The atmosphere at NASSCOM 2007 in Mumbai early February was nothing short of effervescent. The elite of India’s IT services industry, gathering for their annual conference, was, as always, ready to borrow from US management speak to express their feelings: the same executives who appropriated Six Sigma, CMMi Level 5 and other benchmarks of process excellence were characterising the state of their sector as ‘inside the tornado’, having entered a phase of hypergrowth in which business activity is soaring as a result of broad market acceptance of a compelling proposition.

The evidence for that was everywhere. Growth at IT services companies such as Tata Consultancy Services, Wipro, Infosys and Cognizant has rapidly gone through the roof in recent quarters: While in 2005 and into 2006 the pace was in the hugely impressive 25% to 35% range, now such suppliers are experiencing scorching growth of 40% to 60% – an astonishing situation for companies already several billion dollars in size.

That all flows from a widespread acceptance within corporate IT that the model for leveraging India’s low-cost, highly skilled labour force is delivering great results. At NASSCOM, customer after customer was happy to take to the stage, full of lavish praise for the “stunning” achievements of the India-centric delivery model and in appreciation of the “phenomenal service” they were receiving. Jonathan White, senior VP of worldwide technology and innovation at giant GlaxoSmithKline was just one case in point: He used the platform to make a public commitment to move 2,000 of GSK’s in-house applications to India over the next 12 months.

Topping it all was the NASSCOM appearance and ringing endorsement of India’s Prime Minister, Dr Manmohan Singh, one of the architects of the country’s high-tech revolution, as he called on the industry to be even more ambitious in its growth targets – perhaps with transparent interest. IT services now accounts for 8% of India’s total GDP – with each position in IT generating at least four ancillary jobs, making it one of the prime engines behind the country’s sensational 9.2% economic growth rate.

Despite the sense of triumph in the air, there was no getting away from the serious challenges the IT services companies face as they continue to tap into the sub-continent’s low-cost skills base – challenges that are beginning to feature in the risk factor lists of many customers.

Staff turnover averaging at 15-20% annually in software development and at anything between 30% to 140% in business process outsourcing; wage inflation running at 18% and threatening to dilute the key Indian advantage; a shortage of high-quality engineers; a lack of clear differentiation between service offerings; a public infrastructure that is buckling under the strain of commercial expansion; and the threat of a cap on the tax-free status that ‘exporters’ of software services have enjoyed in India for most of the last decade: all these represent major issues for companies leveraging the Indian talent pool.

Talent squeeze

As demand for Indian IT services has grown exponentially – and as Western companies, from the giants of IBM and HP to the Tier 2 players of Xansa and LogicaCMG, have rapidly ramped up their efforts to leverage India as their primary software hub – the battle for talent has become intense.

One of the key ingredients of the India economic miracle is the fact that the country has been generating between 380,000 and 400,000 engineering graduates a year. However, says Hari Thalapilli, head of HR at Satyam, “only 30% to 40% of these will ever be employable or deployable, and 20% to 30% of those need to spend six months at ‘finishing school’, ” working on their English and polishing their knowledge of Western business practices. When companies such as TCS, Wipro, Infosys and Cognizant are trying to add 15,000 to 20,000 employees a year, the pickings become a lot thinner.

According to Thalapilli, in such an overheated market, employees are in the driving seat, and are looking for four key elements: the opportunity to work across different

technologies; the opportunity to work in different cultures and geographies (Satyam is typical in executing projects with about 80% of the effort in India and about 20% abroad); the opportunity to use their own initiative; and, of course, adequate compensation.

As he points out, in the current seller’s market, skilled employees can theoretically move every six months and ratchet up their salary each time they move. That means at a company like Satyam, annual ‘voluntary attrition’ is running at 14%. Though uncomfortably high, that is still well below the 20% reported by some of its peers.

“Over 80% of the attrition happens in the first four years, and most of the losses are people being offered opportunities to work in the US or Europe,” he says.

“Everyone here has come to the realisation that there are certain areas where we want to definitely control attrition,” says Thalapilli. “In particular, we don’t want to lose the 35% of our people at a leadership level – at any cost.”

That means Satyam offers such individuals frequent rotation between projects, both at home and abroad; it also provides them with the right of refusal on taking certain assignments; it provides them with customised career planning, so they get the skills and opportunities they want; it offers healthcare benefits not just to individuals, but to their relatives; it tries to outdo Silicon Valley in terms of the quality of campus working conditions; it tries to tie individuals in by involving their families in company social life; and of course, it pays above the odds.

Package from India

Pay rates among Indian IT services companies are far from linear. For a basic engineering graduate, leaving university after four years, the going rate is the rupee equivalent of $6,000 to $7,000; for a non-engineering graduate the annual salary is $3,500 to $4,000.

But above that, salaries are a lot higher. An engineer with a two year post-graduate management degree from one of India’s Ivy League campuses (such as the Indian Institute of Management in Bangalore and Kolkata) might be offered $30,000 to $40,000. Candidates with that level of qualification but from other campuses get paid $10,000 to $15,000.

“Entry level salaries have not been changing much in recent years,” says Thalapilli. The real salary inflation is for experienced positions. Someone with five years of experience can command $20,000 to $25,000.

Meanwhile, for the 20% of staff who might be working at client sites in Europe or the US, salaries are typically tagged to local rates. For example, an experienced project leader assigned to a major client in the UK might be paid as much as £50,000 to £60,000.

That wage inflation has meant a softening in hiring policies. Companies where the minimum requirement was an engineering degree or an MBA are now looking at maths graduates or those from other science disciplines.

Of course, any dilution of the talent pool is inherited by customers. According to the CTO of a large ecommerce firm who has used Infosys’ capabilities for several years, there has been a gradual erosion in the quality of people both onsite and offshore.

Such pressures aside, IT services companies leveraging India can still deliver very high quality work at a lower cost and still make net margins in the 20% to 30% range. “Most of our customers are looking to save between 25% and 30%,” says BG Srinivas, head of EMEA for Infosys, “however, that is not the ultimate goal. It is not difficult to get 30%, but that is a one-off. Companies are looking beyond that one-time benefit.” They want productivity improvements, an innovative partner, and the flexibility to scale their resources up or down, he says.

As that suggests, the relationship between customer and supplier has become a lot more sophisticated. After the earlier phase in which organisations simply tried to squeeze the supplier to undertake the work for as little as possible, organisations are increasingly seeking partners or closely knit groups of partners that can deliver sets of integrated services.  Indeed, a recent poll of CIOs at Patni’s last annual customer conference found that 45% preferred leveraging multiple vendors for project requirements with work competitively distributed, as opposed to 17% who favoured deals with a single service provider.

The drift towards multi-service contracts has been to the benefit of the IT services companies from the US and Europe, several of whom have successfully built critical mass in India to underpin their global delivery models.

They are “getting their act together,” concedes Azim Premji, Wipro CEO. And that puts pressure on Indian companies to show differentiation – beyond simple labour arbitrage.

At NASSCOM, Satyam’s CEO, Ramalinga Raju, was at pains to emphasise that the Indian industry was moving to a higher level of engagement with customers. Having been through the ‘body-shopping’ era, set high quality thresholds and built out global footprints and vertical expertise, now companies like Satyam are trying to show they can add real value to customers’ businesses. “We must demonstrate leadership and innovation so clients benefit from our capabilities.”

Analysts are sceptical. “Many CIOs remain unconvinced of vendors’ ability to ‘deliver innovation’,” says Angel Dobardziev, IT services practice leader at Ovum. “Clients will talk about, and demand innovation, but what they are really after are outcomes.”

As Indian companies shoot for that next ‘orbit’, as Raju calls it, they are stressing that their share of the worldwide  IT services market is still only 5%. “It used to be that multinational [IT services] corporations won the big deals and the Indians got the small ones.” The playing field is now much more even.

More from this feature...

From East To West

• Tata Consultancy Services
• Infosys
• Wipro
• Satyam
• HCL
• Patni
• MindTree Consulting
  

From West To East

• IBM
• Cognizant
• Accenture
• HP Services
• EDS
• Capgemini