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IBM'S Passage to India

By Steve Hamm When IBM (IBM) pulled out of India in 1978 in protest of new government regulations, it opened up the nascent Indian tech market to local players. Some of them grew up to be the tigers of the country's fast-growing software and tech services industries, including Infosys (INFY), Wipro (WIT), Tata Consultancy Services, and HCL Technologies. Now, those outfits are some of IBM's toughest competitors.

But IBM isn't off navel-gazing. It reentered India in 1992 and pumped up its game in the past two years -- intent on turning its operations there into a huge competitive advantage.

TOO HIGH?You might say IBM has gone native. The company boosted its Indian staff from 9,000 at the end of 2003 to 23,000 at the end of last year, and, according to an internal planning document made public by a union, the total is on its way to 38,000 by the end of this year. The company says the 38,000 forecast is too high but acknowledges it will grow fast.

Already, IBM India just blew by Japan as the company's second largest country operation -- after the U.S. "What you have seen in the past 5 years is nothing compared to what you'll see in the next 5 to 10," promises Mats Agervi, a tall, enthusiastic Swede who is vice-president for global delivery at IBM Global Services India.

IBM is under pressure to lower the costs of service delivery. Until the Indian software services companies emerged as serious rivals two years ago, its huge services workforce was distributed primarily within the regions where the work was done. One result was that its compensation costs -- and therefore prices -- were high. With the tech bust and the rise of the Indians, that strategy no longer worked.

BRAND-NEW.So IBM is in the middle of a massive retooling and migration of its workforce. It recently fired 14,000 services employees in Western Europe, the U.S., and Japan -- even while it's hiring in India and Eastern Europe.

The India strategy is isn't all about low-salary software coders, though. Not only does IBM have one of its eight basic research labs in Delhi but its 19 offices scattered across India include software labs in Bangalore and Pune, engineering R&D in Bangalore, and five data centers, including two brand-new ones. One of the new centers matches the capabilities of the company's so-called Level III facility in Boulder, Colo. -- the best of the lot.

IBM isn't the only company expanding rapidly in India. Accenture (ACN) has about 14,000 employees there, and Hewlett Packard (HPQ) has 10,000, according to Technology Business Research Inc.

TAPPING INTO TALENT.The Indian competitors are expanding their own workforces in India -- and setting up programming and call centers elsewhere, as well. So far, though, "they're not in the same league. They don't have consulting, and they're not as global as IBM and Accenture," says analyst Bill Martorelli of Forrester Research. (See BW, 7/29/05, "A Brain Trust in Bangalore"

Indeed, most of what IBM does in India is aimed at worldwide markets. It's developing a formula for distributing the workforce for its $46 billion services business globally to tap into the right talent, local knowledge, and cost levels. So while it puts a smattering of sales and consulting people up close with customers, they're supported by thousands of programmers and business-process operators in India, Brazil, and Eastern Europe. "You find ways to connect resources and capabilities all around the world -- to get the very best from each location, whether it's skills or economics," says John Lutz, vice-president for on-demand business.

BRANCHING OUT.One of the fastest-growing IBM operations in India is Daksh, the business-process outsourcing (BPO) company it bought last year for $150 million. IBM left Indian executives in charge. "We're still entrepreneurial and we're growing so rapidly," says Sanjeev Aggarwal, Daksh's CEO, who co-founded the company in 2000.

IBM doesn't break out Daksh revenues or say how how fast it's growing, but India's Nasscom software services trade organization lists it as the fifth-largest BPO operation in India.

Daksh started off as a customer service specialist, with e-mail and call centers. It landed high-profile customers such as (AMZN) and Yahoo (YHOO). But now it's branching into new areas, so-called transactional business process outsourcing. This includes finance, human resources, and procurement.

JUST AS POWERFUL.The IBM connection has been good for Daksh. The parent company invested to help Aggarwal and his team build the business and has allowed them to tap scientists at IBM's research lab in Delhi to give them an edge over the competition. One piece of IBM Research technology automates the process of searching through documents for unstructured information -- stuff that isn't packed into easy-to-follow templates and forms. That made it possible for Aggarwal to reassign 30 employees to more productive tasks.

Other benefits from the IBM connection are less tangible but just as powerful. In a fiercely competitive BPO market where rivals aggressively recruit each other's top employees, Aggarwal has been able to more than hold his own. His attrition rates are 50% per year in call centers and 20% in back-office operations, both substantially lower than the industry average. IBM's deep pockets allow him to pay among the best salaries in the industry.

KEEP TRACK.He also plays on IBM's reputation. One of his techniques is to reach out to the parents of employees, many of whom live at home. He sends letters to parents when their kids get awards or are promoted, and invites them to open houses at the office so they know it's not a sweatshop. He shows them videos about IBM values. "The IBM brand is important to Indians," he says.

IBM's research operation in Delhi isn't just there to help with local technology and services projects. The lab, established in 1998, focuses on software and services for worldwide consumption. For example, scientists there created "eCoupon" technology for consumer products companies. It distributes electronic coupons to consumers and helps them keep track of them and use them before they expire.

Along with its research and global services operations, IBM is intent on expanding its footprint in the local Indian tech marketplace. IBM says sales rose 45% there last year. Although IBM declines to give the actual revenue numbers, a source close to the company says the total is on the north side of $500 million.

IMPORTANT STOP.Indian corporate clients have all of the sophistication of their Western counterparts. For instance, Bharti Tele-Ventures Ltd., India's leading telecom company, last year outsourced much of its information technology operations to IBM in a 10-year deal potentially worth $750 million. IBM took over Bharti's operations and is transforming the way the company does IT. In an unusual twist, part of IBM's payments are linked to increases in Bharti's revenues.

The deeper IBM goes into India, the less it will seem like an outsider and the more it will become part of the local landscape. At the same time, India will be an important stop on the global talent supply chain.

"In the future you'll have two kinds of operations. You'll have innovation factories scattered around the world, and you'll have people within countries who can deliver to clients the value created in the factories," says Agervi, IBM's global delivery vice-president. Ultimately, if IBM gets this right, IBM India will produce a lot of both. Senior Writer Hamm reported this story from Bangalore

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