For yet another year, India has consolidated its leadership in the IT sector in Asia. The figures speak for themselves. Last fiscal year, the sector once again beat its own record, with 28 percent growth. Of the $36.3 billion in total revenues, $23.4 billion (64 percent) came from exports. The forecast for this fiscal year is even more promising: growth is slated to surpass 30 percent. The dynamizing effect of this sector is clear: it employed 1.3 million people in direct jobs and another 3 million in indirect jobs.

An expanding sector

The leading quoted companies, such as TCS, Infosys, Wipro, and Satyam, recorded an average 36 percent rise in turnover, while the Indian operations of multinationals like IBM Global Services, Accenture, and others announced meteoric business growth, clearly seen by a 30 percent increase in staff. As an example, Accenture now has more employees in India than in the United States. Stakeholders in the sector believe that the goal of $60 billion in exports by 2010 will be reached much sooner. The large Indian companies keep diversifying their markets, as they want to be present in non-English speaking countries. Even though they have set up distribution centers in the United States, they are starting to inundate China in the quest for engineering and design; South Africa to take out insurance policies; and even Eastern Europe and Mexico. Companies from all over the developed world are arriving in India seeking its software know-how, encouraged by the country’s favorable legal climate and export incentives.

Europe, the laggard

Europe is the destination for a scant 23 percent of the exports from the Indian IT services sector, while America accounts for 68 percent of these exports. Within Europe, the United Kingdom receives 15 percent, which means that the share of the continental European markets is paltry. Given the fact that offshoring activities in certain European countries is on the rise, the conclusion is that it is aimed at countries other than India. In 2004, companies from the United Kingdom, Germany, and Benelux monopolized 90 percent of the service-oriented jobs off shored to other countries. The offshoring of companies in southern Europe remains minimal compared to their investment in IT.

The cultural barrier

Experts in the Indian IT sector calculate that Spanish companies are lagging three to four years behind the United Kingdom, and two to three years behind Germany, Benelux, and Switzerland. Linguistic and cultural factors largely account for delay, as Indian companies set English-speaking markets as their main target, and only later did they create the capacities needed to serve German-speaking markets. Now they are aggressively beginning to develop their capacities for Spanish-speaking markets. Gabriel Rozman, vice president to TCS Latin America, estimated that the company reached 4,000 employees in Latin America by the end of last year. Another reason is that Spanish companies have reached Asia late in the game, especially India, a delay that has contributed to a lack of understanding of the region and its potential.

An impeccable pedigree

Regardless of whether they are from Spain or the rest of Europe, companies whose main business processes are based on IT should think about the role India plays in this sector worldwide. If the United States is still ahead of Europe and the rest of the world in terms of ICT (information and communication technologies), it is largely due to its ability to more successfully leverage India’s IT resources and capacities. No European executive in charge of IT can afford to ignore the phenomenon of this sector in India. Whoever still doubts Indian companies’ capacities should recall the country’s sky-high volume of exports in both IT and related services. A full 70 percent of companies around the world with a level 5 CMM certificate, the most stringent quality standard in software and IT services, are Indian. In terms of organization, Indian companies’ mechanisms of corporate governance are on par with the top companies in the world, and their executive teams and technical staff have extensive experience in the most demanding markets.

Advantages beyond just cost

Cost savings is just one of the plethora of advantages of offshoring IT processes to India. Others include its companies’ emphasis on processes, their high level of quality, the abundance of talent and their solid experience in a broad range of sectors, ranging from banking to financial services, insurance, retail distribution, and industry. Companies such as TCS and Infosys received more than 1 million job applications last year, only 1 percent of which actually materialized into hires. It should come as no surprise that with such a strict recruiting policy, the quality of job seekers in the Indian IT sector is exceptional.

Cultural challenges

Before venturing into India, we should bear in mind that only processes can be transferred there, not activities on an ad hoc basis. This is a very important detail, as process-orientation is not one of the strongest points in southern European or Latin America companies. For this reason, working with Indian teams either within the company or via outsourcing will necessitate a substantial change in organizational culture in the guise of a heavier orientation towards processes. This adaptation will not take place overnight, so companies should set realistic profit targets.

Finally, companies have to consider the most suitable offshoring model. There are several different possibilities, ranging from captive offshoring (such as the operations of Nokia, Dell, and Alcatel) to the outsourcing of processes to a specialized partner, the model chosen by the vast majority of companies, and finally hybrid models.

One initial, low-risk option would be to outsource a well-defined, reasonably sized pilot project. If the operation is successful, companies can then consider more complex models, such as setting up dedicated centers in India.