One lakh. That’s the number of new jobs India’s top five software companies plan to add this fiscal year, riding a boom in outsourcing that’s fattened profits. That’s on top of a record 76,500 new employees who joined these companies last year.
The figures underscore how rapidly US and other Western companies are shifting work to low-cost India, where outsourcing is no longer limited to call centers or back-office work such as billing and salary records.
Companies such as Tata Consultancy Services Ltd and Infosys Technologies Ltd now have thousands of engineers developing software to improve corporate productivity and manage information technology infrastructure.
And despite concerns that rising salaries, a possible slowdown in the US economy and the rupee’s strength against the dollar would hurt business, the latest earnings figures—released over the past two weeks—show that profits are surging.
Net profit for the top five outsourcing companies—Tata Consultancy, Infosys, Wipro Ltd, Satyam Computer Services Ltd and HCL Technologies Ltd, ranked in that order—grew to a collective $3 billion (Rs12,300 crore) for the fiscal year through March, up 47%. Sales, meanwhile, jumped 41% to a combined $13.6 billion.
And the top four software companies won 713 new clients last year. A figure from HCL Technologies was not available.
“We are seeing robust growth,” Infosys chief executive Nandan Nilekani said when his company reported a 70% year-on-year surge in profits during the January-March quarter.
Nilekani’s confidence appears rooted in the strong economic rationale of the outsourcing business: Western companies will keep shifting jobs overseas so long as they can get the same work done for less money elsewhere.
Indian companies have set up centres in other low-cost countries like Vietnam and Romania to stay competitive despite rising salaries at home. As a result, they are hiring more people in these countries. Nearly 10% of Tata Consultancy’s employees are now foreign nationals. For Infosys, the number is close to 3%.
The outsourcing portfolio has also expanded over the years to increasingly include high-value services, thus enabling Indian companies to charge higher fees and partially offset the impact of a weaker dollar and increased wage costs.
Tata Consultancy, India’s leader in the field, had sales of more than $250 million last year managing IT infrastructure of its client companies, said Ashwin Mehta, analyst at Mumbai-based brokerage Ambit Capital.
HCL Technologies said its focus on remote infrastructure management services—which may include everything from help in installing new software to monitoring network security—helped in winning several large multi-year deals last year.
“The deal sizes are getting bigger,” said Mehta.
Tata Consultancy won 12 outsourcing orders worth more than $50 million each last year, while Wipro Ltd won 10 such deals. Both companies said they are aiming to win similar contracts this year.
“We believe that we have the right ingredients to keep winning,” Wipro chairman Azim Premji said after the company announced its latest earnings.
To keep the momentum going, Indian software companies are also looking to win more customers outside the US, traditionally the largest client country. They have acquired businesses in Europe to increase visibility there, set up centres in Latin America and are also winning orders from Australia and New Zealand.
Diversifying helps hedge against a possible slowdown or a potential political backlash in the US.
Besides Indian companies, IBM Corp., Accenture and EDS Corp. are also expanding their off-shore centres in India, hiring tens of thousands of new employees.
The boom in outsourcing underlines the increasing globalization of labour, which has helped corporate profits—in both rich and poor countries—rise faster than labour costs, said D. Subbarao, a member of the Prime Minister’s advisory council.
According to a recent International Monetary Fund report, the share of labour in total economic output of rich countries fell over the past two decades because of technological progress and outsourcing, with Europe accounting for the biggest drop of about 10 percentage points.
But pay in emerging countries such as China and India has seen robust growth, the report said.
Subbarao fears there could be a backlash from US labour groups, which could cause Washington turn more protectionist in the run-up to next year’s presidential elections.
In 2004, a Democrat campaign against outsourcing saw several states reverse plans to transfer some of their back-office work to places such as India. The impact on India’s outsourcing companies was limited though.
“These are temporary blips on the long road to globalization,” Subbarao said.