Offshore outsourcing is the most controversial topic in the IT industry today. Few subjects present chief information officers with more opportunities for cost savings ... or provoke more vocal reactions among technology workers.

Some critics see offshore outsourcing as little more than UK jobs being lost to India and other developing countries. But it remains the fastest growing sector of the software and services market, perhaps the one area to have benefited most from the industry slowdown. India is obviously doing something right.

Computing travelled to Delhi and Bangalore last month to find out the secret of India's dramatic offshore IT success over the past few years, and to discuss some of the concerns - and misconceptions - of UK companies.

The supplier view
Bangalore was once known as the old people's city for its temperate climate and laid-back environment - the Eastbourne of south India. But all that changed when the IT industry moved in.

In the city's main street, Mahatma Gandhi Road, designer shops sit next to shopping malls, and Bangalore's famous pub culture is seen in the modern bars and restaurants.

But this is still India. On the outskirts of the city - populated by eight million people - you drive down a dusty road, past shanty buildings where the ubiquitous cows wander across the road, and stop at a security gate. Beyond this, visitors are seemingly transported to a Silicon Valley business park - Electronic City (e-City) - the heart of Bangalore's position in Indian IT.

The industry grew in the 1970s and 1980s to serve the home market after the Indian government restricted software imports, leading to the departure of major suppliers, such as IBM.

The country opened up in the 1990s, particularly with the establishment in 1991 of Software Technology Parks of India, a government quango tasked with building the infrastructure to support a modern IT industry.

When IBM and General Electric returned to India, the indigenous suppliers realised their competitive advantage would be in people, not products, and the concept of the offshore software development centre was born.

Now vendors such as Infosys, Tata Consultancy Services and Wipro Technologies are $1bn (£0.6bn) companies with global customers.

The dramatic growth of the past few years started with the year 2000 bug, when millions of lines of code were shipped to India for checking, and customers maintained the relationship for rapidly-developing dot com applications.

The next challenge is to become recognised as broad-based IT players, rather than simply 'Indian', says Wipro chief marketing officer Sangita Singh.

"We have recognised the need to learn and assimilate from around the world if we want to achieve our aim of being a top 10 global IT service provider," she says.

Visitors to e-City can hardly fail to be impressed by the resources available to Wipro. The company trains up to 1,300 staff every day on the latest software development technologies, as well as quality processes, language skills and cultural education, so staff feel comfortable with Western business values. More than a third of all training is online.

Wipro and its rivals recruit from a pool of some 300,000 graduates in IT and engineering. The desire to work in the industry is so high that only the very best are employed.

At e-City, Wipro runs 24x7 software development centres for more than 50 customers - more than 80 per cent of whom renew their contracts.

It also provides remote infrastructure support services for some 280 companies, of which one-third are outside India, including Thames Water, which claims to have achieved cost savings of 35 to 40 per cent.

But there is more to the industry than the savings to be derived from India having a lower cost of living than the West.

"Offshore outsourcing is becoming more strategic for customers, with more influence over strategy than just project-based," says Sudip Banerjee, president of enterprise solutions at Wipro.

"We are seeing an increase in visits from chief executives. The breadth of our and the industry's capability is not sufficiently well-known - there is a change in perceptions when people visit India."

The latest competition for the established Indian suppliers is the increasing number of multinational vendors, such as EDS and Accenture, setting up offshore operations in the sub-continent to employ their own lower-cost workforce. IBM already employs nearly 10,000 people there.

Indian suppliers are also opening more overseas offices and recruiting local staff to complement their home-grown workforce. Wipro is openly acquisitive to obtain geographic or vertical market coverage. Many Indian suppliers are developing emerging offshore markets, such as China and Eastern Europe.

The change in the nature of the competition is noticeable, says Wipro general manager of business development Suryanarayana Valluri.

"Most multinational competitors now have a presence in India. They talk more about quality, and are developing business models similar to ours," he says.

"We used to spend half our time explaining Wipro to potential customers - now they tell us to keep the company introduction to five minutes and focus on their requirements."

The industry view
The Indian IT industry recognises that it still has many challenges to overcome, despite achieving growth rates of more than 25 per cent in the past two years.

Many UK organisations, especially in the public sector, are put off outsourcing by its lack of regulatory protection in areas such as security and privacy - India has no equivalent of the Data Protection Act, although legislation is planned. And while the major suppliers place a big emphasis on quality, there are still smaller vendors that tarnish the country's reputation.

The National Association of Software and Service Companies (Nasscom) is leading the efforts to lobby the Indian government and industry to take the steps needed to develop the sector further.

Last month Nasscom announced plans for a Quality Charter, asking for all Indian call centre operators to sign up as an international stamp of approval to recognised standards.

The organisation is also leading attempts to overcome the backlash against offshore outsourcing seen in the UK and US, as some companies come under pressure from consumers to refrain from moving work to India.

"The backlash is a genuine concern at the level of individual human beings," says Nasscom president Kiran Karnik.

"We want to turn it from an emotional to a rational debate. The nature of advanced economies is that you shed jobs that are no longer wanted or can be done better and cheaper elsewhere."

Karnik says one of the causes of the anti-India lobby is the lack of growth in Western economies, just as the Indian market is booming.

"Over time, more jobs will be created than are lost," he says. "Recently, though, job creation in the UK and US has lost steam. We are saying to policy makers: 'Don't look at protecting jobs, look at creating jobs to pull out of the recession'."

Karnik believes that India can play a valuable role in solving the UK demographic timebomb that will see the baby-boom generation retiring with insufficient workers to replace them.

"The UK macroeconomics show that there will not be enough people to fulfil the work that needs to be done. India can help solve that without excess immigration to the UK.

"The challenge is to get the balance right - the perception at the moment is that too much work is going overseas. We need to find a better balance point," he said.

Karnik is sympathetic to concerns in the West, but believes the shift in the IT sector is inevitable.

"IT is the first truly global industry, it has no boundaries," he says. "This is not an India issue - it is an issue about companies' business models."

The government view
The Indian government's Ministry of IT acts as a catalyst for promoting its IT industry, offering tax breaks and funding to help the growth of the sector.

Talk to any senior executive of an Indian supplier and they will say the key to their success has been the Ministry's early decision to not regulate the market.

"We allowed the industry to flourish without government interference," says Mr S Lakshminarayanan, additional secretary to the Ministry of IT.

"We constantly talk to the industry to find out their problems and bottlenecks and we try to help them by taking up the cudgels on their behalf with government ministries. For foreign investors in IT, India was known for its red tape - we converted that into a red carpet."

But the government's role goes beyond helping the technology sector. It also tries to ensure that the financial benefits of the IT industry are spread across the country.

"We are connecting all the universities to a research network so the expertise available in one university will be available to all. We are also trying to computerise all the schools.

"The forward-looking states want to make IT education compulsory in schools. We also conduct pilot projects to promote IT education in schools," explains Lakshminarayanan.

"We are doing our best to see that the more backward states are helped in terms of infrastructure and providing capacity and computers and networks. The chief ministers have realised the importance of IT, and there is competition among them to do more for their state."

The Ministry is adamant that there be mutual gain for overseas economies as well as India.

"For international companies outsourcing is cost savings. As a developing country we want more jobs and less unemployment," says Lakshminarayanan.

One of the unique achievements of the Indian success story has been in making IT a trendy, cool industry.

"The biggest barometer in India is the marriage market," he observes. "Single people all want to marry someone in IT these days."

IT in India

• 2002 sales were $13.5bn (£7.9bn) - forecast to reach $87bn (£51bn) by 2008
• IT exports in 2002 totalled $8bn (£5bn), with a $50bn (£29bn) target for 2008
• Annual growth between 1991 and 2001 was more than 50 per cent a year
• Business process outsourcing revenue increased 70 per cent in 2001-2002, reaching $1.5bn (£0.9bn). The 2008 target is $15bn (£8.8bn)
• Software and services is expected to account for 20 per cent of all Indian exports this year, and projected to account for seven per cent of GDP and 35 per cent of exports by 2008
• Indian software is used in some 100 countries
• The industry currently employs 650,000 people, with forecasts of 2.2 million for 2008

"As companies in the UK are operating in an increasingly competitive, global marketplace, they must have the freedom to choose where to locate to maximise their competitive advantage. If we chose to operate a protectionist approach, we would run the risk of forcing companies to locate completely out of the UK. This would be to our long-term economic benefit.

We will continue to create a stable, competitive market in the UK. Our long-term economic interest will be based on our ability to produce high-value goods and services which need a skilled workforce, high-calibre managers, forward-looking unions, and knowledgeable consumers."

The reality of working in an Indian IT call centre
Raman Roy is considered in India to be the father of the country's business process outsourcing industry.

After setting up offshore processing centres for General Electric and American Express, Roy formed his own company - Spectramind - in early 2000, to offer third-party services to overseas companies using lower-cost, but highly-educated Indian workers for call centres and back-office functions, such as payroll.

Now a subsidiary of Indian IT giant Wipro, Spectramind's growth is phenomenal - from 20 people at birth to nearly 10,000 to date. The company recruits some 2,000 employees every month, all of whom go through an intensive 14-week training period.

When a new customer requested a call centre in Mumbai with capacity for up to 300 staff, Roy's team converted a 13,000 square foot office from start to finish in just 58 days.

Visitors to Spectramind's Delhi operation can quickly see the powerhouse that India is creating - and the reasons why companies such as HSBC say the quality of service provided from the sub-continent is better than in the UK.

Roy says that a focus on processes and procedures is the key to managing such spectacular growth.

"Once you're doing something for a customer you can bring it down to a 'cookie cutter' approach," he says.

"Once you get it down to that level, it requires very little management attention or focus. A new process or a new customer requires more management focus. We are able to pace it so that we can meet the needs of our customers."

Computing sat in on a training course and talked to some of the call centre staff - whose average age is 23. Their enthusiasm, commitment and lack of cynicism is rarely seen in some Western offices.

Employees are all graduates and seem to thrive in an environment surrounded by their peers - even though most work nights to reflect UK and US office hours.

Western perceptions of exploitation are also quickly put to rest: "I like the job because of the variety of work and the atmosphere in the office; the pay is pretty good too," says one call centre worker.