers resent being the fallback for companies that have lost their pipeline of international sales. The crisis, points out Arun Gupta of Shopper’s Stop, a large retail chain, has left Indian companies with many engineers “on the bench”. But Indian customers do not want second-rate people with no other work to do.
At a conference in February, Mr Gupta complained that vendors also tried to “force-feed” Indian companies the same solutions they sold abroad. They were “trying to solve a pain that I don’t have, or maybe [one] I’ll get after three years”. For example, tracking customers on video to learn something about the choreography of their shopping is not worthwhile given the narrow margins in Indian retail.
To sell to Indian customers, IT firms must think in rupees, not dollars. One greenback buys around 45 rupees on the foreign-exchange market, but that amount stretches three times as far in India as it does in America, according to the World Bank’s comparisons of purchasing power. Thus when Indian IT firms convert their dollar rates into rupees, they scare many potential Indian customers away. By the same token, the IT firms suffer “negative sticker shock”, when they learn the prices Indian customers are prepared to pay, according to Girish Paranjpe, co-chief executive of Wipro.
Indian customers may demand low prices, but they also hold high expectations. They expect a personal, “magic touch”, above and beyond the rigorous service agreements that outsourcers tend to follow line by line, says Mr Saha. And in India, the home of offshoring, distance is not dead. Customers like their IT firms near at hand. IBM, for example, is establishing a foothold in 14 of India’s second-tier cities, from Surat on the west coast to Bhubaneswar in the east.
To succeed in India, outsourcers must square this circle. That involves taking on the bulk of a company’s IT, not just bits and pieces, according to Mr Paranjpe and Suresh Vaswani, Wipro’s other boss. The task is often to build an IT system, not just maintain or upgrade it. The outsourcer also has to take on more risk. For example, Wipro’s revenue from its deal with Unitech Wireless, a mobile-phone company, depends on Unitech’s subscriber growth.
In return, Indian customers allow outsourcing firms greater leeway in how they meet their commitments. They let them decide whom to put on the job, whether to subcontract it to someone else, which parts to automate and whether to recycle solutions that have worked elsewhere. This freedom allows the IT firms to squeeze a profit even out of the low prices Indian customers demand.
Kris Gopalakrishnan, the boss of Infosys, thinks the outsourcing business will evolve in a similar direction elsewhere, rapidly in poor countries and more slowly in rich ones. Indeed, Western customers could perhaps learn a thing or two from their Indian counterparts. If they ceded as much control as Indian customers happily do, they too might be able to negotiate lower prices. India’s IT providers have overturned the industry once. Their customers might do it again.