Two years ago, when DaimlerChrysler (DCX) decided to overhaul its computing systems, it invited the usual crowd -- IBM (IBM), Electronic Data Systems (EDS), and other giants -- to bid on pieces of the job. But the carmaker also opened the door to a handful of Indian newcomers for the first time. One of them, Bangalore-based Infosys Technologies Ltd. (INFY), won the first $25 million chunk of the project. A 25% cost savings over the giants helped, but what has impressed DaimlerChrysler since then is the quality of the work Infosys has done, says Klaus Felser, a DaimlerChrysler vice-president for technology. The giant auto maker now plans to ship a large percentage of its tech-service work to India over the next five years.
Until recently, Indian service outfits barely registered in the West. Now, Infosys, Tata, Wipro, and others are emerging as real competition for the industry's behemoths. Their ability to offer prices that undercut Western adversaries by as much as 70% is just the start. They're also amassing the skills to handle complex consulting projects and rapidly opening sales offices in the West to get face time with potential clients. Their efforts are paying off: Three years ago, just 125 of the top 500 U.S. companies placed work with Indian companies, according to Nasscom, India's software-services trade association. Last year, that number hit 285, including Boeing (BA), Cisco Systems (CSCO), and Lehman Brothers (LEH).
JIGSAW PUZZLE. This cross-border competition is roiling the $578 billion tech-services industry like never before. Confronted with pesky new rivals, giants such as IBM and EDS are overhauling their operations. To protect their flanks and remain competitive on the low end, they're slashing costs by moving jobs to India, China, the Philippines, and Eastern Europe. In recent weeks, Accenture Ltd. (ACN) said it may hire 5,000 people in India this year, and IBM will hire more than 4,000 people in India and China. At the same time, the bigs are moving up the food chain, boosting their technology innovation and consulting expertise in ways they believe the Indians can't easily match. "This is the biggest reshaping of services in decades," says John Parkinson, chief technologist for the Americas at Paris-based services outfit Cap Gemini Ernst & Young.
The challenge for all the players -- Indian companies included -- is to fuse Western and Asian operations into smooth-running global machines. The industry's giants are expert at hand-holding customers yet are mere novices when it comes to providing low-cost services and dealing with the cultural differences in India. For Indian companies, the opposite is true. Now the race is on for the Western companies to fill in the Asian pieces of the global jigsaw puzzle while their Indian rivals hustle to fit together the Western chunks.
Not all the players will survive. "There is bound to be a shakeout," says Jayant Sinha, a McKinsey & Co. partner who advises service companies. Some weak or smaller players will be takeover bait in a business where the top five players still control only about 20% of the market. Already, computer makers Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL) have snapped up service companies in recent months. BearingPoint (BE) and Cap Gemini, respected firms but poor performers recently, are among the potential takeover targets, analysts say.
Who will win? Among the U.S.-based players, IBM and Accenture are most likely to come out on top. Big Blue, already the key technology supplier for many of the world's largest corporations, has the advantage of being able to offer customers a vast array of services, hardware, and software. Accenture not only has a solid start on reducing costs, with 4,800 employees in facilities in India and the Philippines, it can also match the breadth of IBM's service offerings. Look for one or two of the Indian companies -- perhaps Infosys, Tata, or Wipro -- to emerge as large players. The handful of companies that achieve both efficiency and innovation will dominate the next era.
Before they can dominate, though, they need to heal the wounds of the past three years. With demand slack, prices were hammered down relentlessly. June E. Drewry, chief information officer at Chicago-based insurer Aon Corp. (AOC), has replaced most of her late-1990s service contracts, and she was able to reduce her bills by 30% to 40%. Prices aren't likely to recover soon. "It's like virginity. Once you lose it, you lose it," says John Kirincich, director in charge of information technology for North America at Germany-based chemical company Celanese. As a result, the industry is expected to grow just 4.7% this year, says Gartner Dataquest, vs. about 10% per year in the late 1990s.
A HIGHER HIGH END. In response, western players are trying to create services for which customers will pay a premium. Both IBM and Accenture harness their research labs to help consulting clients. Accenture, for instance, had its researchers analyze more than 100,000 phone conversations to help them develop an automated phone system for AT&T (T) to handle calls from its customers. The goal? To cut costs by half. "So far, we're getting the savings," says Lou Delery, AT&T's vice-president for operations.
At the same time, the bigs are coming up with strategies that take advantage of their global reach, something the Indians can't yet match. They parcel out work among existing offices in their primary markets, moderately priced countries nearby, and a smattering of Asian companies, including India and such lower-cost countries as China. They divvy up the work to take advantage of not only labor costs but also language skills, time-zone convenience, and the immediate availability of specific skills -- say, obscure programming expertise for the pharmaceutical industry. Cap Gemini, for instance, last year got a $500 million, 10-year contract to manage software applications for auto-parts giant Visteon Corp. It put 350 people on the project -- portioned out among Visteon's Dearborn (Mich.) headquarters and its own facilities in Germany, France, Spain, Bombay, and Kansas City, Mo.
The trickiest challenge facing the industry's giants is to quickly establish productive operations in India. But their mad rush can cause its own problems. For instance, to attract talent, foreign companies typically pay 20% more than the local market rate. At the same time, though, some don't offer their Asian employees upward mobility or other benefits they want. The result is that Western players have annual attrition rates of up to 25% in their India operations -- about twice those of their Indian rivals. When Sapient Corp. (SAPE) in Cambridge, Mass. started up in India in 2000, it didn't understand its new employees' commuting needs, and it took two tries before it got a busing program working. "People can go to India and spend more money and get less done because they don't know how things are done there," says Jerry Greenberg, Sapient's co-CEO.
Local companies are already masters at organizing efficient armies of software programmers. And they have techniques that allow them to perform routine tasks with consistency and quality levels that are hard to beat. Infosys, for instance, processes 1 million job applications a year, administers 1,000 entry skills tests a day, and quickly winnows its applicants to the most qualified and suitable for the jobs.
But the Indian players are still far behind their Western rivals when it comes to anticipating what corporations want. In an effort to change that, they're trying to develop business expertise in industries ranging from banking and retailing to manufacturing and energy. They're also pushing to stay abreast of the most advanced technologies. Infosys, for example, has an alliance with researchers at Massachusetts Institute of Technology who are working on such things as radio-controlled inventory systems.
While the Indian companies have an advantage now because of their low costs, analysts expect the Western competition to come on strong over the next two years. The Indians have a healthy respect for the Westerners. "The beast has awoken -- just as Netscape woke up Microsoft" (MSFT) to the Internet, says Nandan Nilekani, chief executive of Infosys. Don't expect the giants to crush the Indian upstarts, though. This battle will have winners from both worlds. By Manjeet Kripalani in Bombay and Steve Hamm in New York, with Spencer E. Ante in New York and Andy Reinhardt in Paris