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...