Just sit for an hour in the lobby of any business hotel in Bangalore or Bombay if you want to get a sense of the excitement, advises Kees Ten Nijenhuis, VP of enterprise sales in Europe at Wipro, one of India’s ‘big five’ offshore outsourcing companies.

Executives from the Global 1000 are flying in from all over Europe and the US with a clear mission. Under extreme pressure to cut costs, and to show greater value from IT, CEOs, CFOs and CIOs are descending on India in a bid to strike deals that will shave 10% to 60% off of the cost of developing and maintaining their systems, running their customer support services, and processing their back office functions – while still increasing the quality of those applications and services.

Perceptions have changed about offshore outsourcing to the point that, for an increasingly large number of companies, it is now, in the words of Bill Gates, “a common sense proposition”.

Over the last 18 months, a host of factors have come together to bring offshore outsourcing into the mainstream. And with 250 million English speakers, 2 million graduates entering the job market each year, and IT salaries of less than £3,000, India is seeing the bulk of that avalanche. In the year to the end of March, US and European companies bought $10 billion worth of IT services from Indian companies, 30% more than in fiscal 2002.

Aside from the economic pressures that most IT organisations find themselves under, the fact that many organisations have successfully completed pilot projects with Indian outsourcing companies is encouraging them to come back for more. That shows in the fact that companies such as Infosys Technologies and Wipro report that over 80% of their current business is with repeat customers.

Another longstanding concern has also evaporated: quality assurance. To allay fears of weak software development, India companies have spent over a decade being accredited to considerably higher levels of quality management than their counterparts in the West.

Communications issues – largely as a result of the Internet – have also gone away, with costly satellite links replaced by IP-based systems. Lastly, there is also an element of rapidly growing sophistication. The core competencies of the companies have increased dramatically; organisations that were once the powerhouses that got many Western companies through the mountain of Y2K legacy code maintenance, are now highly skilled in .Net, J2EE and Java, and in specialist business processes outsourcing.

“As they have seen the [offshore outsourcing] model working, many companies have decided they should be doing this on a large scale,” says Kumar Mahadeva, CEO of Cognizant, a US-based services company that executes most of its development contracts in India. “So instead of what we have seen before – individual project-based work – we are now seeing some large top-down initiatives in the US and increasingly across Europe. Those involve CIOs and CFOs saying we want to move a substantial percentage of our work offshore in a certain timescale and to deliver a specific set of cost savings.”

Confidence boost

That has led to a dramatic rise in the size of the deals placed offshore, says Mahadeva. Four or five years ago, he says, a large client may have spent $1 million and it would have taken a couple of years to get to a several million spend per year. Now a more typical deal is like the one Cognizant has recently signed

with US insurance company MetLife. That deal has gone from zero to $25 million in its first year.

As well growing in value, contacts are also growing in sophistication. “Customers are wanting us to do much more than simple application management – they are asking for consulting, package implementation and integration, engineering services testing and validation. And in the last year, that has extended to systems integration, trusting us to manage projects, systems and business processes,” says ‘Kris’ Gopalakrishnan, chief operating officer of Infosys Technologies, another of India’s big five (Wipro, Satyam, Infoys, TCS and HCL). He outlines how around 100 of Infosys’s 300 customers are now spending more than $1 million a year with the company.

Many companies are also looking at moving some of their back office operations, such as call centres offshore. “Call centre salaries in India are not at ‘slave labour’ rates,” says Stephen Peattie, managing partner at Kinetic, a change management consultancy with a specialist focus on call centre issues. The average annual salary across the whole country is around £120; a call centre agent might earn £1,200 per annum. But that still makes it very hard for western call centres to compete.

The confidence levels are certainly building among Indian companies. “Large organisations have maybe three or four truly strategic vendors. What is happening now is that, in almost all cases, one of these is becoming an offshore player,” says Gopalakrishnan. “That is the shift you have seen in the last two years, and this is being accelerated by the need to cut costs.”

That kind of business is producing some phenomenal numbers. While IT services companies in Europe and the US are cutting back headcount and learning to live with flat or shrinking revenues, companies such as Infosys are adding an average of 400 people month and growing revenues by 55%.

“Offshore going mainstream has come faster than anyone thought it would,” says Gopalakrishnan. And that will have a major impact on the US and European IT services companies (see box: Offshore impact).

Cost equation

Certainly there is nothing to suggest that the cost equation that, after all, is the key lure will be undermined anytime soon.

An average monthly salary for an entry-level programmer is around £400; compare that to £2,000 plus in the UK and in the US.

That does not translate into five-to-one savings, of course, because there are other costs. In a typical project, around 30% of the outsourcer’s team is based at the customers’ site; there is a co-ordination cost, which runs at about 10%; and there is also a higher data communications cost.

“When you put it all together the typical savings in a offshore application development or maintenance project are 30% and 50%, with no loss of quality,” says Gopalakrishnan. “In fact the opposite.”

That picture is slightly different when it comes to a package implementation, where a larger on-site component accounts for 70% of the cost and results in a 10% to 20% saving over a standard US or European services company.

Others, such as Mahadeva at Cognizant, agree with those figure: Customers should see as much as a 60% saving on their former cost of maintaining and enhancing their applications and in the region of 15% to 20% in new development savings.

One important advantage of the offshore model from the outsourcers point of view is that, because labour costs are so low, companies can keep many more staff ‘on the bench’ while they await a fresh assignment – an unthinkable situation for a US or European company. Throughout most of 2001, Infosys had an astonishing 2,000 people on the bench, and used that opportunity to transform the legacy skills they had built up over Y2K into J2EE, Java and .Net skills.

Big names

Although there have been clear pioneers of offshore outsourcing in Europe, and particularly in the UK, at this point European companies are lagging their US counterparts.

US companies placed about $7 billion worth of software and services contracts in India in fiscal 2003, accounting for 70% of all of India’s IT exports. Multinational conglomerate General Electric (GE) is leading the way. It will place an estimated half a billion worth of IT-related contracts in India this year. As a result, around 8,000 staff at GE and contractor sites in India

will be working on its software and IT services, a number that is growing at around 30% a year,

Although the Indian vendors say it is largely the Global 1000 that are really active in offshore outsourcing at present, the list of companies placing business offshore is long and diverse. The names from the UK, alone, reads like a list of major brands: Argos, Harrods, Somerfield, British Airways, Opodo, Thames Water, Transco, Nectar, BP, Royal Sun Alliance, Royal Bank of Scotland.

Those companies are not only attracted to the lower costs – the quality processes of Indian companies have also had a direct payback. “That translates into a much higher confidence of a project coming in on time and on budget,” says Gopalakrishnan. He suggests that currently 80% of projects come to contract, compared to an industry average of 25% to 30%. “The predictability and reliability of the model is particularly high.”

That is echoed by Colin Windsor, UK managing director at Sapient, another US firm making heavy use of India within its of the global delivery model. The industry average for bringing projects in on time and within budget is 28%; Sapient claims 82% of its deals come in on time and on budget

Global spread

One reason for that is that Sapient spreads its services across the US, Europe, and India, with 40% of its billable staff India.

According to investment bank Goldman Sachs, Indian IT services companies want to follow part of the way down that route. “[Sapient’s is the] type of model that the offshore pure-plays want to achieve, but may find it difficult to achieve because of complexity.”

Therefore, as US and European services companies rush to leverage Indian cost levels, Indian companies are trying to match them by extending their global delivery models in the US and Europe. Having more staff onshore, bumps up costs, but it also enables them to pitch for business that was previously outside of their competency.

Organic growth is not always the answer. Wipro, for example, is bolstering its presence outside of India through selective acquisitions. In late 2002, it paid $26 million for the utility practice of IT services company American Management Systems and in April 2003, it spent $18.7 million to build a stronger hand in financial services consulting with the acquisition of NerveWire, a Boston-based group.

The next level – BPO

That activity signals that Indian companies are now positioning themselves to exploit the opportunity for business process outsourcing (BPO) services.

At this stage, the contracts are for relatively unsophisticated work, such as contact centre services and claims processing. But that will change. There is also a new breed of BPO specialists springing up, such as ICICI OneSource and WNS, who are already challenging the ‘first-generation’ Indian IT services giants. OneSource, for example, recently won a major deal with the UK’s Prudential.

BPO involves greater risk – in many cases it involves some critical aspect of the company’s operations. Nevertheless, as the perception of risk towards India is much lower, so you will see a trend towards more process outsourcing, says Gopalakrishnan of Infosys.

“As offshore becomes mainstream you will have a mirror image of the companies that exist today in Europe and the US. The larger companies with the abilities to provide end-to-end solutions, including business process management, and specialist players providing point solutions and services for smaller companies,” says Gopalakrishnan. “This is just the beginning of the new equilibrium in global services delivery.”