Columnist Andy Mukherjee of Bloomberg has a good op-ed on the challenges facing India’s outsourcing firms like Infosys and Tata. The biggest challenge is a strengthening rupee, although there are others. For instance, foreign firms like IBM has set up shop in India doing outsourcing as well, posing more competition. If those weren’t enough, wage costs are escalating, possibly because IBM and others are hiring away personnel from local outsourcing firms.
Some solutions are offered. As the title alludes, generating more business locally would be helpful for these firms since foreign exchange considerations are less important. India’s booming economy begs the question, “Why go abroad all the time when there is so much potential business at home?” There is also mention of moving up the value-chain ladder of services:
Indian software companies, which compete furiously with each other for global outsourcing deals, are now facing a common enemy in the rising rupee. Infosys Technologies Ltd., India’s second-largest computer- services provider, last week pared its full-year sales and profit estimates. A strengthening home currency is reducing the rupee value of its dollar revenue and earnings. Tata Consultancy Services Ltd., Infosys’s bigger rival, this week reported that its profit margin was hurt by 2.6 percentage points in the three months ended June 30 by, among other things, a 7 percent appreciation in the rupee against the dollar, the biggest quarterly gain in more than three decades. The company said it managed to “largely offset” the impact on net income by hedging its revenue against an increase in the rupee’s value. Although the day-to-day volatility in the exchange rate has abated since the end of April, the challenge of long-term competitiveness remains for Indian exporters. As the Indian economy expands 9 percent a year, soaking in larger amounts of overseas capital, the real effective exchange rate of the rupee is bound to rise. Since inflation tolerance in India is low, much of this adjustment will occur through an appreciation in the nominal currency value. The Indian central bank will try to hold the rupee down when it can afford to loosen monetary conditions at home. It would be less willing to protect a competitive exchange rate when doing so could lead to overheating. All is not lost for Indian software exporters. The economics of outsourcing are still in their favor, though wage costs are galloping, too. Partha Iyengar, vice president at research firm Gartner Inc. in India, has a blueprint that Indian companies can use to mitigate cost pressures. Their first task should be to walk away from simple code- writing and testing — the “$10-an-hour” work that Iyengar estimates still makes up 55 percent to 65 percent of the revenue generated by top Indian software exporters. Replacing low-end tasks with better-paying work is an obvious route to boosting revenue per employee. However, competing for such assignments against an International Business Machines Corp. or an Accenture Ltd. won’t be easy. Capabilities need to be created, or acquired. The best place to build those muscles, Iyengar says, is in the domestic Indian market, in which local companies have shown very little interest. Out of the several large outsourcing deals from India in the past several years, few have gone to Indian companies. In March 2004, IBM won a $750 million order from Bharti Tele-Ventures Ltd., an Indian mobile-phone service provider. Around the same time, Dabur India Ltd., a local maker of shampoos and beverages, asked Accenture to manage its computer systems. A 10-year, $150 million order from Bank of India, a state-owned commercial lender, went to Hewlett-Packard Co. “If you’re being beaten in your own backyard, you can’t chase large global deals,” Iyengar said in an interview last week in Singapore. “Those clients will say, `we don’t believe you have what it takes; you haven’t demonstrated it.”’ Meanwhile, IBM and Accenture are expanding in India, hiring the same programming talent as their homegrown rivals. Unlike the latter, however, they also have a larger pool of business consultants, people who understand clients’ needs. “It won’t take an IBM six months to line up a supply-chain specialist to go talk to the board of directors of a prospective client,” Iyengar said. To stake a credible claim for, say, a $2 billion global outsourcing order, Indian companies must first show their ability to execute large projects at home, says Iyengar… At Infosys, revenue generated within the Indian market is just 2.4 percent of North American sales. The neglect of the home market was a logical thing to do when it was small, dominated by government orders. Now, when some of the fastest-growing companies in the world are in India, the apathy is strange. In the current fiscal year, which will end in March 2008, the domestic software and services industry is expected to grow 22 percent to $10 billion in revenue. Sure, exports will be three times as large. That, however, is no excuse to ignore the home turf anymore. From retail and transportation to hospitality, banking, insurance and telecommunications, there are many domestic businesses in which Indian companies are scaling up at a breakneck speed to meet burgeoning demand. These are also businesses that are most likely to place large outsourcing orders. When Bharti Airtel Ltd., as the company is now called, placed its order with IBM, it had 7 million mobile-phone subscribers. Now it has 43 million. Had an Indian outsourcing company won the chance to meet the company’s information technology requirements during this explosive growth, it could have leveraged that experience to seek deals from Vodafone Group Plc or Sprint Nextel Corp. The same is true now for retail. Mumbai-based Reliance Industries Ltd., which began setting up supermarkets last year, intends to make it a $25 billion business by 2011. According to media reports, it’s going to spend at least $250 million on technology… These local growth engines offer learning opportunities. Indian outsourcing companies must tap them if they want to go beyond being low-cost service providers. Apart from its other advantages, local, rupee-denominated revenue will also serve as a natural currency hedge. For that benefit alone, Indian companies should look more closely at the business in their own backyard.