Business Tech

India's traditional outsourcing centers appear to be falling out of favor.

According to Pierre Audoin Consultants, outsourcing companies are increasingly looking outside Bangalore and Mumbai when choosing bases in which to set up shop.

PAC found that while India remains popular with the top 50 outsourcing companies--11 of the 49 new offshoring delivery centers set up in 2008 were based in the country--vendors are progressively creating more bases in cities such as Chennai, Noida, Hyderabad, and Pune.

According to Nick Mayes, a senior consultant at PAC, conditions for outsourcers in Bangalore and Mumbai are no longer as favorable as they once were.

"Over the last two or three years, labor markets, particularly in Bangalore and Mumbai, have become overheated. The big IT services companies and multinational companies have been competing very intensely for the best resources coming out of the universities and also resources from their rival organizations," he told Silicon.com.

Big Indian outsourcers TCS and Wipro have been first to turn to the second tier, establishing links with the universities and inspiring a shift toward cities like Chennai and Pune.

The consultants also found a trend among outsourcers to spread outsourcing sites over a number of countries.

"(Outsourcers) are spreading not just the risk but also being wary of being overdependent on single-market terms of salary inflation in that country or the political environment in that country," Mayes noted.

Over 2008, PAC found that 10 new outsourcing centers were opened in Latin America and another six in China, while Mayes believes Malaysia and the Philippines will also increasingly prove to be attractive outsourcing destinations.

While similarities in business culture and language will keep India at the top of the United Kingdom's list of outsourcing hot spots, Eastern Europe and Russia could be set to emerge as an alternative.

"There's some fantastic technical skills coming out of the former Soviet Union--guys with 20 or 30 years' experience of programming for military organizations and things like that," Mayes said.

"Slowly but surely," he said, "companies are starting to get the supplier marketplace in place to be able to support Western clients--previously, it was 10 or 20 man outfits out there, but we're starting to see some sizeable companies build up, and that's what Western clients want to work with. They want the security of knowing the company they're working with will be around in 12 months time so they can commit to serious business with them."

Jo Best of Silicon.com reported from London.

Satyam Computer Services announced Wednesday its founder and chairman, B. Ramalinga Raju, has resigned, following an admission that he inflated its financial performance.

Satyam, one of India's , counts such Fortune 500 companies as among its customers.

The company said it received a letter from its chairman on Wednesday, outlining some of the accounting irregularities and his resignation.

While Satyam did not include a copy of the letter in its announcement, a report in The Wall Street Journal contains a copy of the letter.

Raju noted in his letter that Satyam's balance sheet for the quarter ending September 30 includes inflated cash and bank balances of 50.4 billion rupees ($1.04 billion), nonexistent accrued interest of 3.76 billion rupees, an understated liability of 12.3 billion rupees due to funds arranged by the chairman, and an overstated debtors position of 4.9 billion rupees, according to the Journal report.

And during the September quarter, the company also reported inflated revenue of 27 billion rupees, vs. actual revenue generation of 21.1 billion rupees. That resulted in artificial operating margins of 24 percent of revenue, compared with its actual 3 percent margin.

In the letter, Raju said:

The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly...The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations - thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The Securities and Exchange Board of India announced it is investigating the matter.

The company, in a statement, said it was "shocked" by the letter and is working toward moving forward, in light of the disclosure.

More than half a million of India's small businesses that have never owned PCs before will acquire their first computers this year, according to a new study released Monday.

According to Access Markets International Partners (AMI-Partners), nearly 22 percent of small businesses, or companies with up to 99 employees, in India have plans to invest in computers for the first time over the next 12 months.

While buying their first PCs, these small businesses will also boost spending in other IT sectors in India, such as software, services, and security, the research house said.

Dipendra Mitra, an analyst at AMI-Partners, said small businesses in India that already own PCs will extend the lives of their existing personal systems as they try to cut costs during the economic downturn.

As such, "non-PC-owning businesses hold the key to growth in India," Mitra said in a statement. "Even if a fraction of the 2.5 million non-PC-owning businesses buy a PC, it will provide a considerable boost to the Indian IT industry."

Although small and midsize businesses are a vital part of India's economy and a major contributor to its gross domestic product, only a little more than a third of all small businesses actually own a PC, AMI-Partners noted. A reason for this is their lack of awareness of the benefits PCs can provide, the research firm said.

A separate AMI-Partners survey found that more than 55 percent of small businesses see PCs as having no relevance to their business, and nearly a third have not even considered buying one.

However, Mitra said, this attitude is changing.

"About a quarter of non-PC (small businesses) say PCs will make their business look more professional," he said. "One-fifth of these non-PC SBs say PCs will increase the productivity of their employees, and the resultant business automation will boost efficiency."

Sol E. Solomon of ZDNet Asia reported from Singapore.

New contenders are emerging to challenge the BRIC countries' dominance of the offshoring market.

While India was the "undisputed leader," followed by China and other BRIC countries Russia and Brazil, research firm Gartner's list this year of the top 30 offshoring destinations showed Mexico, Poland, and Vietnam pushing their way up to take them on.

Ian Marriott, research vice president at Gartner, said these countries would be seeking to take advantage of the credit crisis to capitalize on organizations' drive to save costs.

The four countries that dropped out from last year's Top 30 were Northern Ireland, Sri Lanka, Turkey, and Uruguay, while the new entrants were Egypt, Morocco, Panama, and Thailand.

Marriott said the four that dropped out of the list had not underperformed but that the dynamic nature of the market had seen others making strong progress.

Gartner judged the locations on language, government support, labor pool, infrastructure, educational system, cost, political and economic environment, cultural compatibility, global and legal maturity, and privacy and security of data and intellectual property.

Strong interest in near-shore locations was a key factor for companies choosing an offshore location, as were language skills, cultural compatibility, time zone, and travel time.

The final list included 13 countries from Europe, the Middle East, and Africa--such as the Czech Republic, Poland, and Hungary, which were valued for their language skills--and for the first time, two North African countries.

The trend for countries in Europe being used as near-shore centers for traditional service providers and large Indian providers also continued.

The study found that South America is becoming an attractive proposition for the United States, the largest buying market for offshore services, and that they are increasingly valued for their Spanish-speaking skills.

Ten countries from the Asia-Pacific region were represented in the list, while there were also emerging countries such as Malaysia, Pakistan, the Philippines, Thailand, and Vietnam--mostly chosen for their attractive costs. Below are Gartner's top 30.

Americas:

• Argentina
• Brazil
• Canada
• Chile
• Costa Rica
• Mexico
• Panama

Asia-Pacific region:

• Australia
• China
• India
• Malaysia
• New Zealand
• Pakistan
• The Philippines
• Singapore
• Thailand
• Vietnam

EMEA:

• Czech Republic
• Egypt
• Hungary
• Ireland
• Israel
• Morocco
• Poland
• Romania
• Russia
• Slovakia
• South Africa
• Spain
• Ukraine

Nick Heath of Silicon.com reported from London.

As promised, Dell unveiled several new computers Wednesday made specifically for emerging PC markets like China and India.

There are four new models in all under the Vostro line--two laptops and two desktops. The notebooks will start at $475, and the desktops at $440, and will be available in more than 20 countries in Africa, Latin America, Asia, and Europe.

New Vostro notebooks from Dell made for emerging markets.

(Credit: Dell)

The notebooks are available in 14.1-inch and 15.6-inch sizes, and come with Intel Celeron or Core2Duo processors, and Ubuntu Linux or Windows Vista. The desktops come with Intel Atom, Celeron, or Pentium processors, and Ubuntu or Vista.

Dell says there will be more Vostro products for these markets released in the next few months.

This looks to be the beginning of the company's promised push into two of the fastest-growing PC markets in the world. After establishing a retail presence in both China and India in the last year, Michael Dell said in March that while growth in the U.S. market for PCs would be "OK," Asian markets would grow more.

Dell has traditionally derived the majority of its business here in the U.S., but for the first time ever its international business ticked above 50 percent of the company's total last quarter.

But looking abroad for a boost is a strategy that Dell's not alone in pursuing. Chief rival Hewlett-Packard has been doing a bang-up business for a while now in China, which is the home turf of another PC heavyweight, Lenovo.

We'll see Thursday how effective the retail push into Asia has been for Dell, when it's due to report its second-quarter earnings.

More venture capital is flowing to India and China, in an obvious sign that Silicon Valley is no longer the only go-to spot for tech investing.

In the second quarter of 2008, venture firms invested $238 million in 17 deals in India, a 120 percent jump from the comparable period a year ago and the second-highest quarterly total on record, according to figures released Thursday from Dow Jones VentureSource. That growth was thanks largely to investments in advertising companies, including $70 million put into Laqshya Media of Mumbai, an outdoor ad company that runs digital ad networks. The amount of money put into deals was also up because of an increased number of later-stage funding to help companies get acquired or go public.

The deals, according to Jessica Canning, director of global research for Dow Jones VentureSource, highlight two growing trends within India: "One being a growing interest in advertising plays that capitalize on India's emerging infrastructure and growing Internet usage; the other being an increase in second-round deals."

Investments in China easily eclipsed those in India, but they're also on the rise. That's thanks partly to new China venture funds from U.S. firms including Accel Partners and Matrix Partners.

Last week, VentureSource reported that the amount of venture capital invested in companies in China grew by 85 percent in the first half of 2008, largely because of late-stage investments in Internet companies. Venture firms invested $2.15 billion in China-based companies in the first six months of the year, up from $1.16 billion in 2007.

The biggest deals came from Internet companies, including a $430 million investment in Oak Pacific Interactive, $57 million in Tudou.com, and $51 million in 51.com. Specific to information technology, venture firms invested $1.1 billion in 42 deals, up from $553.5 million in 60 deals a year ago.

Still, IT investing in India was down year over year, even though it was the sector drawing the second-highest number of deals. Venture firms put $33 million in three IT deals, a 55 percent drop from the quarter in the previous year. The overall median deal size of India-based companies has also dropped from $17 million in 2005 to $8 million in the first half of 2008.

"While the size of venture deals in the U.S., Europe, and even China continues to climb, venture capitalists have shown some restraint in terms of investments in India, due largely to the risk still associated with this emerging region," Canning said in a statement.

India is starting to assert itself as a center of high-tech innovation, according to a study set to be released Monday morning.

A talent pool of engineers working in research and development that barely existed 15 years ago has blossomed to 250,000 people, more than 140,000 just in Bangalore, said Vamsee Tirukkala, co-founder of the consulting company Zinnov, which conducted the study. That's second only to Silicon Valley. And as Indian ex-patriots return home and new college graduates stay home rather than read to regions such as Silicon Valley, as they have in the past, those numbers are only expected to grow, Tirukkala said.

"The brain drain 10 years ago is actually helping the market today," he said. "These are the people going back today...bringing domain expertise with them. The opportunities in India have dramatically increased for them."

If there's a point to be taken for Silicon Valley in Tirukkala's admittedly enthusiastic report it's one that Valley leaders have discussed for years: The next real competitor for high-tech leadership won't be another American tech hub like Massachusetts' Route 128 corridor or North Carolina's Research Triangle Park. It will be in a developing region such as India's Bangalore.

The growth in R&D investment in India, is perhaps the report's most interesting data point. India's high-tech industry may have gotten its start in call center outsourcing, giant services business, and basic "grunt" software coding, but that's beginning to change. R&D offshoring to India is currently worth an estimated $9.35 billion, according to the report, and that's expected to more than double to $21.4 billion within the next four years.

Interestingly, American companies that have been moving more R&D work to India will continue to do so, but for a reason that is perhaps different than the cost-savings that drove them over the last decade: they want to tailor products for the growing local market, and the best way to do that is to have local people who understand cultural and business differences doing the work.

Does that mean Bangalore is going to surpass Silicon Valley for tech industry leadership anytime soon? No. The Valley still receives, by a wide margin, more venture capital investment than any other region in the world, and the big tech companies and universities that call the Bay Area home aren't going anywhere.