The fundamentals of India’s $118 billion technology outsourcing industry rest on a few key pillars. Teams of engineers are cheaper here than in developed markets, for one.The time zone difference with the US, which meant teams here could work while coders in North America slept, making code development a round-the-clock operation, was deemed a major advantage. Other factors, such as fluency in English and a large pool of technical manpower, helped make the journey smoother.But the main ingredient in this cocktail of advantage was location. Teams based in India, earning an Indian wage, built this industry that now contributes an estimated 8% to India’s GDP annually.Its geographical centre of gravity, which has hovered above Bengaluru for more than four decades, however, is now beginning to erode, as business and geopolitical factors compel Indian IT companies to hire teams overseas.As the political sentiment around outsourcing has sharply deteriorated, especially in the US, the liberal visa norms that facilitated the flow of engineers from India to client sites in mature markets, has turned hostile. Multiple companies are facing lawsuits alleging discrimination in hiring practices, making the sector conscious of issues around diversity. And most importantly, as the nature of work shifts to newer paradigms such as social, mobile, analytics and cloud, many companies prefer vendors to work in proximity to their internal teams.In response, Indian IT, a prestige employer preferred by millions at home, is re-thinking hiring and manpower. While automation and robotics chip away at the low-end jobs the industry generates, it is also hiring thousands of people overseas, either to win contracts that require either domain skills in segments such as analytics and artificial intelligence or for conservative customers who demand local centres and local hires.The greenshoots of this trend have been visible across the IT landscape for a while now. But as anti-immigration and anti-outsourcing political rhetoric sharpens in the US and Europe, the shift, requisite investments and the pressure on margins owing to higher costs, have all got real, bigger and urgent.TCS, Infosys and their rivals are all queuing up to hire talent — engineers, mathematicians, data scientists and sales and marketers, among others — to meet the needs of this changed market. Around 20% of TCS hiring has been locally sourced in the past 12 months, a company spokesperson told ET Magazine.TCS has invested $100 million in the US and created some 17,000 jobs in that country between 2011 and 2017, vice-president Vish Iyer said in a December interview with ET. Infosys, India’s second largest software exporter, had on December 5, opened a large centre in Hartford, Connecticut, where it plans to hire some 1,000 people by 2022.This is the third centre in the US for the firm, which also has units in Indiana and North Carolina, with two more planned. Infosys has already hired some 7,000 people in the US and plans to hit 10,000 by next year. It will spend $20,000 training each one.Cognizant, which has a majority of its coders in low-cost locations, including India, had at the end of 2017, approximately 50,400 employees in North America (up from 47,500 in 2016), and approximately 13,800 in Europe (up from 11,500 in 2016). “In the US… we now have delivery facilities in over 20 states and multiple centres in Canada and Mexico, with plans to expand this network,” says James Lennox, the company’s chief people officer. Cognizant has hired 15,000 people in North America alone and continues to sustain its pace of recruitment there.Other outsourcers are expanding their overseas hiring, too. HCL Technologies says it has hired some 17,000 people in the US and around a third of them are local hires, reducing the dependence on shaky H-1B visas. In 2017, HCL Technologies applied for 640 visas and was granted 400. It is now focusing on local hires to make weight.“Localisation is something which is inevitable for the industry and our localisation percentage is anywhere between 65 and 70 in most places,” Apparao VV, company’s HR Head, told ET in August. This means 65-70% of their staff at overseas facilities are nationals of those countries. Wipro has over 14,000 people in the US and nearly 60% are local hires. In March, Wipro opened a 45,000 sq ft centre in Plano, Texas, staffed with 150 people, with plans to ramp up to 2,000 in a couple of years. This is in addition to facilities in Houston and Dallas, focused on digital technologies.“When we go and work in a particular state, we get access to the businesses around that place…. if you can get service a short car drive away, why will you give work to a provider who you will have to take a plane to go meet? That way it helps us get more business,” Wipro CEO Abidali Neemuchwala told ET earlier this year.Infosys did not comment due to a silent period ahead of results. TCS and Wipro said its senior executives were travelling and unavailable to comment now.A slew of lawsuits alleging discrimination in hiring practices has hit Indian IT companies in recent years, drawing political attention to the issue.On November 5, three former TCS employees, Christopher Slaight, Seyed Amir Masoudi and Nobel Mandili, filed a case in the US, claiming they had been discriminated against and eventually fired based on their ethnicity. TCS, the trio claimed in their suit, let go far fewer people of South Asian origin, compared with others. The charges were dismissed in court. Several other IT firms, including Infosys, Wipro, Cognizant, HCL Technologies and Tech Mahindra, face similar cases in American courts.Even as they battle individual charges legally, the cases bring greater political attention to how much local employment is generated by these companies that bill large sums to US- and Europe-headquartered companies and multinationals.As they expand their overseas footprint, Indian outsourcers will face unprecedented competition for talent, especially because their hiring is for more specialised capabilities. Wipro, for example, wants to make its Plano, Texas, centre a global hub for cyber security. Others are hiring in areas such as artificial intelligence, machine learning and data sciences. HR consultants and industry executives point out that TCS and its cohort are jostling with immediate rivals such as IBM and Accenture as well as broader technology players, startups and software product companies for this talent.“Service providers find themselves in competition with US firms of all kinds that are looking to fill their tech needs,” says Peter Bendor-Samuel, CEO, Everest Group, an outsourcing advisor.While technology behemoths can pay top dollar for the best talent, they also hire in smaller numbers. Indian companies may try to beat the resultant wage inflation by locating their centres away from major tech hubs, where competition and wages are at its peak, and hiring more extensively from campuses and training fresh hires, similar to how they work back home.“Whether you are Accenture or Capgemini, or an Indian-headquartered company, the labour arbitrage is no longer there based on region and geography,” says R Ray Wang, CEO of Constellation Research, a technology advisor. “In cases where digital skill sets are needed, customers are paying for faster access to talent, increased time to market and local delivery. The willingness to pay premium to complete a digital project makes a lot of this feasible.”The challenge of paying for these resources is the biggest stumbling block for these companies. According to estimates from the likes of Kris Laxmikanth, CEO of The Headhunters, a HR Consultancy in Bengaluru, someone with eight to ten years of experience can expect to earn around `80 lakh annually in the US, four or five times more than their peers here. In hot segments such as machine learning and data sciences, this skew can be even higher.“There is a shortage of, and significant competition for, professionals with advanced technological skills we and others require, especially in the area of digital technologies and services,” says Lennox of Cognizant. “We continue to invest in development of our people, are looking at ways of enhancing employee engagement, retaining them and creating compelling new opportunities.”The inevitable margin pressure is being felt. Infosys has already reduced its targeted margin to 22-24% for FY19 from 23-25% as it needs to pay higher wages onshore. Despite this, the company — and its peers — are aiming for the best of both worlds. They want to hire talent locally in these high-cost locations, but also push more work to offshore locations, led by India.“Our focus on optimising on onsite employee cost including sharper focus on productivity, onsite pyramid and others, localisation and cost optimisation measures led to a decrease in the onsite employee cost,” Infosys’ former finance chief MD Ranganath said on a call after announcing the firm’s annual results in April 2018. “Our efforts… resulted in onsite mix decreasing to 29.3% this year. In Q4, this further reduced to 28.7%, which is the lowest level in 12 quarters.” Wipro, Tech Mahindra and HCL Technologies have also faced margin pressure over the last few years as they ramp up their investments in onsite resources.HCL Technologies, which overtook Wipro to become the No. 3 player, has seen margins fall from as high as over 24% four years ago to under 20% at the end of the last fiscal. Analysts tracking the space said companies would face strong headwinds as they seek to ramp up this type of hiring. “Indian firms are faced with growing labour cost and a shortage of qualified workers for their US and EU operations,” says Bendor-Samuel of Everest. “This is increasingly eroding margins and offsetting the gains they would have otherwise enjoyed from rupee depreciation.”Outsourcers are doubling down this path nevertheless, knowing this is a beast they will need to tame sooner than later.