Good stuff, cheap. That\u2019s the reputation of India\u2019s IT outsourcing industry, and it\u2019s both a blessing and a curse.The blessing is that India has finally been able to seize the global stage by harnessing its greatest natural resource\u2014people\u2014and focusing on filling the world\u2019s yearning for IT skills and services. By becoming, as some call it, "the back office of the world," India has grown its IT exports in less than a decade from $150 million to more than $4 billion\u201410.5 percent of India\u2019s total overseas sales. And in so doing, India has built a solid record for developing IT talent as well as delivering top-notch legacy system maintenance and software applications.The curse is that, despite what IT outsourcing has meant for India\u2019s economy, the country\u2019s top IT vendors have been typecast, and they\u2019re scared. Wipro, Infosys Technologies, TCS\u2014they all hear the approaching footsteps of Ireland, China and the Philippines, the up-and-coming IT service centers. What happens to India if any of these upstart countries learns to provide good stuff, cheaper? At the same time, these vendors feel the pressure of great expectations. They represent India\u2019s best hope to achieve economic prosperity in the 21st century, and so they push themselves to develop new products and services to meet projections that India\u2019s software exports will exceed $50 billion by 2008. But these companies already have grown so quickly that they now face their own staffing crunch. They compete with one another\u2014and with their foreign customers\u2014to recruit and retain thousands of young, restless programmers who want to get their hands on the hottest new IT projects. Yet how do India\u2019s IT vendors grow their businesses and create these hot, new projects when they\u2019re stuck with this label of "good stuff, cheap"?"India has been branded as a country with a lot of cheap people available, and that\u2019s a lot of baggage to carry," says Soumitro Ghosh, general manager of worldwide marketing at Wipro, based in Bangalore. "We\u2019re trying to change that image. Getting work is not difficult; getting the right kind of work is difficult. We have to convince customers that they can outsource high-value work to India."Toward that end, India\u2019s top IT services vendors are changing their marketing strategies. They\u2019re downplaying the legacy systems work, software debugging and "body-shopping" (sending Indian programmers overseas to work on assignment for customers) on which they built their businesses in the \u201990s. Instead, they\u2019re pinning their 21st century hopes on e-business development, new software products and end-to-end business\/system consulting\u2014high-profile, high-paying projects that will improve their ability to stave off competition, grow their companies and retain staff. Fueling this shift is the fear that if India\u2019s vendors don\u2019t somehow escape the reputation for good stuff, cheap, then their good fortune will go away as quickly as it arrived. "Despite what companies\u2014even our own\u2014might say, we know that the work we currently do is work that someone else chooses not to do," says N. Lakshmi Narayanan, president and COO of Cognizant Technology Solutions, a Teaneck, N.J.-based IT services vendor that operates several software development centers throughout India. "Certainly these services are business-essential, but they are not business-critical. For us to really be at the leading edge, we have to get into business-critical systems."The Indians make a strong argument. Nobody can beat their price\u2014software programming in India costs roughly $35 per hour, as opposed to $200 in the United States\u2014and their quality is world-class. In fact, of the 23 companies worldwide that have been awarded the United States-based Software Engineering Institute\u2019s Capability Maturity Model (SEI-CMM) Level 5 rating for fault-free software engineering processes (the equivalent of a perfect 10 in Olympic competition), 15 of those elite companies are Indian, among them Infosys, NIIT and Wipro.There\u2019s only one problem with this scenario: What if their customers don\u2019t want to expand their offshore relationships? Indeed, some of India\u2019s best customers say their entire offshore strategy is based on the premise of good stuff, cheap. "We\u2019re looking for lower prices and quality people," says Kelly Robinson, CIO and vice president of operations at E-Health Solutions, an Arlington, Texas-based health-care provider that outsources data entry to India. "If [Indian vendors] take away the low-end work, we\u2019ll start looking elsewhere." As for the hot, new projects, those are the ones many CIOs reserve for their own restless staffs. "Those projects are the ones that keep the local superstars working for me and not somewhere else," says one manufacturing company CIO, who prefers to be anonymous. "I\u2019m in deep trouble if I lose those folks."Which isn\u2019t to say Indian vendors don\u2019t stand a chance of attracting higher-level, higher-paying projects. In fact, some market analysts believe that window of opportunity is open now. "In general, I\u2019m finding a sense of hostility on the behalf of U.S. companies toward the Andersens, KPMGs and [other consultancies]," says Marty McCaffrey, executive director of Software Outsourcing Research, a Salinas, Calif.-based company that has tracked offshore outsourcing trends since 1996. "CIOs feel they\u2019re not getting their money\u2019s worth from these companies."If Indian vendors suddenly appear with lower-cost, high-quality business services, then they will find an eager customer base, says McCaffrey. The key is developing those services within a matter of years, if not months. "They can be the equals of the best of our [business-service] companies in a very short period of time," he says.Consider, after all, how quickly India built the entire offshore outsourcing industry.Birth of an IndustryThe offshore outsourcing industry as it\u2019s known today began in 1972. That\u2019s when TCS, founded by India\u2019s multi-industrial Tata family in 1968, sent its first technical staff overseas to work onsite for United States-based customers. "Body-shopping" is how the practice came to be known, and it was popular during the offshore industry\u2019s first 20 years, as foreign companies enjoyed the benefits of augmenting their own staffs with India\u2019s ready, willing and cheap labor.But beginning in 1991, when ex-Prime Minister P.V. Narasimha Rao\u2019s government initiated a series of economic reforms to open India\u2019s borders to foreign trade, the offshore industry began a gradual transition from staffing to services. Suddenly, foreign customers, particularly those in the United States, realized that India wasn\u2019t just a source of cheap IT labor, it was a place where top-quality IT services could be performed effectively, inexpensively and in a time zone that gave Western companies nearly around-the-clock access to IT talent. Since 1991, scores of big-name companies (including General Electric, IBM, Microsoft and Texas Instruments) have outsourced certain back-office functions or, with help from the vendors, opened software development centers staffed and managed entirely by Indian programmers. It\u2019s an understatement to say that the 1991 economic reforms changed the fates of several companies. In a decade\u2019s time, TCS, the first to outsource these services, has become India\u2019s biggest outsourcing vendor, exporting roughly $400 million in IT services annually. Wipro, which tried and failed to market its own project management software product in the early \u201990s, now is the nation\u2019s No. 2 IT services exporter and was the first company in the world to achieve SEI-CMM Level 5 status. Infosys, a software development company founded in 1981 by seven friends who borrowed startup money from their wives, now is No. 3 among India\u2019s IT outsourcing companies and No. 1 in polls ranking India\u2019s most admired companies. It\u2019s equally an understatement to say that as these IT services companies have grown, so has the nation. Not only do IT exports account for more than 10 percent of India\u2019s total exports, but the Indian IT industry employs roughly 320,000 people\u2014and at a far higher standard of living than people earn in other professions. The average professional salary in India is equal to $4,000 to $6,000 per year, but entry-level software engineers can earn anywhere from $8,000 to $10,000. And the growth potential for the industry and its employees alike is tremendous. A recent industry survey by India\u2019s National Association of Software and Service Companies projects that the country\u2019s IT industry could earn $87 billion and employ 1 million people by 2008. To the Indian mind, which reads math equations like poetry, these projections are nothing short of inspirational. "In the brick-and-mortar world, there were always limitations," says B. Ramalinga Raju, chairman of Satyam Computer Services, India\u2019s fourth-leading IT services exporter. "IT has brought an opportunity for this country to reach out to the world. In today\u2019s world, it doesn\u2019t seem to make much of a difference where I\u2019m working. The world has become the marketplace for India."Growing PainsIn the early years, the biggest challenges for India\u2019s IT services companies were matters of perception and communication. Customers had a hard time getting past the image of offshore outsourcing companies as high-tech sweatshops populated by scores of Indian cybercoolies working for bread, rice and spare rupees. And if they did rise above that stereotype, then customers frequently became entangled in project management issues complicated by geographic and cultural differences. Once customers visited India and saw the truth for themselves, half the battle was won, says R. Ramanan, vice president of TCS in Bangalore. "No customer I\u2019ve known has visited India and left without changing his perspective on what we can and can\u2019t do," Ramanan says.But understanding what Indian companies can do is one thing; getting out of their way and letting them do it is quite another. The notion of sending IT work 9,000 miles offshore and to a time zone that\u2019s anywhere from 9.5 to 12.5 hours ahead of the United States (depending on whether the destination is on the U.S. East or West Coast) was so...well, foreign that customers had a hard time releasing the reins. Consequently, they tended to overmanage the projects to the point where some companies would even send their own staff to India to oversee the vendors\u2019 work. "That tendency to overmanage could make [cost] value disappear fast," Ramanan says.There also were some cultural barriers to overcome. For one, Indians have a tendency to shake their heads from side to side to signify yes\u2014a visual cue that means no in most Western countries. And when Indians want to say no, they aren\u2019t always explicit. As opposed to Americans, who generally are quite comfortable voicing their opposition to a proposal, Indians tend to keep their initial doubts to themselves and then express them later, when the project might be in full swing. These initial challenges were overcome by two factors: successful outsourcing engagements, which built on one another, and the Y2K scare, which created more software programming than any company could handle in-house. Indian companies ended up taking on a lion\u2019s share of Y2K work (roughly $2 billion worth of work from 1996 to 1999), which helped cement their reputation for delivering good work, cheap. The upside of offshore outsourcing\u2019s rapid ascent is that it has allowed the Indian vendors to enjoy unprecedented growth. In just the past five years, the offshore outsourcing business has grown from about $734 million to $4 billion. Meanwhile, outsourcing vendors such as Infosys and Wipro have grown from a few hundred employees to several thousand\u2014with no end of growth in sight.The downside of this explosive growth is that while Indian IT companies have been helping foreign customers mitigate staffing shortfalls, they\u2019ve been developing a staffing crisis of their own. Even in India, after all, the IT labor pool is only so deep. Currently, each of the major IT companies has an attrition rate of 11 percent to 13 percent, which is below average by U.S. standards. But if you consider that these companies are growing on average by about 20 percent per year, you\u2019ll see the staffing challenge they face. The engineering schools and universities are turning out tens of thousands of IT professionals each year, and these become the primary focus of the vendors\u2019 recruiting efforts. Yet recruiting is only half the battle; retention is the next struggle. More than money, young Indian IT professionals want (not necessarily in this order) the opportunity to work overseas and the challenge of working on the highest-priority projects with the hottest new technologies. But there are only so many overseas opportunities, and for those who stay domestic, the most challenging projects are not the ones that traditionally get outsourced.And then, of course, there is the specter of mounting competition for the good stuff, cheap business. Countries such as Ireland in the West, China in the East and Israel in the Middle East all fancy themselves as providers of good, inexpensive IT services. Currently, India enjoys first-to-market advantage and owns anywhere from 80 percent to 95 percent of the U.S. offshore market\u2014but not without some healthy fear of losing that lead to a country that might come along and offer better services cheaper. "IT is a very powerful way of raising the standard of living," says Nandan M. Nilekani, president and COO of Infosys. "A lot of other countries want to be IT powers too." Beyond market share, India also enjoys the advantages of possessing a large, English-speaking population and a relatively open, democratic government. But these are hardly insurmountable advantages. "We can\u2019t afford to be complacent," Nilekani says.The New MandateTo meet their many challenges\u2014grow the business, retain employees and stave off foreign competition\u2014India\u2019s IT services companies have adopted a common strategy: Offer higher-level (and higher-paying) strategic business products and services that improve the vendors\u2019 value and help anchor restless employees. "For our IT industry to continue to grow as it has, we must change to become an end-to-end solutions provider," says S. Gopalakrishnan, deputy managing director and cofounder of Infosys. This doesn\u2019t mean abandoning the bread-and-butter back-office work\u2014not entirely, at least\u2014but rather focusing aggressively on the pursuit of strategic business projects. "We must compete with the Andersen Consultings [of the world] as an end-to-end company," Gopalakrishnan says.Toward that end, Infosys has just unveiled a suite of e-banking products on which it hopes to build a new financial services consultancy. TCS, meanwhile, is investing 4 percent of revenues in new product research and development, and the company has pledged to make higher-end strategic services 35 percent to 40 percent of next year\u2019s total volume of business. "We\u2019re seeking more joint ventures, more equity relationships with partners," says Ramanan. "We need to build total-system consultants and system engineers, not software consultants and software engineers."While striving to offer a higher level of service, some Indian IT vendors are also starting to point to their SEI-CMM Level 5 status and wonder why they\u2019re paid less than lower-rated vendors from the United States or the United Kingdom. "Indian companies in many cases have traveled great distances in terms of creating quality of service," says Raju of Satyam, one of India\u2019s SEI-CMM Level 5 service providers. "Our customers are now open enough to say that our services are far higher than what the local vendors are able to provide. Companies like Satyam are now becoming more confident asking why there needs to be a difference in price when our value is higher."But how will these vendors be received when they show up in the United States seeking better projects and pay? With skepticism, says Peter Bendor-Samuel, president of The Outsourcing Center, a Dallas-based outsourcing consultancy."I don\u2019t blame them for trying. Who wants to be known as the cheapest?" Bendor-Samuel says. Yet cheap is exactly what most CIOs seek first in an offshore relationship.Beyond price, the Indian vendors will be challenged to demonstrate that their people possess the business savvy to compete with the major IT consulting companies. By their own admission, the IT vendors recruit almost exclusively at college campuses, and the average age among employees at these companies is 26. Hardly seasoned business veterans. Western CIOs may be reluctant to turn over business-critical work to offshore personnel that might not fully grasp business requirements. "I wouldn\u2019t be worried about turning over the technology; I\u2019d be worried about [turning over] the business side," says E-Health\u2019s Robinson. "[Indian vendors] have the aptitude to learn the business savvy, but they\u2019re not going to learn it in India. They\u2019ve got to come here" and develop U.S. business experience.Still, McCaffrey of Software Outsourcing Research says that if the Indian vendors acquire these capabilities as quickly and as aggressively as they did their SEI-CMM Level 5 status, then it\u2019s not unreasonable to assume that they might carve out a significant piece of the business services pie. "Companies that already embrace offshore outsourcing in general are interested in these [higher-level] services," McCaffrey says. But, he cautions, "it\u2019s going to take time, and there will be a learning curve."Even Bendor-Samuel, who is skeptical that India can compete head-to-head with the major consultancies, does see an opportunity for Indian vendors to leverage their ability to do good work, fast. "People still look at India as a last resort. If they need to get a project done really fast...that\u2019s been the \u2019hot\u2019 stuff that\u2019s gone to India," he says. "But if India can deliver on time to market, then they will have a nice niche. That\u2019s their market space."But is a reputation for "good stuff, fast" any better than "good stuff, cheap"? It won\u2019t be easy for India\u2019s IT vendors to change their image. But then Indians are approaching this mission with uncommon zeal. It\u2019s not just business they\u2019re after; it\u2019s opportunity. Indians never quite made it in the industrial age; they don\u2019t want to make the same mistake in the information age. As Wipro\u2019s Ghosh says, "If we miss this bus, we may never get another opportunity."