Banks have looked to India for low-cost IT and business services for years. But the competition for talent and subsequent rising salaries are diminishing benefits to banks and Indian services providers. That's causing both to modify their strategies.

Tata Consulting Services, for one, is getting deeper into the software business. Last week, it formed TCS Financial Solutions, its first products division, to sell core banking, CRM, wealth management, and other software applications to financial companies.

Indian Financial Software

TCS Financial Solutions:
Anti-money laundering, core banking, CRM, wealth management

Infosys:
Core banking, CRM, treasury, wealth management

I-flex:
Analytics, anti-money laundering, consumer lending, core banking

Polaris Software Lab:
Core banking, retail banking, reward management, risk management

Tata acquired Financial Network Services, maker of a popular banking app called Bancs, in 2005 for $26 million. Last November, it acquired a majority stake in TKS-Teknosoft, maker of the Quartz wholesale banking apps, for $80 million. Strong reception of these products, and for software it has developed in-house for banking customers, prompted Tata to create a business focused on software sales, says Financial Solutions VP Terence Donnelley. Financial software sales grew 66% in Tata's last fiscal year, to $170 million.

That's just a fraction of the $1.8 billion Tata grossed from financial services, and it plans to tack on customization and integration services as part of the software sale. Unlike its services business, though, the software unit isn't built around cost arbitrage. "Our products aren't sharply discounted, and they don't need to be," boasts Donnelley. Tata's financial software will be sold under the brand name TCS Bancs.

HARDER TO COME BY
Those aren't the only reasons Tata is pushing into the software market. India's financial IT services companies are trying to recast their intellectual property in ways that don't require the constant hiring of talent that's harder to get than ever. "Growing by adding more people is a fabulous business model when you have a huge labor cost advantage, but that cost advantage is dropping," says Bart Narter, an analyst with financial services research firm Celent. Instead, Indian services companies are looking to leverage the knowledge and experience of their employees by "encapsulating that into software, and then selling it over and over without the added labor costs," he says. Tata isn't the first: Infosys sells software called Finacle, considered by Gartner to be the leader in the international retail core banking segment. Its closest competitor is Flexcube, made by India-based I-flex Solutions, in which Oracle acquired a majority stake for $909 million in 2005.

Meanwhile, banks continue their march to India and other regions in an effort to cut costs. In April, Barclays said it would ship 10,800 jobs to India and other countries.

But some banks seem to be losing interest in running those operations themselves. Several India-based media outlets reported last week that Citigroup is shopping a stake in its business-processing unit in India to IBM and other services companies; both Citigroup and IBM declined comment. Narter predicts more banks will look to services providers to take over part or all of their India-based operations, which are called "captives." Familiarity and experience have made banks less concerned about handing over intellectual property and data security to outside firms, and they're at a distinct disadvantage in the talent war. "People would rather work for a company like Tata, where they have the chance to be a top dog, than for the outpost of some U.S. company," Narter says.

It's a concern also heard by Aftab Ullah, who heads Capgemini's financial services business in India. Salary increases in India this year are upward of 15%, and captives often have to pay a premium on top of that. Even then, captives' attrition rates are running at about 25%. "That's highly unsustainable," he says. Capgemini has built a financial services consulting unit around its February acquisition of Indian firm Kanbay International. Out of Capgemini's 15,000 financial services employees globally, 6,000 are in India. Ullah looks to increase that to 9,500 by year's end and to 18,000 by the end of next year.

Given India's talent market, it might be a costly strategy.