The list of American companies competing for IT talent in India is growing: America Online last month confirmed it's holding internal discussions with an eye to opening a development office staffed with a small number of programmers in Bangalore, India, and search-engine company Google Inc. last month said it plans to hire about 100 engineers at a new software-development center in Bangalore in March. Also, The Wall Street Journal reported recently that IBM, which already has a significant presence in India, plans to employ almost 5,000 programmers in India and other overseas locations to update software for running the vendor's business. Outside the tech field, other brand-name companies, from General Electric to General Motors, either directly employ thousands of IT professionals in India or outsource jobs to service providers operating there.

At the same time, American IT service providers are beefing up their presence in India. Perot Systems Corp. in late December said it would spend $105 million to buy out its Indian joint-venture partner--HCL Technologies LLP--so it can operate a wholly owned services facility in that country.

The high cost of labor for U.S. IT workers has had much to do with the growing interest in offshore outsourcing, particularly to India where there's a large contingent of well-educated technology professionals. Indian IT workers with five years of experience typically earn $25,000 to $30,000, says S. Padmanabhan, VP of human resources at Indian outsourcing firm Tata Consultancy Services. In the United States, the salary would be $60,000 to $80,000, he says.

"People need to realize there has been huge inflation in IT wages" in the United States, says Forrester Research analyst John McCarthy. But now the same thing is happening in India. "The market there is heating up," says Erran Carmel, associate professor at American University's Kogod School of Business. The probable result of that, he says, is that wages and turnover will go up as employees job-hop. A recent report from outsourcing firm Hewitt Associates and the National Association of Software and Service Companies, an industry association representing Indian IT companies, notes that compensation is on the rise for Indian IT employees as a means to combat attrition rates. According to the report, performance-based salary increases among IT companies grew by 23% in 2003.

IT providers in India are paying higher salaries, especially for junior and middle-management jobs, a spokesman for Hewitt Associates in India says in an E-mail. Salaries for those jobs are determined more by market dynamics and less by a person's industry experience, market relationships, and specific skills, he says. Those factors come into greater play for determining compensation for senior-level positions.

The current climate could cause some American companies to think twice before expanding internal operations in India or signing outsourcing contracts with some big IT services providers that operate in the country.

But some of the leading lights of Indian IT services providers--Cognizant Technology Solutions, Infosys Technologies, Tata, and Wipro Technologies--say potential and existing clients shouldn't be concerned they'll be affected by a talent shortage. They say they'll remain cost-competitive because graduates of India's vaunted technical-education system tend to favor working at the big Indian service providers.

Indian IT companies have strong historic ties with those academic centers and can ramp up the production of talent the way Dell might speed up its PC assembly line, says Padmanabhan of Tata. "All the educational institutions are gearing up to meet the demand," he says. Close to 95% of those offered a job with Tata accept, he says. Last month, Cognizant, which operates in several Indian cities, said it would hire 4,000 new programmers in the coming year and spend $40 million to build more than 600,000 square feet of additional office space in Pune, Chennai, and Bangalore. The company's head count, which stood at 6,700 in June, will hit 13,000 by the end of 2004. "We have a direct line to the top universities, so finding the people we need is not a problem for us," Cognizant CFO Gordon Coburn says. Its customers include The Metropolitan Life Insurance Co., Northwest Airlines, and Sprint, and "our deal pipeline is the strongest it's ever been," Coburn says.

Some smaller Indian tech firms may have a tougher time fulfilling demand, says Vivek Paul, vice chairman of Wipro Ltd. and CEO of Wipro Technologies, via E-mail. And they're not alone. "Interestingly, even many recognizable U.S. companies setting up centers in India are having difficulty," he writes. A U.S. IT services company may consider a 250-person office in India to be a large organization, but that environment won't appeal to Indian managers, who want to direct larger teams. "Their scale relative to that of Wipro's is so small," he writes. Wipro Ltd. has more than 20,000 employees. "So, indeed, top talent is getting harder to find for those down the value food chain or for midsize newcomers."

Basab Pradhan, senior VP at outsourcing service provider Infosys, says his company continues to hire between 2,000 and 2,500 employees every quarter, chosen from among 400,000 resumés it receives annually. "However," he says via E-mail, "new companies setting up shop in India may be challenged to find middle and senior management to head new operations."

But top-tier U.S. companies with global brand recognition and an established presence don't see a problem. A spokesman for General Electric, which employs about 18,000 to 20,000 people in India, says the company has seen no evidence of a talent shortage.

One thing that makes the big Indian IT service providers appealing to employees is their commitment to continuing education. M.S. Krishnan, associate professor of computer information systems at University of Michigan Business School, says the largest companies in India that do software outsourcing train thousands of people each year in new technologies. That's critical to the ongoing competitiveness of the Indian IT industry and the Indian IT worker.

But big Indian IT companies are paying attention to the labor market and preparing for the future, when even they might have a harder time competing for talent at home without increasing service costs. "The new trend we're seeing is Indian software companies are trying to open centers in China, in Philippines," Krishnan says. For instance, he says, Infosys is experimenting with a large software-development center in China. "While India will be the eye of the storm for some time, it can certainly move to other countries."

Yankee Group analyst Andrew Efstathiou sees the same trend. The drive to China is "partially a result of the fact it is so much less expensive in China that even if costs remained the same in India, corporations would still want to go to China for more savings," he says.

Still, it will be some time before most other countries can seriously challenge India or even support Indian outsourcers' operations at a high level. "Delivery and higher quality are making people look at India, says Krishnaswamy Subrahmaniam, president and CEO of Covansys India. "The only thing that can move work away from India at this point in time is higher quality and better productivity compared to India." Of course, he says, there are good programmers in Canada, China, Mexico, and Vietnam. But barring China, every other country has a scale problem. Countries such as Slovakia and the Czech Republic, for example, "have excellent resources, but in what numbers are we talking about? Two hundred thousand per year? There's no way."

-- with Paul McDougall