Setting up IT operations in India

Foreign companies aiming to take advantage of India's low-cost staff have the option to either outsource work to a third party in India or set up their own operations there.

The decision may depend on the kind of work the company wants to get done. When Yahoo Inc. began evaluating India as a development location it decided that Indian outsourcers had been successful primarily in the area of enterprise applications, rather than software for the Internet.

"We came to the conclusion that Yahoo had to set up its own center if it wanted to leverage India," said Venkat Panchapakesan, chief executive officer of Yahoo India Research and Development, a Yahoo Inc. subsidiary in Bangalore.

Tesco PLC, a U.K.-based retailer, also opted for an Indian subsidiary to do software development and run some of its back-office processes. "Our decision was related to (viewing) IT and our processes as core to our capability," said Meena Ganesh, chief executive officer of Tesco's Hindustan Service Center.

Staff at a contractor would not be able to add value, innovate, and suggest improvements to processes the way Tesco's Indian employees are doing, Ganesh said. Contractor staff don't typically have a good view of the organization as a whole, or know where the process they are working on fits into it, she said.

Other multinationals have chosen to contract out work to an outsourcer. Cartesis SA, a Paris-based vendor of business performance management software, decided to outsource application development to Ness Technologies (India) Ltd. in Bangalore because it didn't want the hassle of recruiting staff, building an infrastructure and running an operation in India.

About two-thirds of India's revenue from back-office and call-center operations comes from subsidiaries of multinational companies, including multinational service providers, according to Kiran Karnik, president of India's National Association of Software and Service Companies (NASSCOM). The share of these operations in business process outsourcing revenue is climbing further, he added. In contrast, about two-thirds of the country's revenue from IT services comes from Indian service providers, according to Karnik.

A middle way between outsourcing and setting up a subsidiary is to ask an Indian outsourcer to set up an operation under a build, operate, transfer (BOT) model, an option tried by a number of U.S. and European companies including British insurance company Aviva PLC. Under the BOT model, the foreign company can at some point take over the staff of the Indian outsourcer working on its projects, and transfer them to an Indian subsidiary.

Multinational companies that already have Indian subsidiaries, such as Microsoft Corp., also outsource work to Indian companies. Yahoo also outsources some work, such as product quality testing and the development of custom modules for customers and partners. "This is work that we don't consider as our core competency and for which we can leverage external vendors," Panchapakesan said.

Tesco uses Indian service providers to tide over peaks in demand without having to add staff at its Indian operation. Indian companies also provide services in specialist areas where Tesco doesn't want to create in-house capabilities. Tesco prefers the staff from an Indian outsourcing firm work alongside its staff at a Tesco facility, Ganesh said.

See Also:
>>Outsourcing to India shows no signs of letting up
>>Europe slow to embrace India
>>Indian outsourcers flock to China
>>India, by the numbers