IBM Corporation (NYSE:IBM) declared a revenue growth of 43 percent in India in 2007, compared with an approximately 35 percent average revenue growth of the five top Indian outsourcing vendors in the last twelve months.

The India revenues of IBM touched $1 billion in 2007, growing 43 percent from the previous year, making India the fastest growing market for the global IT major. India is already its second largest center in terms of manpower after the US, with more than 73,000 employees across various locations in India. The company has recently opened a new center in Noida, near New Delhi and will follow this up with another center in the vicinity to cater to rising demand for application services.

Intensifying competition

Global IT firms like IBM, Accenture, EDS and others have been strategically increasing their presence in India over the last few years, building low-cost capability and leveraging the large talent pool in India. As Indian companies continue to eat into the share of the global outsourcing pie, IBM and the likes have been working to safeguard their own position. Interestingly, while India is a part of their global delivery set-up, they have also drawn on their India operations to establish a base to expand the clientele in India.

With rising outsourcing maturity, more and more Indian companies are taking to outsourcing their information technology and business process operations, and IBM has been at the forefront of several large contracts announced in recent years. In 2007, IBM won a $29 million contract from real estate company DLF and a $45 million contract from India’s Central Board of Direct Taxes. It has been in an agreement with telecom provider Bharti Telecom since 2004, to provide IT infrastructure services.

At a time when the sharp appreciation in the rupee-dollar ratio is spelling troubled times for the Indian IT companies, the rising potential of business on the home ground provides a lucrative opportunity to de-risk revenues and stabilize margins. Action is now intensifying on the domestic scene, as Infosys, Wipro, TCS and Satyam are aggressively going after the Indian business, and are likely to prove tough competition for IBM. TCS has announced this week, a subscription-driven pay by use business offering for small and medium sized businesses in India. Wipro has bagged a nine-year business transformation contract from telecom company Aircel. Banking, telecom and retail are expected to lead the growth in the domestic business in future.

Going forward

The rupee appreciation is an added concern for Indian companies, while the global majors will remain relatively insulated (although higher costs will affect them too). Further, as concerns of a slowdown in the West build up, there is as yet little clarity about its impact on outsourcing to India.

Though global business growth may be stunted, some are expecting outsourcing to continue full swing, as cost cutting becomes a larger mantra than before. Meanwhile, the shrinking manpower pool, and its rising cost of retention, is likely to be a huge delimiter on the India growth plans of Indian and global outsourcing companies alike. In the near future though, neither the global majors nor the Indian IT companies have indicated any slow down in their large-scale hiring plans for 2008. However, wage growth is likely to be limited and stricter performance measures to retain quality talent is likely to take a toll on attrition.