India is fast becoming a global hub for back-office services as U.S. and European companies increasingly shift their information technology services, call-center operations and other business processes to it, either by opening their own units there or by outsourcing processes to Indian service providers.
What's fueling the stampede, of course, is the desire to gain access to the country's lower-cost, high-quality labor--in some technology areas, higher-quality labor--as well as global technological changes that make it possible to offshore white-collar activities that once had to stay close to home. Infosys grew modestly during its first decade, finishing 1991 with $3.89 million in revenue. The liberalization of the Indian economy in 1991 spurred the growth of the company, which took the opportunity to globalize its operations. Its revenue exploded, to about $121 million by fiscal year 1998-99. Application-development costs in India were one-fifth of U.S. levels, so Western customers continued to jump on the offshoring bandwagon. By fiscal year 2002-03, the company's revenue stood at $754 million.
Yet the Indian IT-outsourcing market is already changing, and analysts point to some dark clouds on the sector's horizon. Giant IT services firms, such as Accenture (nyse: ACN - news - people ) and Electronic Data Systems (nyse: EDS - news - people ), and many global IT-consulting firms, such as Computer Sciences (nyse: CSC - news -people ), are opening their own software-development centers in India. So are large Western software-product companies, such as Microsoft(nasdaq: MSFT - news - people ) and Oracle (nasdaq: ORCL - news -people ). All these will compete with Indian companies for local talent.
Global IT-services firms also compete for work against Infosys and its Indian peers. Eventually, the software-product companies may even encroach on some service areas. At the same time, customers are squeezing IT vendors--including Indian technology firms--for price cuts across the board. Margins have fallen.
Narayana Murthy, the co-founder and chairman of Infosys, believes that his company is well positioned to compete with both Indian and Western challengers in the fast-growing market for offshore IT outsourcing. Offshoring isn't solely a matter of arbitraging low-cost labor, he argues. Providing low-cost, high-quality software-development services remotely requires well-developed processes for managing large-scale projects in distributed locations--capabilities that Indian technology services companies have honed during the past two decades.
In a conversation at the company's Bangalore headquarters with Jayant Sinha and Gautam Kumra, both principals in McKinsey's Delhi office, Murthy discussed these capabilities, the economic differences between Indian and Western IT services firms and the challenges facing Infosys.
McKinsey Quarterly: Western companies have long had the opportunity to move IT services offshore, but until recently only a few pioneers did. Now the climate has changed dramatically. From your perspective, what has put the bloom in the offshoring rose?
Narayana Murthy: While the pressure on Western corporations to leverage the power of technology has been mounting for years, it became acute in the late '90s, and there was a tremendous shortage of trained manpower to do the application-development work involved. Infosys and other Indian companies have the trained manpower and can do the work while giving greater value for money. That, I would say, is what's driving this.
But we also have had to work hard to create awareness among Western companies that we could do the work. In the early '90s, when we went to the United States to sell our services, most chief information officers didn't believe that an Indian company could build the large applications they needed. The CIOs were very nice to us, of course. They offered us coffee or tea, listened to what we had to say and then said, "Look, don't call us--we'll call you." We realized that there was a huge gap between, on the one hand, how prospective Western clients perceived Indian companies and, on the other, our own perception of our strengths.
Thanks to a concerted effort by our industry association--the National Association of Software and Service Companies--by individual companies in our industry and by the government of India, we mounted a campaign to enhance awareness among prospective clients in Western countries of our sector's value proposition. Western companies had a tremendous shortage of trained manpower, and we made them aware that we had a solution. That was how it took off. By 1999, about 185 Fortune 500 companies had started sourcing software from Indian companies. The fact that the revenues of India's technology services sector grew from about $160 million or so in 1991 to about $10 billion last year is a very clear indication that there is greater acceptance of our sector's value proposition.
Still, I would say that awareness among Fortune 500 CEOs of what Indian companies can offer has become even sharper since 2001, when the technology bubble burst and companies started trimming their IT budgets and looking for better value for their money.
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