India's IT services companies have had a golden run. Over the past decade, the industry has achieved average annual growth of 40 percent as businesses from banks to manufacturers in Europe and North America have shifted routine back-office tasks and IT functions to India's talented, low-cost workers. The country's top three IT services companies—Infosys Technologies, Tata Consultancy Services (TCS), and Wipro Technologies—have evolved rapidly into established players, each with annual revenues ranging from $1.4 billion to $1.6 billion.

That rate of growth could falter, however, unless India's IT companies fend off rising competition by expanding beyond the country's borders to build truly global businesses. As wages in India rise and its supply of skilled workers tightens, its advantages relative to Central Europe, China, and specialized locations such as Brazil and the Philippines could erode. Corporate customers will increasingly demand that Indian companies move beyond supplying a pool of low-cost labor and embrace a business model that incorporates more complex technology and greater industry expertise. Indian IT companies must seize the moment if they hope to establish global operations and become players in China, Europe, Japan, and North America.

India's offshoring industry faces major new challenges in several areas. First, growth in demand may slow down. Corporations increasingly realize that changing business processes to accommodate a large offshore workforce is a difficult, time-consuming task and one that often produces lower savings than expected. Employees must document procedures and establish performance benchmarks before functions can be sent offshore. It can take 12 to 24 months before the performance of offshore employees stabilizes and the volume of work ramps up, which slows the payoff. In the wake of several well-publicized breaches, concerns about service quality and security are making some companies think twice before moving functions offshore.

Moreover, as union and political opposition to offshoring grows, companies in Europe and North America are becoming more wary of sending thousands of jobs to India. Job losses from offshoring became a major issue during recent referendums on the European constitution, as well as in the 2004 US presidential campaign. In the United States, "Don't get Bangalored" has become a rallying cry for opponents of the practice.

Indian companies themselves are confronting a looming shortage of skilled workers. With competition for offshoring contracts intensifying as countries from around the world enter the market, India is under pressure to improve both its workforce and its infrastructure (see "Ensuring India's offshoring future"). The country lacks large numbers of workers who are fluent in French, German, Japanese, and Spanish, for instance, so that Central and Eastern Europe and China are more attractive offshoring destinations for European and Japanese companies, respectively. Furthermore, China, Hungary, and Russia are better labor sources for certain specialized skills, such as aerospace engineering and materials science.

Industry competition is also heating up. Major global IT services companies such as Accenture, HP, and IBM are expanding their presence in India through acquisitions and accelerated hiring. With well over 10,000 employees there, these companies can offer their customers very competitive rates to develop and maintain software applications on a large scale; they can also complement their sophisticated, well-established operations in North America and Europe with an inexpensive global workforce to handle low-cost products and services. Finally, as offshoring matures and becomes an integral element of the way businesses operate, corporations such as Cisco Systems, Citigroup, HSBC, Oracle, Prudential, and Verizon are setting up their own centers in India to perform tasks that in the past would have gone to local companies there.

To manage a global presence, Indian companies will need leaders who are effective across boundaries

Top-tier Indian companies must upgrade their capabilities if they hope to become global players. Their primary challenge will be to expand beyond India's borders by building worldwide networks capable of providing advanced services—both in distant, low-cost locations and in the customer's home country. Such global reach will, for instance, enable clients to transfer operations to the appropriate offshore location quickly and smoothly—a crucial factor for success. The top Indian companies already have locations in China and are extending their reach elsewhere; TCS, for example, has established additional toeholds in Brazil, Canada, Hungary, Japan, South Africa, the United Kingdom, the United States, and Uruguay.

Expanding into such countries will force companies to adapt the recruiting and training skills they have developed successfully in India. Even so, it may take companies several years to build their presence and brands in order to attract a sufficient number of top engineers in Central Europe and China. To manage this global presence, these organizations will also need leaders who are effective across organizational and national boundaries. As things stand, however, most top Indian IT executives have limited international experience outside North America.

Meanwhile, companies are beginning to understand how locals can provide the insider status needed to cement close client relations in many countries. Several Indian companies have already made small cross-border acquisitions to gain such leadership talent and local industry expertise, but they will probably need one or two major purchases to vault into the global big leagues.

Indian companies can no longer simply provide large armies of inexpensive offshore workers and good project-management skills; they need to develop sophisticated service offerings as well. In IT, for instance, they could manage communications networks from their operating centers in India or China or develop the ability to undertake large-scale migrations of desktop software from offshore locations. For back-office operations, they could build Web-based platforms to handle revenue management for companies such as airlines. These offerings would allow IT companies to move from charging for their services by the hour (as most of them do today) to fixed fees and transactional pricing, thus accelerating their revenue growth.

To deliver such sophisticated offerings, Indian businesses will need to forge partnerships with major technology corporations, such as IBM, Microsoft, Oracle, SAP, and other leading software companies. They should also pursue relationships with other, smaller, software companies that target specific industries or technology segments—Retek in retailing, for instance, or RSA Security in security management. This approach will require companies jointly to develop products and services, train salespeople to cross-sell them, and coordinate the marketing campaigns.

Companies that succeed at both improving their service offerings and building global networks will also have to implement new management processes to cope with the added complexity. Today, most companies are organized along functional lines, with separate units for sales, the delivery of services, and marketing. In the future, organizations will need structures and matrixes with greater flexibility to coordinate an array of overlapping entities, from large global accounts, industry business units, and cross-industry technology units to offices in individual countries and border-straddling functional areas such as quality assurance, training, and marketing.

Indian IT companies must also increase their efforts to lobby the government—individually or through their industry organization, the National Association of Software and Service Companies (Nasscom). In particular, companies need to work with local governments to improve education, highways, airports, power plants, and other elements of the infrastructure. State politicians in India, fearful of voter reprisals in large rural constituencies, often back away from committing money to upgrade urban areas, but companies should encourage local officials to follow through on the federal government's push to increase investments in infrastructure. That approach has been successful in states such as Andhra Pradesh and West Bengal.

The toughest challenge may be reducing the potential political backlash in countries that are losing jobs to offshoring. Although Indian companies can do little to influence domestic policy in Europe and the United States, they can lobby their own government to promote a level playing field between India and the rest of the world. For instance, India needs to open its financial-services and retail markets and infrastructure projects more fully to foreign investors. Companies there should also push for stronger laws and increased enforcement of existing regulations to protect intellectual property and to improve data security. Measures such as these can't prevent outside criticism, but they can deflate some of the arguments opponents use to push for limits on offshoring.

All of these elements add up to a hefty to-do list, but for companies aspiring to be global champions that goes with the territory.