India blossoms

01 May 2006Features

The Indian IT sector is often associated with offshore outsourcing, but it has been a hub of original development for a long time, and formerly indigenous suppliers are increasingly taking a dominant position in international markets, reports Joy Macknight .

India is known as the back office of the world with global financial giants like Citibank, JPMorgan, Deutsche Bank, Credit Suisse and UBS using labour arbitrage to reduce running costs and increase productivity.

Others, such as Goldman Sachs, are now starting to move their middle and front office functions to offshore centres in Bangalore, Hyderabad or Mumbai. JPMorgan Chase’s investment banking division is expected to hire 4,500 new employees in India over the next two years in order to cope with the explosion in growth in the structured finance derivatives business.

According to a survey by PricewaterhouseCoopers in September 2005, the scale of offshoring in the financial services sector is set to double by 2008. A quarter of the 156 executives surveyed currently offshore between 10-20% of their personnel, while almost half of the respondents expect this to be the case in three years’ time. Cost saving was the main reason for offshoring for 79% of the participants surveyed.

“First and foremost, the value proposition is so compelling that every bank has really started to dive in with both feet. You are beginning to see a lot of the high street banks really starting to follow the US banks in leveraging India as a very valuable and integral component to their long term IT strategy,” says Bill Benton, principle at Patni, an IT services and business solutions firm headquartered in Mumbai.

But cost reduction is not the only reason that financial institutions are looking to India. The quality of graduates and high standard of education, plus the necessary English language skills, have meant that the business case for offshoring in India is easier to make. And it is no longer just back office and number crunching services that are being offered — today, high quality technology for the financial industry is being generated and Indian companies are coming into the global market to challenge the established leaders for a place at the table.

A national culture of innovation gives Indian companies the ability to compete in the global IT market, especially in the financial services sector. The kind of changes that are being seen in terms of products that banks are launching for their clients, plus the kind of innovation being seen in China or India that is required just to remain competitive, are significantly different than that seen in Europe, UK or the US. There is a lot of knowledge being brought to the table from developing markets to the more developed markets.

“Most of the work they do, be it at Infosys or Tata Consultancy Services, is application development and maintenance. So companies will hire them to develop custom-built applications, to maintain applications or to do integration work. A Citibank, Deutsche or a Lloyds will hire one of these Indian services firms to do the coding for them, whether it is old code, new code or anything,” says Douglas Jaffe, associate director at Financial Insights Asia Pacific.

“They do a lot of work, some of it is just menial coding work, some of it is custom development, like centralised trade mapping utilities or systems, and then there is packaged software that they sell themselves. Some of the Indian companies are creating world leading products, like core banking solutions from Infosys, i-flex and Tata,” he says.

NRK Raman, chief operating officer of i-flex solutions, says: “Nobody could imagine that we could produce world class intellectual property software out of India. We created the solution and have gone out to the market, and are competing with the likes of Misys and all the established players.”

Jaffe agrees that the times have changed. “In a global bank, say maybe a couple of years ago, a chief information officer might not have been willing to talk to an Infosys or a Wipro or any of the other firms, but today I think there is a change in perception that these guys are people you should listen to,” he says.

Both Infosys and i-flex have announced a number of international wins with their core banking solutions, Finacle and Flexcube respectively, beating out long-established competitors. TCS has also had a number of successes with a range of technology implementations, like clearing and settlement applications at SIS SegaInterSettle, the Canadian Depository for Securities, and, most recently, at Russia’s National Depository Centre.

NDC chose eClearSettle from TCS because it was a tried and tested platform (see box). Nikolai Egorov, chief executive of the National Depository Centre, says: “We sent questionnaires to the well known clients of Tata, for example, the Philippines Depository and Trust Company, and got a very positive response. Tata is a very big and global player and its solution is seen by important international institutions to be of high quality. We haven’t got any reservations about choosing an Indian company, why should we?”

Financial institutions are now convinced that the offshore technology vendors can actually deliver what they want — and on time. They have got over the fear that if they gave the project to an offshore vendor, then they wouldn’t know what was happening 7,000 miles away and that when the system is delivered, it won’t meet their requirements. The vendors have provided the transparency as to what is happening and how the client can monitor the progress of the project.

With the confidence level in offshoring rising, non-Indian technology companies are trying to grab a chunk of what India has to offer. Hilary Robertson, offshore development director at Xansa, the first UK IT company to wholly acquire an IT services company in India in 1997, says that the distinction between Indian and non-Indian companies that have substantial operations in India is getting blurred. She argues that it is India that is taking the dominant position, through its portfolio of benefits, not necessarily the Indian companies.

Global players continue to exploit the Indian IT seam. RSA Security has recently announced it will open a Bangalore development centre. In December last year, Oracle picked up Citigroup’s shares in i-flex in order to expand beyond general-purpose ERP applications and into more industry-specific software. EDS has made a bid for control of Indian BPO firm MphasiS. Others, such as enterprise data management specialist GoldenSource, have expanded their development centres in response to client demand. The firm has partnered with a bank to build a new product with all the development being done in its Indian centre. It has delivered the first release of the product and is hoping to make an announcement soon.

“Accenture has a lot of development work out there in India, we do development work there, plus Barclays, Axia Prudential… there are a lot of companies that are using India in general, and I think it is India that has those skills in particular. I also agree with the point that a number of bigger global players from India are coming to the fore,” says Robertson.

The market trend can also be seen to be moving in the opposite direction with Indian companies looking beyond its borders to maintain growth. Many Indian companies are not content to sit back and wait until the market comes to them, but are moving up the value chain and into the big international markets organically and also through acquisitions. Recently, TCS acquired Financial Network Services, a Sydney-based provider of core banking technology, and Comicrom, a Chile-based provider of business process outsourcing services.

Some Indian firms are tackling market access problems by setting up development centres in closer proximity to the market they are trying to enter in order to develop strong front-end skills and an understanding of the local markets and local regulations. “The potential challenge is that now some of the people are looking at nearsourcing — development centres are coming up in Eastern Europe, Russia and South Africa. To counter this, some of the Indian vendors are developing global delivery centres. TCS has development centres in Hungary, and we will also have one in Peterborough,” said Ashok Panda, head of banking and financial sector at TCS.

Polaris, an Indian firm providing niche services and software for the banking, financial services and insurance sectors, is developing its nearshore operations in Europe with the opening of a Belfast application certification centre. Polaris argues that because testing cycles need to be extremely short — three month cycles for each project — this can’t be offshored easily. The company found that some of its customers preferred to have the testing done on the premises, or that there were restrictions like data protection where companies are not allowed access to customer-centric information outside the country. This meant that Polaris needed to have a presence locally and, at the same time, an ability to serve short-term turnaround levels.

Bikash Mathur, executive vice president and business head, Polaris Europe, says: “We feel that, in going forward, banks are going to require more onsite presence to accomplish some of the things that they are trying to undertake, whether they are moving to new platforms, new technologies or more market-facing technologies. All of these are going to require specialist skills and we think that Europe has those skills. In Belfast, with its proximity and its ease of doing business, we would be in a relatively easy position to ramp up our quality of skills, rather than just the quantity, which has been the offshore model in the past.”

He thinks that although there will still be a bulk of people offshore, the 80/20 rule, which is 80% offshore and 20% onsite, is going to change, especially in the banking arena. “I think the proportions are changing because banks are changing the way they do software — and I think vendors are also seeing that change,” he says. “Today, the middle and the back offices are coming to us and asking if we have something semi-ready, that has seen the light of day. They don’t want something that is so different from what other banks are doing globally, maybe 30% or 40% of the way there, so that they can tailor it to their users and get it out to them in a shorter cycle time.”