Oracle's Outsourcing Play in India

At a two-day conference in Bombay on Jan. 10, Oracle announced that it will be hiring an additional 1,400 employees in India -- not only in tech hotbeds like Bangalore, but across nine cities and rural towns throughout the country.

Given recent announcements that Microsoft, Cisco Systems, and Intel would each pump at least $1 billion into the country, Oracle might look like a bandwagon jumper. But make no mistake: It was in India long before that was the cool thing to do.

And executives from Oracle, the world's second-largest software company, will be the first to tell you so. Oracle has been in India for 19 years, and the planned hirings will increase its local staff to 10,000, representing about 20% of its global workforce.

That's considerably more than Microsoft, which now has 3,000 employees in India and plans to add 3,000 more in the next five years. All told, Oracle has invested $2 billion in India in the past half-decade.

Oracle President Charles Phillips underscored the reasons for expansion in a statement: "The fast rate of development, high literacy rates, and availability of I.T. skills in each of these cities represent an untapped reservoir of future economic wealth for India."

Symbiotic Relationship

It's not so bad for Oracle either. Getting bigger in India could boost both top- and bottom-line growth. The company is increasingly dependent on software-maintenance fees from existing customers -- and less so on clients taking out new licenses. That makes it all the more important that Oracle reduce costs to boost profits.

Oracle has been one of the more aggressive U.S. companies in moving jobs offshore, and India is alluring because its labor expenses are lower. Oracle relies on Indian staff not just for fixing software bugs but also for conducting high-level research and development. In fact, Oracle's largest R&D center outside the U.S. is in India.

Working for Oracle in India is a pretty nice gig, too, says AMR Research analyst Bruce Richardson. When he visited Oracle's Indian facilities two years ago, he was struck by amenities that were equal to or better than those offered at the company's Redwood Shores [Calif.] headquarters, be it ping-pong tables for relaxation or fringe benefits like company-sponsored health care for the whole family.

Local Competition

Oracle has added reason to expand its India presence. It's positioning itself to take advantage of a growing business-software market that often excludes outsiders, according to experts. The domestic market for software and services was $22 billion last year, up 32% from 2004, according to Nasscom, an Indian I.T. Chamber of Commerce organization.

Oracle has been doing pretty well in India, with 6,000 database and middleware customers, and about 400 clients using its business applications, which run corporate departments such as human resources and accounting. India has become Oracle's fourth-largest Asian market, up from tenth a few years ago. The bulk of those sales, however, are actually won by local partners and resellers, who better understand the Indian market, according to analysts. Oracle has more than 200 of these reseller relationships, according to its Web site.

As the already high-tech country becomes even more skilled at software development and attracts more of the West's venture-capital dollars, local companies could arise to challenge the likes of Oracle and SAP. "In many ways, the biggest competitors for the Oracles, SAPs, Microsofts, and IBMs in developing nations are the small, local, independent software vendors," says Evan Quinn, an analyst at market research firm IDC. That's especially true with business applications, because local business customs, languages, and laws are crucial to crafting software that employees will find easy to use.

M&A Activity

Oracle clearly understands that it pays to be local: Look no further than its $900 million purchase of a controlling stake in India's i-flex Solutions last year. One of the country's largest and most celebrated software companies, i-flex makes applications for the financial-services industry -- an area of the market that neither Oracle nor SAP dominates. The deal allowed Oracle to obtain a controlling stake and keep i-flex's well-regarded Indian management team, instead of buying the company outright. Among IDC's top software predictions in 2006: more arrangements like that.

With Oracle's penchant for making deals -- and cash of about $5 billion, once the Siebel purchase closes -- it could again become a suitor. Indeed, as Oracle battles SAP for application supremacy and looks to keep its core database market growing, it can't afford to lose out on lucrative emerging markets like India. Judging from this announcement, it doesn't intend to.

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