When President Obama meets with Indian political and business leaders during his four-day swing through Mumbai and New Delhi starting Nov. 6, he's sure to encounter some harsh words about the current U.S. backlash against Indian outsourcing firms. In August, Congress passed a law raising fees for work visas by $2,000 to about $4,300. The visas, used by foreign IT workers spending time in the U.S., could cost Indian companies up to $250 million a year, says Som Mittal, president of Nasscom, the Indian software industry's lobbying group.
Also in August, Ohio banned the outsourcing of government IT projects to offshore destinations such as India. "There's some level of concern," says P.R. Chandrasekar, chief executive of Mumbai-based Hexaware Technologies. "You don't want other states to do that."
Their growth hindered by the recession, Indian outsourcing companies are now poised to benefit as business recovers. Spending on outsourcing by American companies and governments is likely to jump 5.6 percent this year, according to Forrester Research (FORR), as clients start spending on IT again. Mumbai-based Tata Consultancy Services (TCS), India's largest software exporter, announced on Oct. 22 record second-quarter sales in North America of $1 billion. "We see phenomenal growth in demand," says Vish Iyer, head of Asia Pacific operations. "They need help from people like us."
The worry is that protectionist measures in the U.S. could quickly change the outlook from robust to dreadful in a market that represents 61 percent of India's $50 billion in annual IT service exports. Two-thirds of Hexaware's $215 million in revenue last year came from the U.S. Bigger Indian companies rely on the American market, too. U.S. sales accounted for 57.5 percent of TCS's revenue for the year ended March 2010, and North America made up 66 percent at Bangalore-based rival Infosys Technologies (INFY), according to Bloomberg data.
Indian executives know they must diversify, yet they have had limited success generating new business in markets beyond North America and Western Europe. Their presence in Japan is insignificant, says Arno Franz, president of Asia Pacific for sourcing advisory firm TPI. Indian outsourcers have high hopes for China, where they are hiring engineers to work on projects for multinational and local customers. "They are placing most of their bets on China," says Franz. "But it takes years and years." India's major IT companies only employ around 5,000 people in China, according to a Goldman Sachs (GS) report, and generated sales of just $257 million.
That means India's IT companies have to keep building their business in the U.S. while their efforts elsewhere slowly take root. To defuse the outcry about companies shipping American jobs offshore, Indian firms are trying to build up local staffs.
Mahindra Satyam (SAY), a Hyderabad-based company that on Oct. 13 announced a contract to design a document-management system for the Kentucky state government's health and family services department, has so-called near-shore operations in 11 countries, including the U.S. It wants to be positioned in the U.S. and elsewhere to hire locally. "Firms are more comfortable with near-shore centers," says the firm's chief executive CP Gurnani. As a result, "dependence on U.S. visas is reducing." About 20 percent of employees are outside India, he says, up from zero in 2006.
The uncertainty surrounding visa rules and state outsourcing policies might accelerate the trend of Indian companies making acquisitions in the U.S. Indian outsourcers have already done $1.9 billion worth of technology acquisitions in North America over the past decade, according to Bloomberg data.
Despite the anti-outsourcing political rhetoric in the U.S., Western companies seeking productivity gains will continue to have a big incentive to shift work overseas to save money. "Anything between 30 to 80 percent of the work," says Sanjoy Sen, senior director at Deloitte Touche Tohmatsu in Hyderabad, "can be potentially done from India."
The bottom line: Indian outsourcers fear that a U.S. backlash over job losses will endanger their biggest overseas market.