India’s Knowledge Economy

There are still people out there, it seems, who think India's outsourcing industry is just a bunch of poorly paid clerks with PhDs doing mind-numbing drudgework. Until recently, one of them was the senior US insurance executive who visited the business processing arm of Wipro, India's third largest software and services company. He was soon disabused by his hosts.

What they showed him was a virtual back office staffed by insurance specialists equipped to handle a full range of tasks, from receiving claims to adjudicating them up to a value of £500,000 ($931,000). "We understand everything!" Raman Roy, head of the Wipro division, told his visitor. He immediately clinched a contract.

Another myth is shattered by a stroll around the modern campus-style headquarters in Bangalore of companies such as Wipro and Infosys, where corporate customers' global information networks are managed round the clock from Nasa-like control rooms. If these are sweatshops, the Ritz hotel is a doss-house.

Even judged by the blistering speed of information technology industry change, India's achievement is astonishing. In barely a decade, it has created a business with more than 800,000 employees and annual sales close to $20bn, almost all exports. The corporate names on the welcome boards at Bangalore reception desks read like the Fortune 500.

And that, industry leaders say, is only the start. Mr Roy foresees continuing annual growth of 50 per cent or more and a trebling of business processing jobs to 1.2m by 2008. Meanwhile, Azim Premji, Wipro's chairman, aims to boost software productivity and slash development times by applying techniques pioneered by Toyota in manufacturing.

The larger companies are already plotting their next leap: to evolve from sub-contractors into strategic partners, sharing risks with customers. Many are busy hiring consultants with experience in target industries including banking, healthcare and telecommunications. The goal, says Mr Roy, is to "suck out knowledge" from customers, to serve them better.

Wipro's IT development centre is an example of how much further outsourcing of what were once core activities can go. It does much of the vital circuit design for consumer electronics manufacturers. They say what they want new products to do; the centre ensures they do it.

India's ambitions seem to know no bounds. But these companies still face hurdles. One is building customer trust. Despite the IT companies' proved competence and reliability, they lack the brand recognition and market presence of an IBM or an Accenture, which means that they must compete heavily on price.

They must also manage increasing complexity and scale, while keeping footloose employees loyal. Intensifying competition for skilled labour makes that harder. Demand for engineering graduates may soon strain even India's capacity to produce them. The hunt for talent is already spreading to China and other parts of Asia.

The industry recognises all those challenges and is seeking to meet them. But one potential hazard lies beyond its control: a backlash against outsourcing in the US, by far its biggest market. Although the threat has receded as US job creation has recovered, an economic downturn could revive it, along with hysteria about industrial "hollowing out". Pressure for protectionist measures - possibly curbs on cross-border data flows, imposed on "national security" grounds - could quickly follow.

If that happened, all the earnest arguments heard in Bangalore these days about outsourcing being a "win-win" game, and trade a two-way street, would be unlikely to cut much political ice in the west.

India's IT industry knows that. But it also senses a powerful counter-trend running in its favour. Fiercer global competition, bigger commercial risks, faster innovation, shorter product cycles and shortages of key staff are all transforming its western customers' methods of doing business.

Mr Premji says they are defining their technological "crown jewels" ever more narrowly and entrusting work previously performed in-house to partners. That is an imperative of their commercial survival. The belief that it will continue and grow even stronger is the Indian IT industry's biggest bet on the future.