IT offshoring: What's the latest trend?

HCL Technologies is organising its second global meet in Agra, which has the top management from nearly 400 leading global companies attending. These experts will share their views on the likely trends that will emerge in the offshoring.

On the sidelines of this meet, HCL Tech's president Vineet Nayar, Forrester Research vice president Stephanie Moore and founder and CEO of Everest Peter Bender Samuel give their perspective on the trends in the offshoring space.

According to Vineet Nayar, SG&A expenses are increasing due to investment in new business models. He also adds that the new business models have been resulting in better realisations.

Stephanie Moore feels that scaleability is a challenge for Indian IT firms. He mentions that talent squeeze has been eroding some benefits of Indian vendors.

Peter Bender Samuel expects billing rates to remain firm, but he does not anticipate any sharp upmove. He feels that IT infrastructure and engineering will be growth drivers for Indian IT.

Excerpts of CNBC-TV18's exclusive interview with Vineet Nayar, Stephanie Moore and Peter Bender Samuel:

From your preliminary discussions, you have been rubbing shoulders with a large number of CEOs and CXOs, what is the first cut impression, which you get? Are things all well out there?

Nayar: The first cut reaction is things are pretty hot out there. The customers across the globe are looking for innovative ways of reducing costs, reducing time to market and getting things done faster. They are looking for new business models of working with India.

They don't want to work in the same old business model in which they were working. As long as the Indian IT companies adapt themselves to the new business model, I think the markets are pretty hot and the customers are looking at India very aggressively.

What is the feeling that you have in terms of what is happening with technology spending? How will the next year, which is likely to be a bit tricky for many of the companies in the US, mean for Indian technology companies and outsourcing?

Moore: I think that, as Vineet said, people are looking at India for a lot more today than just labour arbitrage or cost savings. Certainly, during the downturns, India is protective due to their cost structure. More and more companies and more of my clients are looking to India for innovation.

In fact, India and Indian vendors are their first stop when they are looking for alternatives or solutions to their IT issues and now even sometimes their business issues. I think even as the budgets tighten a little bit in the United States, you will see a continued and a pretty rapid growth for the Indian IT and the Indian BPO companies.

Vineet made the point about new business models, which many of the clients are trying to engage in. Could you give us your experience about what are the new areas, which are opening up for growth for Indian companies and whether that could have any implications on pricing as such because for the last couple of years, while lots of interesting work has been done, we haven't seen companies move up too much on the pricing platform.

Peter: There are several very interesting new areas that the Indian firms are extending themselves into. I think a very big one is the area of IT infrastructure and this is a huge area that Indian firms are very well positioned to do very well in.

We see a growth potential of a small base but in excess of 100% a year in this space. This could certainly add dramatically to the potential for the Indian market and another very hot space is engineering. Those two together give a great new momentum to the offshoring model.

With regard to pricing, you see required pricing staying fairly firm, somewhat flat in terms of the last few years. But there is a slightly upward progression but I don't think it is going to rise a great deal and the challenge for the Indian firms is to deal with wage inflation and to continue to drive cost efficiencies and operational efficiencies to offset that. So far, they have been able to do that and do that with excellence.

You made the point about engaging with different business models. But do you think you will succeed in extracting greater value or realizations for yourself as a company in a space, which might be a little sticky for many of the companies over the next couple of years?

Nayar: The answer is yes, and if you take a specific example of HCL, what you have seen is that SG&A has significantly increased for HCL because we are making a huge investment in new business models. But at the same time, at the EBITDA level, it is marginally improved despite the SG&A increase.

The new business model - whether it is device based pricing, output based pricing, total IT outsourcing, the mixed bags of infrastructure and application concept to manufacturing are resulting into higher realization for HCL compared to what I call the traditional services of coding, testing so there is a value enhancement.

At the same time, what is happening today is companies like HCL are taking that money out and investing it back into business models into things which will scale up the value we are delivering to the customer and scale up the way our customers see Indian companies versus IBM, EDS and global services companies. So that is what is happening I think there is an enhanced value that companies like us are creating.

The other interesting observation for an outsider has been in the last one-year, we have seen far many more big deals being reported by many of the companies ranging from USD 50-100 million per year ranging up to quarter of a billion dollars spread over a few years do you see more of this happening as many of the IT companies out there, outsourcers out there engage Indian companies in much larger deals and don't see them as just good for USD 10-15 million kind of jobs?

Moore: The expectations have changed dramatically with regard to our customers both in the United States and Western Europe and their understanding of the value of the India outsourcer. So firms like HCL and the other top 10 Indian firms are infact competing head to head with centers like EDS and IBM and infact they are competing very well against them.

I do not see an end to that in the near future but the challenge is whether the vendor can scale to accommodate what looks like some pretty phenomenal growth. This is the big worry for companies that are now relying exclusively on India as an outsourcing and innovation and application development destination.

What is your own feeling because there is a little bit of a squeeze for talent on the ground. Wages have moved up, maybe not to the extent which would worry many of the companies out here, but do you think that the talent squeeze and wage inflation can erode the advantage of some of these frontline vendors?

Moore: I think the talent squeeze and rapid growth is already eroding some of the benefits of working with an Indian vendor at least from the perspective of European or American clients.

I think that people have become very used to the flexibility and customer service that they get from the top tier Indian vendors and some of that has gone away because these firms have become so large and they have had to create more rigid processes. So some of the flexibility benefits that people used to get, have gone away to some degree and I think that's a concern for clients.

What's your own sense of wage inflation, the ease with which you are able to get people extract or attract quality talent? Are these issues that you are grappling with in the scalability factor that Stephanie alluded to?

Vineet Nayar: There are two aspects to it - if you are in the vanilla business of coding and testing, I do not think there is a scale or a talent issue. However, as we at HCL and everybody else moves up to value chain and doing transformation, transactions and value add, talent is definitely scarce. That's not a worry in India, it is scarce across the world; good people in any industry even retail are difficult to find.

So if the organizations have good talent transformation initiatives, employee initiatives, and here is where I come back to the HCL mantra of 'employee first and customer second'. So if you have an employee focussed initiative, you have a better chance in succeeding in some of these initiatives compared to some of our competitors.

I completely agree with Stephanie that the difference in success and failure is actually not going to be the revenue, which you generate from the customers, it is how you service them and how you are able to make them happy, so that you can create a sustainable business model.

For more on markets & business, log on to www.moneycontrol.com