New York Times

Saritha Rai


July 14, 2004

India Sees Backlash Fading Over Boom in Outsourcing


ANGALORE, India, July 13 -- The backlash against the outsourcing of software and back-office services to India appears to have died down, executives here said Tuesday as a bellwether company posted better-than-expected earnings, mostly on improved business from the United States.


The company, India's second largest for software and services outsourcing, Infosys Technologies, said on Tuesday that its quarterly profit had increased 39.2 percent, helped by the economic recovery in United States, its prime market. Net profit rose to 3.88 billion rupees ($84.3 million) in the April to June period, its first fiscal quarter, while revenue was 15.2 billion rupees ($33.04 million), a rise of almost 39 percent.


The results at Infosys, the first of a series of Indian outsourcing companies to post earnings, underscored that pressure against Indian software and back-office companies was easing, though the emotional protests against it in the United States and Europe never seemed to actually cut into business.


"The backlash against outsourcing has abated, customer spending is on the rise and we have redesigned ourselves internally to take advantage of the vast opportunities," said Nandan M. Nilekani, chief executive of Infosys.


Nearly two-thirds of Infosys's earnings come from customers in the United States. The outsourcing company hired 2,305 employees in the quarter, bringing its work force to nearly 28,000, and added 29 clients, taking that total to more than 400. That roster includes Reebok, Amazon, Cisco, Apple and Boeing.


Infosys shares closed almost 2 percent higher on the Mumbai stock exchange.


India's outsourcing sector has boomed as global companies have shifted work offshore to take advantage of the country's skilled, cheap, English-speaking labor force. The loss of jobs to India from the United States and Europe became a political cause, however, which sent ripples of anxiety through the industry.


India's $15 billion software and back-office services sector has grown at around 30 percent in the last few years, with the industry looking for $50 billion in business by 2008. Most of the business, about $12.5 billion, is with companies outside India, and more than two-thirds of that from the United States. The industry employs just short of a million people in India.


Some executives said the Infosys results could be the turning point for the industry's preoccupation with the backlash issue.


"The debate about outsourcing appears to have moved from an emotional, anecdotal, job-losses plane to a more sober, balanced one about the advantages of globalization of services," said Sunil Mehta, vice president of Nasscom, India's leading software industry trade body.


Infosys, known for its conservative earnings outlook, especially during the backlash period, said it expected sales to rise nearly 40 percent in the current year. "Infosys continues to benefit from the positive demand environment for offshore services," said S. D. Shibulal, head of worldwide customer delivery.


Though the furor in the United States has died down some, the National Foundation for American Policy, a research group, says more than 100 bills are pending in 38 states to curb the use of offshore contractors by state and local governments, and legislation has been passed in 5 states and vetoed in 2.


Earlier this year, Congress enacted an amendment to the federal omnibus appropriations act, sponsored by Senators Craig Thomas of Wyoming and George V. Voinovich of Ohio, both Republicans, that prohibits the use of offshore workers on some government jobs. And Senator John Kerry, the Democratic candidate for president, earlier this year referred to the outsourcers as "Benedict Arnold companies and C.E.O.'s," but lately has been relatively quiet on the issue.


Earlier this year, executives from American companies that outsourced to India came on clandestine visits, rarely spoke about what deals were being negotiated and forbade Indian companies from publicizing the contracts.


As Indian outsourcing companies grew fearful that negative publicity would harm business, Nasscom tried to protect themselves by campaigning for outsourcing with lawmakers, government officials and industry lobbies in the United States and Europe.


But in the last two months, analysts say the backlash issue seems to be fading in importance to the American public and to United States businesses.


"No longer are customers prefacing outsourcing questions with what they should do to deflect the backlash issue," said Partha Iyengar, research director for Gartner in Mumbai. Gartner nonetheless still recommends that its United States clients continue with employee-impact assessments and community audits before embarking on outsourcing.

Some experts said they expected the concerns to be replaced by more pressing matters, like the shortage of skilled labor.


"Most companies are expanding so rapidly," Mr. Mehta of Nasscom said, "that we fear the new threat for outsourcing is not the backlash but the imbalance in supply of skilled professionals."


The hostility against outsourcing may have inadvertently helped the industry, some experts suggested.


"The backlash proved a gold mine of free publicity for Indian outsourcing companies," Mr. Iyengar of Gartner said. "For many U.S. companies, the backlash made offshoring a compelling proposition."


Even smaller outsourcing companies, like iGate Global Solutions, based in Bangalore, reached some deals after the controversy. The company, with $125 million in annual revenues and 4,000 employees, has customers like General Electric, GreenPoint Financial and Kraft Foods.


"The backlash issue made outsourcing so mainstream that even my barber was speaking knowledgeably about outsourcing," said iGate's chief executive, Phaneesh Murthy, who is based in Fremont, Calif.

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