Online Extra: IBM Wakes Up to India's Skills

The computer company is ramping up operations with cutting-edge projects while using more low-cost, high-value local labor

By Steve Hamm

The sheer speed of IBM's (IBM ) expansion in India suggests a mad dash to hire as many low-salary employees as possible in the shortest amount of time. The company's Indian worforce has gone from 9,000 to 43,000 in just two and a half years. But while low-cost labor is one of the main factors behind IBM's speedy ramp-up, that doesn't mean its Indian employees perform low value work. "We're putting the highest level of skills in India,"says Larry Longseth, vice-president of server systems operations at the company's strategic outsourcing unit.

In fact, Bangalore -- India's Silicon Valley--has become the epicenter for some of IBM's most important projects. A global delivery center completed there last year is IBM's most advanced outsourcing facility in the world -- employing 2,000 people, equipped with the latest data center management systems, and using the most advanced business processes. Bangalore is also the site of a 14-scientist lab set up by IBM Research to pioneer technologies for automating tech services.

The staff is expected to double by the end of the year. And, most recently, the company established a software development center that creates industry-specific software modules to be used by IBM consultants to build sophisticated information systems for their clients. "The focus on Bangalore is tremendous at all levels. It's the center of the world right now for IBM," says Guruduth Banavar, head of the company's Bangalore research lab.


  In addition to those cutting-edge projects, IBM India also has nearly 20,000 business process outsourcing employees at its Daksh subsidiary, 17,000 people developing software applications for specific clients, 2,000 programmers who work for its software group, and a basic research lab in Delhi. Plus, it has a sales force and consultants focusing on the domestic Indian market for technology hardware and services, where IBM sales grew by 59% last year to about $1.4 billion -- making it the company's fastest growing market.

Having a large footprint in India also helps IBM keep close tabs on the local tech industry. Indian outfits including TCS, Infosys (INFY ), and Wipro (WIT ) pose a serious challenge to Western tech-services companies due to their low costs and high quality work. "We don't consider the Big Six outsourcers to be our threat," says Longseth.

"Our competition is Wipro and Infosys. We see that if we don't move quickly, the Indians will be doing to strategic outsourcing what they have done to applications development."


  While Indians have had a huge impact on software programming services, they are just starting to make a mark on the strategic outsourcing business -- which includes managing data centers. IBM hopes that by rapidly automating data center tasks and establishing superior service processes, it will be able to establish an insurmountable lead in this area. "We're trying to lead the charge down that path. We think we're the dog to chase," says Michael Daniels, senior vice-president for IBM Global Technology Services, a $31 billion business in 2005.

IBM is relying on its research scientists to give it an edge. The company established its Global Delivery Research and Development group late last year to apply math and science to services. So far, the group -- made up of 65 researchers and 150 service delivery people -- has come up with 15 projects and has begun piloting them in India.

"Bangalore is our living lab where we take new technologies and processes and deploy them. Once we test them there we'll deploy them around the globe," says Mahmoud Naghshineh, director of service delivery for IBM Research.


  Another target for the researchers: Customer service call centers. IBM bought Indian call center pioneer Daksh in 2004 for about $150 million, and has left the original management team in charge. Pavan Vaish, IBM Daksh's chief operating officer, says he has been forging partnerships with the research organization to bring new technologies to bear on call center operations.

"We're like kids in a candy shop," he says. One technology that is already in use is a software application that combs through the information collected from customers by call center operators, spots emerging problems, and alerts clients in a matter of days so they can quickly address them.

IBM may never be able to match its Indian rivals on price, but analysts believe its vast resources of technology and expertise -- including people in India -- will help bridge the gap. "These other things can give them a competitive edge," says Mark Toon, chief executive of outsourcing advisory firm EquaTerra.

Hamm is a Senior Writer for BusinessWeek in New York

Edited by Cristina Lindblad

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