Indian Services Firms Post Strong Growth While U.S. Rivals StruggleIndian Services Firms Post Strong Growth While U.S. Rivals Struggle

Though their torrid growth rates are cooling, India's top outsourcers last week continued to report big gains in sales while major U.S. competitors such as IBM stagnate.

The most recent round of quarterly financial reports by Infosys Technologies, Satyam Computer Services, Tata Consultancy Services, and Wipro Technologies show that offshoring to India is an increasingly popular option for companies looking to bolster IT resources or cut costs, despite a recent report by Technology Partners International indicating that outsourcing lets businesses reduce expenses by only 15% on average.

For the most recent quarter, Infosys posted a 30% jump in sales to $593 million, Satyam a 35% rise to $300 million, TCS a 44% gain to $836 million, and Wipro a 33% increase to $687 million. The performance of major Western services vendors is far more modest. Industry leader IBM last week said its sales of IT and business services increased just 3% to $11.6 billion in the most recent quarter. Most analysts expect EDS to post a sales decline of 2.8% when it reports earnings on May 2, while Computer Sciences Corp. is expected to post a sales increase of 8% on May 23.

Spread It Around

What's driving these numbers is a growing desire by American and European companies to diversify their services partners, ensuring that low-cost Indian vendors get a piece of the action. General Motors in February reduced the amount of IT work it gives to EDS, its main service provider, while tapping Wipro to handle certain application development tasks. Last year, Dutch financial services company ABN Amro split outsourcing contracts valued at more than $2 billion among Accenture and three offshore players: Infosys, Patni Computer Systems, and TCS.

The challenge for Indian vendors is to maintain their price advantage as Western rivals begin hiring Indian workers by the tens of thousands to lower their own costs. Wage inflation in the country already is starting to nip at Indian vendors' profits. Ultimately, those increases could get passed along to customers. Wipro noted in a statement last week that increased compensation costs contributed to a 2% decline in the ratio of operating income to revenue for fiscal 2006. Meanwhile, the company's operating expenses, excluding amortization costs, increased 29% compared with the previous year.

Wages in India are rising by about 15% annually. Wipro added more than 11,000 workers during fiscal 2006, boosting its workforce beyond 53,000. Infosys plans to hire 25,000 workers this year, and TCS says it will add 30,500. Combined with hiring plans of Western firms, at least 200,000 IT jobs will be created in India over the next year or so, which is likely to put even more pressure on wages as companies try to keep tech professionals from jumping to better-paying jobs.

Still, some Indian IT execs say they aren't worried about wage inflation. Infosys CEO Nandan Nilekani notes that salaries represent only 14% of the company's total revenue, and he thinks Indian vendors are positioned to compete on more than just low-ball offerings. "The game has gone way beyond cost," Nilekani says. "If you look at the work we do, we're becoming more about intellectual property."

Nilekani predicts Indian services vendors will make more acquisitions to obtain expertise in industries such as health care and financial services. Infosys last week paid $115 million to acquire Citicorp's 23% stake in Progeon, a provider of business process management software and services. Infosys will be looking for deals, Nilekani says, that can provide it with expertise in vertical industries and access to new markets.