Indian outsourcers' U.S. shopping spree

The headlines below the fold on the business page may not have captured everyone's attention, but astute observers may have noticed a trend among the major Indian outsourcing companies: "Wipro buys Infocrossing for $600 million," "Caritor acquires Keane for $854 million," or "Infosys and Wipro gunning for MarketRx."

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In every case above, what we are witnessing is an attempt by tier-one Indian outsourcing firms to up their game and climb higher on the value chain by buying the one thing they lack: industry or domain expertise.

The fact is these companies need to change their business models, which are linked too tightly to the cost of the services they provide. In a body-shop environment, the business model drives them to add more services, but that requires more resources and more cost. The only way to overcome this is to "go further up market by getting outside the borders of their country," says David Blanton, vice president for global sourcing at Unisys.

For the Indian companies, operating margins are up by as much as 50 percent, with the value of the rupee climbing against the dollar -- coupled with a 15-percent increase in the cost of Indian labor year over year. In that economic environment, it becomes increasingly difficult for Indian companies to grow at rates approaching 40 percent as they have in the past. Acquiring domain or industry expertise is a way of buying what they can't build.

The niceties of adding value

It is not new strategy, says Alan Herrick, CEO of Sapient. Indian firms know that their Western counterparts have been offering domain expertise since the '90s as a competitive differentiator, and continue to compete on that today.

"Look at the horizon. The Indian firms have to ask themselves: How can we play as the leading value proposition? They know there is not enough wage arbitrage to support a [growing] business model and as you climb higher up the value chain it becomes less significant," says Herrick.

Can these acquisitions be enough to put major Indian firms on the same footing as Western consultancies? Very likely not by itself. Successful consultancies understand how to deliver the high-touch, highly collaborative services Fortune 1000 organizations demand, according to Herrick. Having a couple of hundred representatives here in the States and in Europe cannot by itself yield a global company that understands the special needs of the Fortune 1000.

The fact is, adds Herrick, lack of domain expertise isn’t the usual reason an outside company fails to deliver on its promises. Instead, projects tend to fail because the partners could not clarify the objective and align all the constituencies across the company. That requires a deep understanding of corporate politics and culture.