Hewlett-Packard's Success With Buying EDS Depends on India.

HP is taking on IBM in the tech outsourcing business by buying EDS and how well it succeeds will depend on India. That’s right, India. The media is focussing on the difficulties of merging the different cultures of West Coast-based HP and Texas-based EDS but I think the real issue will be the availability and price of Indian talent.

IBM has been increasingly successful in managing the technology infrastructure of corporations because it moved most of the service labor to India in recent years. IBM is the leader in the services market with revenues of about $54 billion. EDS is second at $22 billiion and HP is third with about $17 billion in revenue.

Much of IBM’s success is to to the nearly 75,000 people working for it in India out of about 120,000 employees. EDS, with 140,000 employees only has about 28,000 people in India. That has pushed its costs higher than IBM’s. It’s operating margin, at 6%, is half IBM’s.

The big job for HP CEO Mark Hurd will be to find enough talented Indians willing to work at modest wages. That won’t be easy. Wages

among India's tech elite have been soaring in the past two years. And IBM has locked up much of the talent (although now it may have to pay more for it). IIT and other elite Indian schools aren't graduating enough engineers to meet the market demand and lesser qualified students from regional colleges are being hired.

This could prove problematic to HP. Both IBM and HO should be supporting these regional colleges in a big way to boost the supply of highly trained Indian engineers and software writers.

Before it's here, it's on the Bloomberg Terminal.