Quotes of the Day

One glance at the travel itinerary of Natarajan Chandrasekaran will tell you just how dramatically the postrecession economy is changing. Since October, when he became CEO of Indian IT firm Tata Consultancy Services (TCS), Chandrasekaran has retraced the business trips his predecessors have been making for years to New York City and London, the home cities of big banks and other companies that have traditionally outsourced computer programming and other work to Indian firms. But jaunts to the industrialized world may no longer be sufficient to keep his Mumbai-based firm growing at top speed. So Chandrasekaran is also venturing to locales Indian techies in the past rarely considered worth the cost of a plane ticket. He has already stopped in Beijing and Singapore, and early in 2010, he'll head to Montevideo, São Paulo, Mexico City and the Middle East. "You need to make sure that you're more focused on growth everywhere," he says.

India's IT sector, born out of the forces of globalization, is undertaking some globalization of its own. In search of new sources of rapid growth, the country's outsourcing giants are aggressively expanding beyond their usual stomping grounds into the developing world, setting up programming centers, chasing new clients and hiring local talent from Santiago in Chile to China's far-west metropolis of Chengdu. Through geographic diversification, Indian companies hope to regain some momentum after a dismal year, at the same time becoming even tougher competitors to IBM, Accenture and other industry leaders. India's companies "clearly realize that if we want to be global players, we need a presence in emerging markets," says Sangeeta Gupta, vice president of India's National Association of Software and Service Companies (NASSCOM) in New Delhi.

This shift is being driven by a global economy in which the U.S. is no longer the undisputed engine of growth. India's IT powers, among them companies like TCS, Infosys Technologies and Wipro, rose to prominence largely on the decisions made by American executives, who were quick to capitalize on the cost savings to be gained by outsourcing noncore operations, such as systems programming and call centers, to specialists overseas. Focusing on the U.S. produced some spectacular results. Revenues in India's IT sector surged from $4 billion in 1998 to $59 billion in the country's fiscal year ended March 31. But recession has caused a dramatic deceleration as companies in the U.S. and Europe scale back technology spending. NASSCOM forecasts that the growth rate of India's exports of IT and other business services will drop to at most 7% in the current fiscal year, down from 16% last year and 29% in 2007-08.

NASSCOM's Gupta calls the crisis an "inflexion point" that has jarred Bangalore into moving more quickly into markets with higher potential for economic growth. K.R. Lakshminarayana, chief strategy officer at Wipro, says that, with the West mired in "an economic reboot," his company has over the past two years opened operations centers in China, Egypt and the Philippines, while expanding others in Brazil and Romania. These markets, he says, will help Wipro achieve its primary goal: "the maintenance of velocity."

More than the crisis is driving India's IT firms into the emerging world. As their multinational clients expand into developing countries, they are finding it imperative to follow. New customers are also surfacing among large firms and financial institutions from emerging countries as they seek to professionalize their operations. A study by NASSCOM and consulting firm McKinsey figured that by 2020 about a quarter of potential IT- and business-services revenues for outsourcing firms will be generated in the so-called BRIC countries: Brazil, Russia, India and China. Although the U.S. still accounts for 60% of the export revenue of India's IT sector, emerging markets are growing faster. NASSCOM data show that the Indian IT sector's revenues from the Asia-Pacific region grew by a compounded 42% a year between the 2004 and 2008 fiscal years compared with 29% in the U.S. That's why management at Infosys is targeting a long-term restructuring of the company's revenue base, decreasing the U.S. share from the current 65% to 40%, while raising the proportion coming from the Middle East, Latin America and Asia from about 12% to 20%. "The U.S. continues to grow," says S. Gopalakrishnan, CEO of Infosys, but "we can get higher growth rates in [emerging] markets."

Tapping these more dynamic economies won't be easy, however. The very different demands encountered in the developing world are forcing an overhaul of the way India's IT firms conduct business. Their goal for the past 30 years has been to woo clients outside India, but to transfer as much of the actual work as possible back home, where lower wages for highly skilled programmers allowed them to offer significant cost savings. With costs in other emerging economies equally low, India firms can't compete on price alone. Emerging markets also require that services be offered in languages other than English.

To adapt, Indian companies are establishing major local operations around the world, in the process hiring thousands of Brazilians, Chinese, Eastern Europeans and others. The need to train new recruits in multiple countries is a major test for Indian management, and has sparked a few cultural conflicts as well. Cesar Castelli, the São Paulo – based president of TCS in Brazil, says that the company has had difficulties squeezing more free-spirited Brazilians into an Indian corporate environment run on strict hierarchy and a devotion to internal rules. "Indians say 'Yes' and Latins say 'Why?,'" he quips.

IT firms also have to work extra hard to woo business from emerging-market companies still unaccustomed to the concept of outsourcing. Unlike CEOs in the U.S., executives in the developing world prefer to manage their technology in-house. The fact that Indian companies are relative unknowns in many parts of the world hasn't helped. Castelli says that one problem marketing the TCS brand name in Latin America has been that tata in Spanish means "daddy." "Nobody knew if we were talking about our father or the company owner or what," Castelli says. "It took time to explain that Tata was an Indian IT company."

Yet these hurdles are steadily being overcome. Since opening its first emerging-markets operations centers in China and Uruguay in 2002, TCS's annual revenues from Latin America, the Middle East and the Asia-Pacific region have surged from $160 million to $1.2 billion, or about 20% of total sales. "The investments we've made in emerging markets have all reached a critical size," says TCS's Chandrasekaran. TCS discovered that its expansion has opened up new opportunities to lure business from international clients. After struggling to convince Spanish companies to outsource to India, TCS found them much more comfortable outsourcing to the firm's staff in Spanish-speaking Latin America. Business is coming from local companies as well. In early December, TCS launched a currency-trading network for Chinese banks, a project completed for the People's Bank of China.

India's IT giants are charging forward as quickly as they can. TCS is adding some 1,000 people a year in Latin America, where it now employs about 7,200, while in China it intends to nearly quintuple its staff to 5,000 over the next five years. "These emerging countries are now beginning to see the value of outsourcing," says Martha Bejar, Wipro's president of global sales and operations. If so, the future of India's outsourcing sector could prove as bright as its past.

—with reporting by Andrew Downie /São Paulo

• Michael Schuman
• After cashing in on globalization's first wave, India's IT giants are discovering their continued success may depend on international expansion