Based on this PC World story about the recent financial performance of Cognizant Technology Solutions, an outsourcing provider that is headquartered in the U.S. but employs mostly workers based in India, you'd think everything was hunky-dory for Indian service providers. After all, the headline refers to a "surge" in offshoring. And Cognizant did experience a 43 percent growth in revenue and 37.5 percent rise in net profit vs. the same quarter in 2010.
The truth, however, seems a bit more nuanced. The article touches on staff attrition, an issue that is becoming a growing concern for Cognizant and many of its Indian rivals. Cognizant's CFO says the company plans to increase salaries by 12 percent to 14 percent this quarter.
It's a similar story for Wipro Ltd. Reuters reports that while the company beat financial estimates with a 14 percent rise in net profit in the latest quarter and added 68 new clients, it would increase wages of India-based employees by 12 percent to 15 percent in the coming quarter. Wage hikes and continued strength in the rupee would impact its operating margins, its executives warned. Currency fluctuations, higher taxes and rising wages also were mentioned in a Reuters story detailing the financial performance of Tata Consultancy Services.
The story also references growing competition from IBM and Accenture. Indian providers are now struggling to keep up with these multinational companies, according to an Investor's Business Daily story. The story quotes a Stifel Nicolaus analyst who says IBM and Accenture have staffed up in India to effectively level the labor arbitrage field. Indian providers, however, have not been as successful in beefing up their higher-end consulting practices to take business away from the multinationals.
The story also quotes Kevin Campbell, Accenture's group chief executive of technology:
We proved that we can go down-market and meet them at the price points they have offshore. They have yet to prove that they can come upmarket, do the big complex work and build the industry experience at scale in a global environment.
Indian providers were experiencing pressure on their margins way back in 2009 when I interviewed Peter Allen, then partner and managing director for global practices at outsourcing advisor TPI and now president of global sales and marketing for Computer Sciences Corporation. Allen told me:
... The runway for labor arbitrage benefits is just about gone.
Allen said traditional providers like Accenture were faring better than Indian rivals in a then-tough environment for outsourcing. He said:
... They're the ones that really gave rise to the industry. Even when they went offshore, their proposition was about more than just wage arbitrage. There's a pretty bright line between the universe of providers that are actively using offshore delivery locations, but as part of a productivity-oriented proposition, vs. those that are simply throwing people at the problem.
The Investor's Business Daily story notes both Accenture and IBM beat expectations for sales and earnings in their latest quarters and raised their profit outlooks. It also cites a Times of India story that recently reported IBM is now India's second largest services employer, after Tata Consultancy Services. IBM was recently suspended from a program that expedites applications for temporary work visas because some of its applications were fraudulent - though it was later reinstated.