India's winning ways

This morning the stock prices of India-based computer services companies are rising fast. Infosys (INFY) +5.9%, Satyam Computer Services (SAY) +4.3%, Wipro Technologies (WIT) +4.3% and Cognizant Technologies (CTSH) up $2.53 to a fresh 52-week high above $61.22.

These stock price increases are certainly justified by financial performance. These Indian players are growing six times faster than the computer services industry while earning four times the profits. Since corporations are looking to get more out of their computer services providers while spending less, the simple solution has been to hire India-based IT services providers. The demand for such providers has grown almost six times faster than the industry. For example, the 2002 NASSCOM-McKinsey Report estimated that the Indian software and service industry generated $15.5 billion in 2004 revenues and is expected to grow at a 34% compound annual growth rate to $50 billion by 2008.

The key factors that are expected to contribute to this growth are:

• High service quality. Indian companies have developed high quality delivery processes. For example, a 2004 NASSCOM survey of international quality standards of the top 275 Indian IT services companies reported that 195 companies had acquired International Standards Organization (ISO) 9000 quality certification. According to NASSCOM, during 2004, 74 Indian companies received a level five assessment under SEI-CMM, developed by the Carnegie Mellon University. Level five is the highest level attainable under the SEI-CMM standards, which assess an organization’s quality management system and systems engineering processes and methodologies;
• Large supply of English-speaking IT professionals. In the view of Satyam Computer Services’ management, India ranks second to the US as the country with the largest population of English-speaking IT professionals. According to the NASSCOM Strategic Review 2004, educational institutes in India produce 290,000 engineering students and 139,000 computer software engineers each year. Given the shortage of technical labor in the US, India’s ability to produce so many technically trained people is a source of competitive advantage for Indian IT service companies; and
• Significant cost advantage. The cost of employing IT professionals in India is significantly lower than in the United States. For example, A NASSCOM study estimates that India enjoys a 25% to 50% cost advantage over US-based IT services firms.

Peter S. Cohan & Associates recently compared US and India-based computer services firms. A comparison of EDS and Cognizant from that study is a case in point. At the core of Cognizant’s advantage is a much lower average cost per employee. In particular, Cognizant, at $19,689 per employee, spends 16% of EDS’s $98,707. This cost advantage enables Cognizant to outperform EDS on every statistic that matters. In particular, in 2005 Cognizant

• Grew sales at a 34% annual rate while EDS’s shrank 4.5%;
• Boosted profits 40% while EDS’s fell 5.4%;
• Increased its stock market value 49.3% while EDS put in a respectable 35.4% increase;
• Earned net income of $6,831 per employee, over five times the $1,281 that EDS earned;
• Generated a gross margin of 46% compared to a paltry 19% for EDS; and
• Sported a net profit margin of 18.7% compared to a razor thin 0.8% for EDS.

If India can continue to enjoy these enormous cost advantages while enhancing its service quality, it will continue to outsell and out-earn its global competitors.