The threat that foreign software services and consulting companies pose to Indian companies by leveraging the advantage of low cost of operations in countries such as India, Philippines and China, is all set to become more real, according to a recent Merrill Lynch report.
Leading foreign software services and consulting firm Accenture, according to the Merrill Lynch, is all set to increase its offshore headcount to about 20,000 in the next three to four years.
This would mean that 30 per cent of its work force in the next three years would be offshore. At present Accenture has only about 7,000 personnel in offshore destinations across the world.
While this is great news for IT professionals, Indian companies need to worry.
Accenture has indicated that while it does compete with Indian software companies for projects abroad, the competition is restricted to only 1 per cent of its software development revenues.
And for that matter the Accenture top team has, according to the Merrill report, indicated that only 15 per cent of their total revenues comes from software development.
The fact that the domestic advantages of Indian software companies is now being whittled away can be gauged from the fact that the report cites Accenture's top management team as admitting to being as cost competitive as the top two Indian software companies, read Infosys and Tata Consultancy Services.
The push by MNCs to develop a base in India springs from the demand from clients for better billing rates.
Amid depressed world economies and shrinking IT corporate budgets, MNC software companies are increasingly using India to do just what Wipro, Infosys and TCS have been doing over the past decade.
MNCs such as Accenture, IBM Global Services, and EDS are using India as a base to develop and deliver high quality software applications to clients abroad at substantially reduced operating costs.
According to Nasscom figures, MNC software exports from India grew by a huge 131 per cent, from Rs 4,252.50 crore (Rs 42.525 billion) in 2000-2001 to Rs 9,855 crore (Rs 98.55 billion) in 2001-2002.
The shift to India, however, is not expected improve MNC bottomlines and only their clients will benefit. The low-cost India benefit will be passed on to their clients and it may not probably reflect in their balance sheets.
EDS for example despite having offshore development centres has continued to lose money, though the slide in profitability has considerably reduced after they set up offshore centres in countries like India.
Multinationals such as Cap Gemini Ernst & Young plan to double its size to 3,000 in the next 24 months. EDS' payroll strength will swell to 5,000 by 2004 from the current strength of 900.
IBM Global Services will almost double its numbers to 6,000 from its current 3,100. Exact numbers of how much Accenture is going to ramp up in India though are not available.
According to the Merrill report, companies offering pure offshore services alone may not survive and prosper, and instead those companies which offer offshoring as one of their strengths are the ones which are most likely to survive the continuing downward trend in IT spending budgets worldwide.
The report points out that Fortune 1000 clients do not choose software services companies purely on cost but on value-added services that they deliver.
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