Firms in U.S. Navigating an IT Passage to India

Published in the Richmond Times-Dispatch
May 21, 2002

In May last year, The Economist magazine noted that General Electric (No. 6 in the Fortune 500) had more employees in India than in the United States.

Information technology outsourcing has arrived. Outsourcing of IT functions to India by U.S. companies has mushroomed.

India’s association of IT companies, NASSCOM, estimates revenue to Indian companies from IT outsourcing grew 50 percent annually throughout the 1990s, reaching $8.3 billion and 400,000 Indian workers.

Even with the American technology recession, NASSCOM estimates 30 percent growth will occur from March 2002 to 2003.

According to Wired magazine, about 260 of the Fortune 1000 outsource some IT functions to India.

While theydo not publicize it, several publicly traded companies headquartered in Virginia aggressively pursue outsourcing to India.

“Outsourcing IT” is a catchall phrase for contracting out various services.

These services include data entry; transcription (such as medical records); claims processing; call and e-mail response centers; computer user help desks; software application hosting, maintenance and development; and remote network management.

Indeed, the new buzz-phrase is “business process outsourcing,” vague jargon for taking any one of a company’s business functions and hiring someone else to do it.

Of course, lower cost entices many companies to India. Amazon.com cut customer service jobs in Seattle while adding them in Gurgaon, India via a contract partner.

Various consultancies estimate the cost savings over using U.S. resources to be about 35 to 50 percent. But cost isn’t the sole factor.

Some U.S. companies report higher quality and faster turnaround from Indian companies than from American ones, perhaps because IT jobs disdained by U.S. workers, such as call center work, can be valued careers in India.

India also produces more college graduates with IT credentials than the U.S.-50 percent more according to NASSCOM.

Because India is 10 hours ahead of our East Coast, American companies can electronically send their IT problems to India at the end of the day and often have fixes sent back by the next morning. The sun never sets on the IT process.

In addition, English is the IT language in India, a vestige of British colonial rule. In fact, Indian call centers often train their workers to fabricate American accents, interests and even names. Some Indian companies push their workers to watch “Friends.”

Outsourcing to India also presents different and greater risks than outsourcing to a U.S. company. Some risks can be overcome or reduced by contracts and relationship structuring.

• War and natural disaster. India and Pakistan have been exchanging mortar fire and rattling nuclear sabers over Kashmir. Violent clashes have occurred between Hindu and Muslim citizens. Typhoons and earthquakes ravage India often.
  Otherwise standard contract clauses protecting parties from difficulties caused by acts of God and war must be pared back. Also, the Indian company must demonstrate solid planning for disaster recovery and customer service continuity.
• Planning for divorce. Any business deal can sour. The American company should contract for a way to serve an American lawsuit on the Indian company effectively and quickly, to make American law govern any disputes, and to enforce a judgment against reachable assets.
  Some companies use performance bonds to ensure contract performance.
• Keeping secrets. India strengthened its intellectual property laws to encourage IT growth, but its courts remain abysmally slow. Some companies parcel out IT projects over multiple Indian companies or negotiate internal firewalls within these companies to protect secrets.

They also negotiate agreements barring the Indian company from performing similar work for competitors, to prevent even unintentional diffusion of secrets.

Beyond these biggies, American companies also must pay special attention to their own compliance with U.S. laws limiting export of some kinds of technology (such as high-powered encryption).

They must watch out for unfamiliar Indian taxes. And they should protect their ability to withdraw if the Indian company changes control, because of the difference in quality between Indian vendors.

While some American workers fret about cheaper Indian labor, India worries about China. Chinese workers lack a key competency – widespread, strong English language skills, especially in speaking.

Also, NASSCOM claims Chinese wages for comparable IT jobs are 15 percent to 20 percent higher than Indian wages – a statistic worthy of skepticism. Even if that’s true, China has some budding advantages.

NASSCOM acknowledges that China has 200 million telephone landlines and about 110 million mobile phones in use, versus 32 million landlines and 5.5 million mobile phones in India.

Also, general Indian infrastructure is weak. India’s IT companies commonly build their own roads, back-up power supplies and (in the Paharpur Business Center) even clean their own air because of the heavily polluted surroundings.

Today, many Indian IT workers in the United States jokingly refer to “B2B” as “back to Bangalore” because of the U.S. tech slump and Indian tech rise. Someday, that may refer to “back to Beijing.”

By John B. Farmer

© 2002 Leading-Edge Law Group, PLC. All rights reserved.