India Outsourcing Giant Battles Volatile Market Conditions

TCS (VARBusiness500 rank: 32), India's largest IT services organization, reported a 55 percent increase in earnings to $291 million on a 42 percent increase in sales to $1.3 billion for its first fiscal quarter ended June 30 compared with the similar quarter one year ago. TCS said it was able to maintain net margins through cost management, productivity increases and hedging gains.

TCS' strong showing comes with outsourcing rivals like EDS and Computer Sciences Corp. (CSC) expected to post single digit sales growth for the similar quarter. For example, EDS is expected to post a four percent increase in sales to $5.41 billion compared with $5.19 billion, according to a survey of analysts by Thomson First Call. CSC, meanwhile, is expected to post a 5 percent increase in sales to $3.76 billion compared with $3.55 billion in the year ago quarter, according to a survey of analysts by Thomson First Call.

At least at this point, TCS is not seeing a sales falloff in the wake of concerns that outsourcing is becoming more costly (witness the rising salaries of offshore workers)more difficult to sustain (language barriers are often at the root of that problem).

"Over the last two to three years, there has been a tendency among U.S. corporations to see the value of outsourcing, especially to destinations like India," says Pradipta Bagchi, spokesman for TCS.

In fact, seven out of 10 of companies on the Fortune 100 use TCS for some type of outsourced service, whether that's for business process outsourcing (BPO), infrastructure services or consulting. The reasons for the integrator's popularity Bagchi explains, is threefold: global expansion, increasing Indian labor force and cost.

In the last quarter, the company opened its Mexico Global Development Center; TCS has more than 150 clients and in excess of than 5,000 professionals in 14 Latin American countries. The center is strategic for furthering its success in the United States as well as for forging new markets in Mexico and Latin America.

"Our centers in Latin America speak Spanish and Portuguese," says Bagchi, "and our new center in Mexico serves not only that country but also U.S. businesses that have a need for Spanish-language services. It can also serve as a 'near-shore' center for U.S. companies because of its English capabilities, and it is in a more favorable time zone than our centers in India." Companies have made it clear that while it is advantageous to have some work done during the overnight hours in the U.S. " the very same hours that make up the Indian workday " it is even more desirable to be able to speak to offshore employees in as close to real time as possible. Sites in Mexico and Latin America, therefore are briskly gaining popularity because of minimal time zone differences (if any).

That high demand continues to fuel the attractiveness of engineering degrees in India. "Countries are not finding the number of technically skilled employees in their own home," says Bagchi. "[India] will have 400,000 engineering graduates this year."

As a result, Tata has had its choice of hires. In the first fiscal quarter, 8,706 employees joined the company, bringing the total employee count to 94,902. Engineering is one of the most lucrative positions for Indians; and the challenge for both Tata and its customers now is containing salary costs, which have been growing rapidly. For example, according to a recent story in the Financial Times, a Silicon Valley start-up called Like.com has opted to save money by closing its Indian engineering center and moving the jobs back to California. The article noted that wages had skyrocketed so much that, in combination with the extra costs of running a separate office in India and the difficulties caused by the time difference from California, the cost savings had effectively become nil.

Bagchi acknowledges that, on average, Indian wages have increased 15 percent in the past year, compared with 3 percent in the United States. But, he adds, in Latin America and Brazil, the workers are still 15 percent more expensive than in India. And, he notes, Indian engineers are one-third the cost of U.S. engineers. In some cases, the disparity is much greater: A senior software engineer in India earned an average of $11,400 (U.S.) last year, according to Payscale Inc., of Seattle, which collects salary information. Meanwhile, the median income of a U.S. software engineer is roughly $100,000, according to the latest IEEE-USA salary survey.

Acknowledging that salaries are on an up-tick, Bagchi says many businesses are moving out of Bangalore, for example, and into "tier two" cities.

"The economic boom in India has led to the growth of airlines within the country," he says. "So it is feasible to fly into and out of these towns now where it wasn't possible before." These towns are not as developed as the larger cities and salaries are not as competitive.

For Tata, the challenge for the future will be in continuing to attract talent while keeping the value proposition attractive to customers. That may take a bit of globetrotting for Tata and other outsourcing firms, as they continually seek low-cost labor to meet high-tech needs.