CAN INDIA RETAIN ITS REIGN AS OUTSOURCING KING?

By M H AHSAN

Hardly a day has passed in recent months without an announcement from a major international corporation that it is outsourcing software development to India or investing in building its own software development center there.

Just today, for instance, France-based Cap Gemini Ernst & Young, the world's fifth-largest information technology services company, opened a new development center in a suburb of Bombay that will house 250 engineers. "We are really looking at this as a stepping stone to build a much bigger presence in India," said the company.

Major Indian outsourcing announcements have come fast and furious recently: IBM will open a Linux research lab employing 500; Nortel Networks, which already has 1,300 developers in India, will spend $350 million in the next three years and employ 500 additional research and development scientists; Cisco Systems will spend $200 million on a development center; and Deutsche Bank is dropping $4.3 million to build a 50,000-square-foot development center that will eventually house 550 software professionals.

India is clearly on a roll--but how long can it hold onto its crown? With the National Association of Software and Services Companies predicting $6 billion in software exports this year (up from $4 billion last year) and $50 billion by 2008, some are starting to question whether India can maintain its competitive edge. Low-cost technology centers in China, the Philippines, Russia and Pakistan are sprouting up and competing for outsourcing projects, making it increasingly unlikely that India will reach that lofty goal.

The Information Technology Association of America, an industry trade group, estimates that some 840,000 information technology (IT) jobs in the U.S. will go unfilled this year. Those jobs, for a first-year graduate, start out with typical salaries of $45,000 to $50,000 and rapidly escalate. The offshore software outsourcing industry will no doubt continue its hyper-expansion in the next few years as Western firms look for cheap offshore talent to fill that gap, but it is clear that India could stumble and lose its crown.

According to Marty McCaffrey, executive director of Salinas, Calif.-based Software Outsourcing Research, India will likely face troubles ramping up to the projected 2008 level.* He estimates that India would need to have 1 million qualified software engineers to support exports of $50 billion, and the country currently graduates around 110,000 computer science students a year. With a dearth of experienced project leaders already on the horizon, that problem will reach a crisis point as outsourcing continues to expand at a rate of more than 50% a year. Additionally, many of India's best and brightest will continue migrating to the U.S. in search of higher wages.

When and if India does slip, there are plenty of low-wage countries that would be only too happy to pick up the slack.

Pakistan, for instance, has sought to emulate India's success by offering similar tax breaks for multinationals and is aggressively modeling their own educational programs in computer and information sciences on India's.

While China would seem to be the biggest threat, with 400,000 software professionals, only 35,000 of them are qualified to do the kind of high-level, systems-integration projects that are so coveted in India. Most of China's high-tech laborers are well qualified to work on software applications maintenance and migration projects, and these workers come at a significantly lower salary than do their Indian counterparts doing the same work.

The Chinese environment has traditionally been grounded in manufacturing and hardware, but that appears to be changing, and the Chinese government has recently placed great emphasis on teaching English to students and IT workers, which is an extremely important skill requirement for American firms looking to outsource.

As a former British colony, India has already been extensively educated in that critical skill set, but perhaps not to the extent of the Philippines, a former American colony, where American culture and language is widely emulated. According to some analysts, those cultural and communications skills could prove to be so appealing to American firms that they would outweigh slightly higher labor costs in the Philippines.

As far as Russia is concerned, McCaffrey calls the situation there "murky." After the fall of the Soviet Union, there were more than 1 million registered engineers, but many of them have since retired, been out of work for long periods of time or don't have the necessary skill sets. Nevertheless, McCaffrey praised Russia's university programs in physics and mathematics and noted that the country has "tremendous outsourcing potential" as an alternative to India. While top-notch talent falls into roughly the same price range, programmers can be found in areas outside of Moscow for as low as $3,000 a year per programmer.

Those countries, along with a host of others such as Indonesia, Malaysia, Thailand and even Vietnam, will collectively challenge India's IT prowess in the next few years. Projects that last year and this year went to Bangalore, India's hi-tech center, might well be going to Manila and Guangzhou, China.