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Surajeet Das Gupta and Bipin Chandran

Did anyone say slowdown in the software industry? You might hear those words uttered in the United States, but in India it's all systems go.

And no one less than the world's richest man, Bill Gates, chairman and chief software architect of Microsoft, is declaring it. ''US multinationals are offshoring more and more larger software projects to India and that's why Indian companies are growing in terms of volumes and revenue. They're moving up on both the size as well as complexity of projects they take," he said duringhis visit to India.

Gates's ebullient predictions were coming true even as he spoke. In the last few days, the Indian infotech fraternity has been abuzz over two mega deals that could be a sign of things to come.

Wipro and Tata Consultancy Services together snared a three-year $70-million contract from financial services giant Lehman Brothers.

A few months ago TCS won a $100 million contract from GE Medical in the face of stiff competition.

Yes, there's a budget freeze and a slowdown in the United States. But - and this is the silver lining for India - that's forcing US companies to head for cheaper offshore destinations like India.

The result: more companies than ever are offshoring projects to save cash.

What's more, they're making moves unthinkable a few years ago and sending key projects - like chip development - to offshore locales.

Grabbing these opportunities are Indian IT services companies that have built a reputation for reliability and cost effectiveness.

The list of companies making a beeline to India reads like an international corporate Who's Who. There's everyone: from PepsiCo to FMCG giant Procter & Gamble and Kodak.

And there are others like British Petroleum, GE, HP, North West Airlines, telecom major Lattice and even - believe it or not - the German army.

Says Deepak Khosla, head, marketing, Patni Computers: "Offshoring large projects is now becoming a business necessity. If your competition is doing it there's no choice but for you to also follow suit."

Nasscom (National Association of Software and Services Companies) has been documenting the changes overtaking the industry.

It reckons that in the next 12 months 30 per cent of work (over $3 billion) in the software services industry will come from offshore orders, each worth over $25 million a year.

Two years ago there were hardly any contracts that size.

The software association also predicts the number of customers with projects of over $5 million a year will leap by at least 10 times in the next two to three years.

These figures are supported by deals done in the last few months. For instance, Wipro, in the quarter ending September 2002, had 27 clients spending more than $5 million annually.

That was up from 24 such customers in the year-ago period. And the number of customer-dedicated development centres in the last year has increased from 32 to 47.

Similarly, according to Nasscom, Infosys had 90 projects worth more than $1 million or above in Q3 2002.

That's up from 35 such projects in 1998-99. Not to be left behind, the top 10 customers of Chennai-based Cognizant Technologies each contributed, on an average, over $10 million plus annually - much higher than a year ago.

And, at slightly smaller Patni Computers, some 8 per cent of customers are spending more than $5 million annually.

But it isn't only size that counts. Indian companies are also shifting gear - they're nabbing more complex software projects. Says Sunil Mehta, vice-president, Nasscom: "Earlier we were at level one with a large global share - 13 per cent to 15 per cent - in areas like customer application development or application outsourcing."

"We had a below 1 per cent share in more complex areas like systems integration, network infrastructure management and packaged software support and installation. For the first time even these projects - which by their very nature are large and long-term - are coming to India," he said.

Take a look at Mumbai-based niche player eInfochips that designs and validates microchips - a highly secretive task.

Once upon a time no client would have entrusted such key work to an Indian company because they didn't believe proprietary technology would be safe here.

Now 90 per cent of the work is done offshore. Similarly, Hyderabad-based VisualSoft Technologies does about 20 per cent to 35 per cent of development work for key customers.

Chennai-based Polaris is also logging on for the ride. It is looking at bagging over a 100 clients in A accounts ($1 million to $5 million), AA accounts ($5 million to $10 million) and AAA accounts ($10 million and above).

Most of the long-relationship projects drive the larger part of Polaris' offshore revenues, which contributed around 61 per cent of total revenue as of September 30, 2002.

Merrill Lynch is confident about the future. The financial services giant says larger projects are moving here and expects the total global IT spend outsourced to India to double to reach 6 per cent in 2002-03 compared to 3 per cent in 2001-02.

Importantly, most multinationals appear happy about their Indian projects and they're coming back for a longer duration.

Industry estimates are that three years ago the average tenure of a software contract was three months to six months.

Now that's climbed to between nine and 18 months. And that, according to Nasscom, means more money for Indian companies.

A three-month project typically fetches revenues of $250,000. But average revenues for projects between six and 18 months could range from $500,000 to $2 million.

Even the relationship between companies and clients is undergoing a fundamental shift - from Indian firms just being sources of cheap IT labour to partners.

Says N Lakshmi Narayanan, President and COO, Cognizant Technology Solutions: "Offshore outsourcing has seen four waves and has transitioned from 'people-centric' to 'project-centric' to 'solution centric' to 'partnership centric'."

Why are US companies pushing bigger and better projects towards India? To paraphrase Bill Clinton: "It's the cost, stupid."

Says Vijay Gupta, vice-president, Wipro: "In the environment of budget freeze, companies look to do more for less cost. The purchasing power parity of offshore execution offers cost advantages for US and European companies to meet their software requirements from India."

Adds N Chandrasekharan, vice-president, TCS: "Cost pressures have made more companies look towards India."

How much do US companies save by coming to India? A lot. Most industry sources reckon a person who would cost $100 onsite costs only $40 in India.

Says V Krishnan, vice-president (finance), VisualSoft: "The offshore outsourcing model can provide substantial savings to MNCs. This can work out to a cost savings of 40 per cent."

Not surprisingly, it's the biggest Indian companies that are bagging the largest orders. The international companies are trying to outsource their IT work to a smaller number of companies and that's good for the winners who land the deals.

Says Infosys president and managing director, Nandan Nilekani: "International companies have become more risk-averse, wanting to work with fewer suppliers and wanting a full range of service. Infosys's size, brand, financial strength, longevity, end-to-end service offerings all help us to get that business."

The fact is many Indian companies have now made their name as reliable suppliers able to undertake complex software tasks.

Says Ramesh Padmanabhan, chief operating officer, Mphasis BFL: "We have a decade or more of software delivery experience, which is a big advantage. Most Indian companies are CMM Level 5 so that tackles the quality issues. So our clients know the work delivered will be of quality and on time."

The result is Indians are recognised at global levels and that means giant customers are dealing directly with Indian firms unlike earlier when most contracts went to vendors who sub-contracted it.

Says Arun Kumar, president and managing director, Hughes Software Services: "Earlier, most offshoring work was going to large outsourcing vendors and subcontracted to Indian vendors.

But this trend has changed as Indian vendors established their presence in markets and built relationships with key customers. Indian vendors are now invited to participate in large global outsourcing bids."

Better infrastructure has also encouraged multinationals that might have hesitated to come to India earlier.

Notes Pratul Shroff, president and CEO, eInfochips: "Earlier, security was a key issue for our clients and the telecom networks were in doubt. But now we've so many companies offering virtual private networks that there are no apprehensions of security or delays."

Multinationals nervous about heading for foreign shores can also turn to international outsourcing consultants.

Says Warren Gallant, president, Technology Partners International, a global outsourcing advisory firm: "We're helping seven Fortune 500 companies to outsource to India. Last year we helped them in outsourcing over $120 million to India and expect that to grow at least five times."

But larger projects don't necessarily mean better margins. Says Nilekani: "Because of the competitive situation and large outsourcing deals, there has been some pricing pressure."

Adds Mehta: "Average margins are at 25 per cent to 30 per cent for larger companies but this would inexorably go down with projects getting bigger as MNCs will negotiate better prices as they are giving larger deals."

But Indian companies could be winners in other ways. Many multinationals are shifting to fixed-price contracts, giving Indian companies income stability.

Also Indian firms can pare costs and improve margins.

And there's even more business out there. Most big projects continue to be from the US. Indian companies haven't yet begun to penetrate European or Japanese markets.

Says Rajendra Misra of Tenet, a mid-sized IT solutions company: "We're missing an opportunity in Japan which outsources as much as the US. Senior IT executives do not have any high-level contact in Japan and aren't geared to meet their requirements. Japanese subcontractors sit in customers' offices and requirements are never frozen."

Adds Marianne Kolding, director, European service research, IDC Europe: "Currently, the market share of Indian companies is low. Tata Infotech is placed at 83 in the IDC list of top 100 service providers in western Europe, followed by Infosys at 91. In Europe companies require on-site staff, not one sales person. That's crucial."

The rush of larger projects to India is good news for India's biggest companies but for second-tier companies it could spell trouble.

Says Vivek Paul, vice chairman, Wipro: "Customers have started discriminating between big software service players and others."

Adds Gartner India analyst Ravindra S Datar: "Tier 2 companies have to watch out. The large majority of them will feel the increasing competitive pressure in both the global and local markets."

That might be a cause of worry but, at the moment, with India being the favourite hot spot for outsourcing, no one's really complaining. Especially if you have the richest man in the world investing a staggering $400 million in India and saying he considers this country to be the 'software superpower' of the world.

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