US News & World Report
May 02, 2005

India's major outsourcers now offer complex tech services, like design engineering

By Terry Atlas

BANGALORE, INDIA--Kaushik Mukherjee's workshop looks like a place where electronics go to die. The guts of tech gear lie exposed, their circuit boards tethered to computer monitors like patients on life support. But the reality is quite different. Mukherjee and his colleagues are hard at work on the next wave of consumer electronics. In one area, they are doctoring a low-cost computer chip to mimic a pricey one for a sub-$50 satellite TV digital video recorder. Nearby, they are designing circuitry for a 65-inch high-definition television. There are other projects, too, ones they can't talk about for competitive reasons.

The name of Mukherjee's employer, Indian tech giant Wipro Ltd., won't appear on any of the eventual products being developed for corporate clients with familiar names. Italian automaker Fiat, for instance, had Wipro design the satellite navigation system for its Alfa Romeo cars. Nokia, the big cellphone maker, sends work to Wipro's engineers. In general, though, anonymity is the rule when it comes to product design outsourcing, as the corporate culture here embraces the idea of packaging a "Wipro brain" under someone else's brand. "We're not a product company," says Mukherjee. "We're a services company."

If you think tech outsourcing is limited to call centers, software writing, and back-office operations, think again. The same Indian firms that generated the outsourcing wave--and the ensuing jobs controversy--are moving up what one executive calls the "value chain." The big three--Tata Consultancy Services, Infosys Technologies, and Wipro--and myriad smaller firms are taking outsourcing in new directions, tech product research and development being just one example. Since the trend is not as obvious as when it involves hearing an Indian-accented voice on a customer help line, it might be considered, as Wipro notes, a "silent revolution."

Two worlds. The heart of the revolution is in Bangalore, a burgeoning city of 6 million that is India's high-tech capital. The streets are rutted and crumbling, the traffic is chaotic, and people complain about electric blackouts, garbage piles, and other typical Third World afflictions. But pass through the gate at any of the city's major outsourcing campuses, and suddenly you could be in Silicon Valley, with the same modern architecture and landscaping, air-conditioned offices, and cappuccino-serving food courts. There are sophisticated videoconferencing facilities, swimming pools, tennis courts, and, perhaps most striking, green lawns in contrast to the brown arid land just beyond the walls. Employees exist in a kind of virtual reality where the normal constraints of the physical world--location, distance, even time--can seem irrelevant. Wipro computer systems experts in one control room here, for instance, manage the minute-by-minute operations of a client's complex network that is physically located a continent away in Britain.

Just as companies sought substantial savings by farming out call centers, they are now attracted by the potential to outsource engineering design and sophisticated business computing. On any given day at Wipro and Infosys, welcome signs for visiting clients read like a list of America's best-known corporations. The firms ask that names not be cited, but Wipro's public client list includes Morgan Stanley, Sun Microsystems, General Motors, Honeywell, Cisco, and Lucent. With some 400 corporate clients, Wipro's head count has tripled since 2002 to nearly 42,000. The company is hiring at a rate of three people every working hour--choosing less than 1 in 100 applicants.

There is confident talk here that the information technology (IT) services revolution is only the opening act of a larger transformation. And a recent report by research firm Gartner predicts an accelerating pace of technology outsourcing to India, China, and elsewhere. Worldwide spending on offshore research and development and engineering, for instance, will increase more than eightfold to $12 billion by 2010, according to Gartner. Similarly, spending on so-called infrastructure outsourcing--such as remote network management--will grow from less than $250 million to as much as $4 billion in the same period.

India's big draw is, of course, its deep pool of skilled technology workers, who may cost a 10th of what they would in the United States and Western Europe. India is turning out some 82,000 engineering undergraduates a year, versus about 60,000 in the United States. And India's top graduates are first rate: The elite Indian Institutes of Technology accepts only 3,500 out of 178,000 applicants for undergraduate and graduate study. At Wipro, a new engineer with top academic credentials earns about $9,000 a year, and a senior engineer with eight years' experience about $20,000. Even with salaries rising 15 percent or more a year, Wipro chief marketing officer Sangita Singh says confidently, "the cost advantage is still in India's favor, hugely."

Jobs of the future. What this will mean in coming years for American tech innovation, and the jobs that it generates, is unclear. India, despite the rapid growth of its tech sector, lags behind the United States in computer software and systems jobs, 540,000 to 2.5 million. An additional 245,000 Indians work in various other types of outsourced services, such as call centers and business support. Some of the worst fears of potential American job losses are contradicted by positive U.S. government projections in computer fields over the decade. Still, a spokesman for electrical engineers sees outsourcing as a factor claiming jobs, suppressing wages, and imperiling U.S. innovation. "Because innovation tends to follow jobs, key drivers of our economic prosperity could be lost," says Gerard Alphonse, president of the U.S. arm of the Institute of Electrical and Electronics Engineers.

Certainly, Wipro's success can be seen in its annual revenues, which have nearly tripled since 2001 to $1.9 billion. But like its competitors, it is under pressure to maintain explosive profit growth. Wipro last week reported that its IT profits increased 47 percent for the most recent quarter, while Infosys racked up a 67 percent profit gain. Still, Infosys's stock got hammered, losing more than 7 percent in value after announcing that profit growth for the year would be a strong but less-than-expected 23 to 25 percent. Investors may be right to worry. A Deloitte Consulting report released last week said some major corporations are reassessing outsourcing in light of "significant negative experiences" and, for nearly half the 25 surveyed companies, failure to achieve expected cost savings. But, Deloitte added, outsourcing "for the right reasons" can "still deliver value."

Part of Wipro's strategy is to expand into more complicated--and more profitable--tasks. For this, Wipro now has some 9,000 engineers designing products for about 100 companies, making it the world's largest third-party R&D outsourcer. In addition to product development, which has grown to some 30 percent of revenues, Wipro has begun marketing other capabilities, such as remotely managing clients' computer networks.

Similarly, Infosys is looking to move into the turf of management consulting powers such as IBM and Accenture. The idea is to have Infosys management consultants in the United States help a client identify ways to improve efficiency and then hand off to software developers back in India the chore of developing the needed systems. Infosys has raided major consulting companies to hire the executives for its new U.S. consulting arm based in Fremont, Calif., projected to employ 700 people within two years. The challenge "isn't about buying the new technology or the next new thing," says Infosys CEO Nandan Nilekani, "but how to put it all together to make it better and more effective for business use."

Left brainers. Of course, there are a few bugs. India offers an abundance of technical talent but lacks the middle managers who can be key to bringing in projects on time and on budget. Also, attrition among tech employees, while a manageable 15 percent at the top companies, is thought to be running 20 to 40 percent at some others. And Indian executives acknowledge that their quantitative strengths aren't matched when it comes to creative tasks, such as envisioning the look and feel of a new MP3 audio player.

And it is still India. Transportation is so problematic that Wipro must run a fleet of 150 buses to ferry workers, and the 15-mile drive from the perpetually overbooked hotels downtown to the technology zone known as Electronic City can take more than an hour. Wipro and other firms have offered to pay a third of the projected $80 million cost to build an elevated toll road from the city to their campuses, but political opposition has stalled the proposal. Without improvements in roads, airports, and power generation, India's tech industry "will be unable to continue its meteoric growth," notes a recent Forrester Research study. That worries Wipro Chairman Azim Premji: "I think we lose a lot of foreign credibility because of our infrastructure." So far, though, that hasn't kept the clients away.