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.

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.

Indian outsourcing companies are likely to be affected by the economic downturn in the U.S., an Indian trade body has warned.

The National Association of Software and Service Companies (Nasscom) said on Tuesday that the continuing "turmoil" in the U.S. financial markets would be likely to have a negative effect on Indian business process outsourcing (BPO) contracts, in the short term.

"The Indian IT-BPO sector is an integral part of the global ecosystem and is likely to be impacted in the short-term (two to three quarters), as clients become cautious in their discretionary spending and decision-making cycles get extended," Nasscom said in a statement.

The trade body added that events such as the $85 billion bailout of AIG by the Federal Reserve had already had an impact on spending in the U.S. financial services industry.

"The U.S. financial market has been in unprecedented turmoil in the past few days witnessing bankruptcy, mega-takeover, and U.S. government bail-out of an insurance company," said Nasscom. "This turmoil has directly impacted spending in the U.S. financial sector and is likely to create a downstream impact on other sectors of the U.S. economy and worldwide markets."

Nasscom did not comment on what it was expecting from Europe, apart from saying that the effects on Indian BPO clients in the rest of the world remained to be seen.

"Over the next few weeks/months we will get a better assessment of the impact on sectors other than financial and also their influence in geographies other than (the) U.S.," the trade body said.

However, there are mitigating factors to the situation, Nasscom said. The subprime lending debacle has forced the financial services industry to put measures in place to try to limit economic damage, said the trade body.

"Since the subprime crisis began, last year, the industry has focused extensively on improved utilization, enhanced productivity, and business transformation," said Nasscom, which predicted that the Indian BPO industry would "tread the period ahead with caution and take measured steps."

By contrast, the nascent black IT economy, where criminals use business models similar to the legitimate economy, is increasing in the region, security company Symantec has warned. Speaking to The Hindu Business Line on Thursday, Shantanu Ghosh, vice president of India product operations for Symantec, said that criminal outsourcing activity was becoming more "mature."

"Phishers and spammers have supply chain managements too, and there are clear prices for the services that each one provides and all these are beginning to show up now," Ghosh was quoted as saying. "This has made the underground economy more mature with flexible models and for a new person entering this area he no longer needs to (be) a specialist, but can buy the services."

Tom Espiner of ZDNet UK reported from London.

IT services provider Unisys announced Tuesday it has begun a search for a new CEO, as the company struggles to right its operations.

Joseph McGrath, who has served as the CEO for the past three years, will step down by year's end. He will, however, continue to oversee the company's daily operations until a successor is found.

"On behalf of the board, I would like to thank Joe for his nine years of loyal service to the company. We wish him well in his future endeavors," Henry Duques, Unisys' chairman, said in a statement.

Unisys was up 2 percent in early morning trading to $3.22 a share, following the news.

Throughout most of the year, Unisys' stock has languished below $5 a share, as the company has struggled to overcome declining revenue.

Unisys posted a 3 percent revenue decline in both its first and second quarters and finished last year with an overall revenue drop of 2 percent.

A pullback by customers in the financial services industry, a drop in IT spending, and delayed government orders have contributed to the company's woes, according to its quarterly reports.

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.