Posted 11/9/2006
While the biggest U.S. tech services are well along the globalization trail, some smaller outsourcing firms have had a hard time in the transition.
Unisys (UIS) and Keane (KEA) are among companies that were slow to grasp the importance of global software delivery, says Stephanie Moore, an analyst with Forrester Research. Both have posted spotty sales and earnings in recent years.
"They thought it was a fad," Moore said.
Most U.S. tech services companies are scrambling to keep up with Indian outsourcing companies that offer skilled tech services for computer programming and business processes. Salaries for workers in India and other developing countries are lower than in the West.
"Even EDS spent too long adapting to this change," Moore said.
The three biggest U.S. outsourcing companies — EDS, (EDS) IBM (IBM) and Accenture (ACN) — have invested big bucks to catch up. They've hired tens of thousands of workers in India and elsewhere.
That puts pressure on the second-tier U.S. tech services providers. "It's a talent war, and a war for credibility and prestige," Moore said.
Some of these services firms, such as Cognizant Technology Solutions (CTSH) and Syntel, (SYNT) have fared well by investing heavily to create a presence in India.
Such moves are essential to battle the low-cost, high-quality offshore model deployed by Indian outfits such as Wipro (WIT) and Infosys. (INFY) In general, North American firms were late in responding to the challenge from their Indian rivals, says Azim Premji, the managing director and chairman of Wipro.
By the late 1990s, most North American firms already had large customer bases. So they overlooked the new offshore model while the Indian firms grew up, Premji says.
"They didn't see how the new business model worked, and their leadership was not sensitive to these changes," he said. "They downplayed it and thought it would go away, which is really absurd."
Premji notes a parallel to the dwindling fortunes of U.S. manufacturers and automakers in the past 20 years. Many were slow to react as offshore producers rose up.
Last month, Paris-based Capgemini said it would pay $1.25 billion to buy Kanbay International. (KBAY) Kanbay is an outsourcing firm based in Illinois with a big staff in India. That deal should help Capgemini expand outside of Europe and will give it more U.S. clients and 6,000 programmers in India, Moore says.
"The acquisition strengthens Capgemini's beleaguered presence in North America and brings it a renewed focus in banking and financial services, as well as a strengthened offshore presence," she wrote in a recent research note.
Cognizant has long been known as a U.S.-based outsourcing firm with strong ties to India. Syntel, which provides software and consulting, has invested $25 million over the past two years to build software centers in Pune and Chennai, India.
Syntel has increased its mix of offshore projects from 64% of total projects one year ago to 71% in the recent third quarter. It plans to have 10,000 programmers on an 80-acre campus in Pune by 2009. Groundbreaking starts on another 30-acre campus in Chennai later this year, says Syntel Chief Executive Bharat Desai.
"We've made a huge commitment to our infrastructure in India, to attract both top customers and employees," he said. "The important thing is creating a competitive advantage by fundamentally changing the cost structure and improving the level of service."
Today, many businesses in need of tech services see outsourcing as more than a simple cost saver. They view it as a strategic advantage, helping to improve operations and speed products to market.
In June, Syntel surveyed 154 tech executives at some of the world's largest companies. Just 4% cited cost as their deciding factor when choosing a tech services provider. Instead, they looked for experience and a good reputation. Outsourcers can make their names only by solving client problems, Premji says. "In the service business, you need a big list of customer references," he said. "Eventually, if you add value to the customer, you will succeed."
