India outsourcing moves to front office
Until recently, the migration of service industry jobs from the West to places like India seemed to obey an unwritten law: Low-skill clerical and programming tasks would leave the developed economies, while high-end careers requiring graduate degrees and commanding six-figure salaries would stay behind.

By Anand Giridharadas Tuesday, April 3, 2007

BANGALORE, India: Outsourcing is breaking out of the back office.

While call centers and software houses closed in the West, often leaving their workers scrounging for employment, professionals in fields like aeronautical engineering, investment banking and drug research likely believed they had nothing to worry about.

Quietly, but steadily, that is changing. High-skilled jobs in those very fields, which once epitomized the competitiveness of Western economies, are flowing to India. The pool of jobs once thought to be impossible to outsource is gradually evaporating.

Boeing and Airbus now employ hundreds of Indians on critical tasks, including the design of next-generation cockpits and systems to prevent airborne collisions. For about one-fifth the cost, investment banks like Morgan Stanley are hiring Indians to analyze U.S. stocks, a job that can pay $200,000 a year or more on Wall Street.

Eli Lilly, the U.S. drug maker, recently handed over a promising molecule it discovered to an Indian company, Nicholas Piramal, which will be paid $500,000 to $1.5 million a year per scientist for at least two years of work readying the drug for commercial use.

And with multinationals employing tens of thousands of Indians, some are beginning to treat the country like a second headquarters, sending senior executives with global responsibilities to work from India.

Cisco Systems, a maker of communications equipment, has mandated that 20 percent of its top talent be in India within five years. The company recently moved one of its five highest-ranking executives, Wim Elfrink, to Bangalore as its chief globalization officer.

"There is no job that is done in Cisco that a guy in India can't do," said Samu Devarajan, a Cisco managing director in Bangalore. "If this theater becomes successful and grows the way we want it to grow, I see no reason why the CEO of Cisco couldn't sit in India."

Accenture, the global consulting giant, has its worldwide head of business-process outsourcing in Bangalore. By December, it will have more employees in India than in the United States.

As their Indian back offices gain in sophistication, Western firms are finding that a vast swathe of their work - even tasks requiring rarified expertise - can be done in the country at a fraction of the cost. At the same time, many see India as deep reservoir of potential customers.

As India has become a lucrative market, not just a back office, many Western firms have concluded that their destiny will be molded largely by what they achieve here. And having a customer market and an outsourcing hub in the same place enriches innovation, executives say.

"India is at the epicenter of the flat world," said Michael Cannon-Brookes, the vice president for business development in India and China at IBM, which has shrunk its American work force by 31,000 since 1992 as its Indian staff mushroomed to 52,000 from zero.

The eastward drift of Western companies came to the fore last week when Citigroup announced plans to cut or reassign at least 26,000 jobs, or 8 percent of its global head count. It will move some jobs to cheaper American cities, and many to India, where the bank already has 22,000 employees in India. Although Citigroup began outsourcing to the country with low-end work like bill collection, it now has about 600 Indians engaged in high-value jobs like analyzing U.S. stocks. Meanwhile, India has become its fastest-growing international market in revenue terms, according to the bank's chairman, Charles Prince.

N. R. Narayana Murthy, chairman of Infosys, an Indian outsourcing company, said Western multinationals were entering a world in which they would conceptualize, develop, manufacture and sell products and services, from start to finish, outside their countries of origin.

"The U.S. will progressively become less and less predominant for the U.S. corporations," Murthy said.

That may be wishful thinking by an Indian magnate. And experts warn that a continued flow of work to India requires drastic improvements in its physical and educational infrastructure. Water and power shortages are endemic, and an industry trade body has predicted that India could find itself short of 500,000 engineers by 2010.

Alan Blinder, a former vice chairman of the U.S. Federal Reserve Board and former economic adviser to President Bill Clinton, recently described outsourcing as a "third Industrial Revolution" that, by his estimate, threatens the jobs of 28 million to 42 million workers in the United States alone.

"We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering," he wrote in the March/April edition of Foreign Affairs.

But Blinder, who teaches at Princeton, added that the likely consequence is not large-scale joblessness in the West. Instead, he argues, the West will shed jobs in easily outsourced fields, like accountancy, and migrate to new professions, like the police or clinical medicine, that must be rendered in person.

A few years ago, the work sent to India consisted mostly of $100,000-a-year-or-less jobs in software maintenance or $50,000-a-year-or-less jobs in customer service, said Atul Vashistha, who runs neoIT, a consulting firm in California that advises U.S. companies on outsourcing.

Now, outsourced jobs include elite positions that pay $200,000 a year or more in the West, he said.

Behind that shift is a story of how an upstart Indian outsourcing industry, needing to prove itself and fend off rivals from Eastern Europe to China, reinvested the profits from outsourced grunt work into an upgrade of skills. Infosys, for example, devotes $65 of every $1,000 in revenue to training. IBM, its U.S. rival, spends $6.56, according to a 2006 proxy statement.

The Indian vendor's investment bore fruit: Western blue-chip companies started sending Infosys critical pieces of their core business tasks.

"The definition of what is core is shrinking and may not even be relevant," said Dennis McGuire, the chairman of TPI, a consultancy in Texas that advises multinational companies like Pfizer and Motorola on outsourcing.

A few years ago, the aerospace giants Airbus and Boeing were outsourcing only basic work like digitizing old hard copy drawings. But they began to outsource ever more complex endeavors as their Indian partners hired their own aerospace engineers, many of them trained at Indian engineering colleges before accruing decades of experience in the Indian state-owned aviation sector.

Airbus hired Infosys, based in Bangalore, to design part of the wing of the double-decker A380. Infosys is also working with another supplier, Tata Consultancy Services, to build software for next-generation cockpits with up to half of the hundreds of switches removed and replaced by touch screens. Airbus has hired a third Indian firm to design and build jet doors.

In Boeing's forthcoming 787 Dreamliner, two mission-critical systems - one to avert airborne collisions and another allowing landings in zero visibility - will be built largely by HCL Technologies, an outsourcing firm outside Delhi.

"In theory, we could place the work anywhere," said Ian Thomas, the president of Boeing India. "We're here because we found a level of sophistication."

Western banks like Morgan Stanley, which have long used Indians for basic research, are now hiring them to write reports for institutional investors on American and European stocks.

"Our analysts will cover equities on their own," read an advertisement posted last year by Thomas Weisel Partners, a U.S. investment bank, on an Indian career site, CoolAvenues.com. "They do not report to another analyst in the U.S." the ad continued. "Simply put, we are not a back office in India."

And in the complex world of pharmaceutical research, Western companies have evolved from outsourcing slivers of research to Indians to outsourcing entire phases of drug development.

In January, Eli Lilly announced a deal with Nicholas Piramal that sent ripples through the industry. Not only would Lilly turn over ownership of a patented molecule to its Indian partner, Nicholas would usher the drug through the first two phases of clinical trials over two to three years. Moreover, Nicholas agreed to bear the risk of project failure, in exchange for much larger royalty payments should it succeed.

"Nicholas will do the whole thing, at their expense, at their own risk," said Gino Santini, a senior vice president at Lilly. He added: "This is truly at the core of what you need to push a product through the development process."

The idea that a company can transfer a fundamental part of its business and still remain viable is controversial. Marcus Courtney, a union organizer representing laid off info-technology workers in Washington State, said Western multinationals were seeking to shed as many roles as possible while building "a global supply chain" in which others do everything. The result, he said, is an unprecedented erosion of competitiveness and Western living standards.

But Murthy, the Infosys chairman, said that his Western clients follow a simple, entirely rational mantra: "Invest where you get maximum returns, source talent from where it is best available, produce where it's most cost-effective, and sell where the markets are, without being constrained by national boundaries."