India must look beyond cheaper staff

Indian outsourcing companies have to move beyond low-cost services on an hourly-rate basis to offering complete services, according to an outsourcing consultancy.

A model that is based primarily on the low cost of Indian staff will not be sustainable by Indian providers in the long term, as the cost advantage is eroding, said Dennis McGuire, chairman of outsourcing consultancy firm, Technology Partners International (TPI) in Houston, Texas. Large competitors like IBM and Accenture are also expanding operations in India to take advantage of low-cost staff, he said.

“When I go to a restaurant, I want a chicken dish and not a rate-card telling me how much the chef’s time will cost me,” McGuire told reporters Wednesday. There isn’t much risk, nor promise of great reward, in the current labor-cost arbitrage model adopted by Indian providers, he said.

Indian service providers must make more investments in senior staff, and industry specific applications and tools if they want to win big contracts, said Peter Allan, a partner at TPI. They will have to develop industry-specific applications, such as a billing system for telecommunications companies, around which they can offer services to customers, said Siddharth Pai, another partner at TPI.

Indian providers have been reluctant to trade current margins for long-term revenue opportunities because investors expect far higher margins from Indian service companies than from their multinational competitors, TPI said.

Only recently have these outsourcers indicated that they are willing to accept total outsourcing deals that involve transferring customer staff and assets, Pai said.

The reluctance of Indian outsourcers to address the lower-revenue domestic outsourcing business will also hurt them as the market shifts from plain coding and testing to higher-end transformation services, research firm Gartner said this week.

Working on projects in India in these new areas would give Indian outsourcing companies the opportunity to prove their capabilities to customers abroad, said Partha Iyengar, research vice president at Gartner.

Indian outsourcing companies such as Infosys Technologies and Tata Consultancy Services are attempting to go up the value chain into IT consulting and services delivered around their products. “ They still don’t offer the full array of services, and in applications they only have products in the core banking area,” Pai said.

However, business is still strong for Indian outsourcers, according to data released by TPI. Of the number of contracts greater than $50 million awarded last year, the share of Indian service providers went up to 11 percent from 8 percent a year earlier, according to the consultancy. Their share of the total value of these contracts went up to 7 percent from 4 percent a year earlier, it said.