Source: Computerworld, September 15, 2003

Country Analysis: India

India invented the modern offshore outsourcing industry, and it currently exports about USD $9.875 Billion¹ a year in software and IT Services, with growth rates of over 28%².  Indian software companies initially concentrated their efforts by providing low level design, coding, testing, maintenance and support services for the export market.  Although, Indian companies have moved up the value chain into areas such as systems integration, network and infrastructure management and system planning and design work, they do not have the name recognition that U.S. based consulting firms do; they are mainly seen as providing a low-cost, high-quality solution.  It is estimated that U.S. companies outsourcing development to Indian software companies can see projected savings of 50% to 70%³, compared to similar priced projects in the U.S. 

The real strength in the Indian software Industry however, does not lie in its low-cost structure, instead, the reason that Indian firms dominate the outsource software development industry is their strong focus on quality software and processes.  In software development, Carnegie Mellon Universities Capability Maturity Model (CMM) is a model which prescribes standards in different stages of software development that firms at a given level of maturity must have.  All the top-tier Indian vendors are certified at CMM Level 5, the highest level.  In fact, of the 23 firms in the world that have been awarded CMM-5, 15 of them are Indian⁴.

This combination of large supply of top notch low cost labor, high quality software processes, and the scale to handle all types of work has allowed the Indian software industry to become a global software powerhouse. However, Indian firms now face the threat of lower cost software developers from developing nations such as Romania, China and Russia.  The next step for the Indian software firms is too move up the value chain and provide total solutions for their clients.  Namely, the Indian firms are now concentrating on providing IT and business consulting services to their global clients, going head to head against global giants such as Accenture and EDS. 

This leap from writing back-end code to acquiring domain knowledge, business expertise and developing reusable code is a difficult transition.  It will require a step up in gaining mindshare of the key decision makers in global corporations.  The Indian software companies will have to make a large investment in hiring, training and retraining their employees to compete in a global market.  They will also have to expand overseas and establish subsidiaries in the US and Europe.  All these moves will increase their overall costs; while at the same time fend off lower costs competitors from Russia, China and Eastern Europe. 

Statistics on the Indian Software and Services Export⁵

Human Capital

The Indian software industry boasts a large supply of over 415,000 IT professionals employed by export-only software companies⁶, with approximately 68,000 new entrants into the IT field each year⁷.  Although wages for Indian software engineers is low compared to their Western counterparts, Indian engineers are well paid compared to Chinese and Philippine engineers.  The average Indian IT programmers salary is approximately USD $6,400 annually⁸ with advanced software engineers earning over USD $20,000⁹.

One of India's core strengths is its education system, both at the University level and through its technical schools and IT training companies.  The Indian Institute of Technology (IIT) is a collection of six elite engineering institutes which graduate the vast majority of India's best engineers.  These schools set the tone for the rest of the educational system, with its emphasis on math and science.  An additional advantage that Indian programmers have is their proficiency with English, which is taught to all students starting at an early age. 

Building up on the strength of the Indian educational system, training institutes, such as NIIT and APTECH, have sprung up to provide software training throughout India.  These training providers have fulfilled three important functions for the Indian software industry.  First, they have given potential programmers the facilities to learn and practice their skills.  Second, the training institutions serve as bases for training and certification of foreign software firms such as Microsoft and Oracle.  Finally, they provide a direct avenue for cheap labor on software related contracts such as consulting and setting up IT systems. 

The combination of strong educational system, widely available training infrastructure and proficiency in English, has allowed India to develop a large and sophisticated software talent pool for the software services industry.  The only clouds on the horizon for Indian software developers is that with the growth of the industry, along with the arrival of foreign entrants into India, programmer salaries will increase across the board. 

Telecommunications Infrastructure

Although India's telecommunications sector has registered rapid growth in recent years, India has one of the lowest levels of telephone density in the world.   India has approximately 5 telephone lines per 100 people, for a total of only 48 million lines for a population of over 1 billion¹⁰.  The main culprit in India's dismal telecommunications infrastructure is that despite a decade of reform, state-owned companies - BSNL, MTNL, and VSNL - continue to dominate India's telecoms services market.  India did deregulate its telecoms services market, however, due to regulatory issues, there is very little competition from the private sector. 

Internet access is another area in which India lags its Asian neighbors, with India being the only Asian-Pacific nation with a single-digit home Internet access rate.  Only one out of 14 Indian households with telephones had Internet access via a home PC, this compares to rates of over 80% home Internet access for some Asian-Pacific countries¹¹.  This low rate can be attributed to the high cost of PC's and the poor telecommunications infrastructure throughout India.  Although India has made strides in shoring up its telecommunications infrastructure, the nation still has a tremendous amount of investment that is required if it wants to continue to post impressive economic growth rates.

Government Support

India's central and state governments have played a crucial role in promoting India's outsource software services industry.  The central BJP government has given top priority to the software services industry by setting up a Ministry of Information Technology, and appointing a task force to find out the IT industry's requirements and translating those requirements into policy. 

Indian state governments have also played an active role in the development and promotion of the software services industry in India.  In particular, the states of Andhra Pradesh, Maharashtra, Karnataka and Tamil Nadu have all played an active part in promoting the software services industry through economic and other incentives in the establishment of foreign and domestic businesses in their respective states. 

Industry Association Support

National Association of Software and Service Companies (NASSCOM) is the preeminent software industry association representing the Indian IT industry, nationally and internationally.  NASSCOM has over 800 members covering small, medium and large sized software companies, which in aggregate represent over 95%¹² of the revenues generated by the Indian software and services industry.  NASSCOM's main role is to promote, lobby and consult with the software services industry and government regarding matters related to the Indian IT sector. 

One of the associations key objectives include working with the Indian government in formulating national IT policies with a specific focus on IT software and services industry.   Another objective includes gathering and disseminating policies, market information and other statistics on the Indian IT software and services industry.   NASSCOM also actively works with overseas governments and embassies to create easier visa and work permit rules for the Indian software industry.   Finally, NASSCOM provides a launch pad for foreign and Indian IT software and services firms to explore potential joint ventures, strategic and marketing alliances, etc. by organizing business meeting with delegation of various countries. 

Regional IT Cluster

In India, software firms and employment in the software industry is heavily clustered around Bangalore, Hydarabad and Mumbai regions in Western, Central and South India.  These three urban areas account for the majority of the large software firms in India, this is due to the clustering of human capital and the presence of high quality research universities (Indian Institute of Technology) in these three locations.  In particular, the Bangalore region has proven to be a magnet for both the major Indian software firms such as Wipro and for large Multi-National Corporations (MNC), such as Nortel and Lucent.