Fifty years from now, when business historians attempt to trace the historical evolution of Indian technology companies, April 2004 is bound to merit a separate chapter. Within the space of a week, two of the country’s premier IT players, first Infosys and then Wipro broke through the billion-dollar glass ceiling. Another giant, TCS, had already breasted the tape nearly a year ago in July 2003. An interesting footnote in the compilation would be Bharti Televentures, the first pure-play telecom player from the private sector, which has joined the elusive billion-dollar club in the course of this very month. And this calls for a party!
Infosys Technologies, was the first to get across the billion-dollar threshold with revenues of $1.06 billion for the year 2003-04, up from $754 million in the previous year. Wipro joined the hallowed club soon. It announced that the company’s revenues from its IT service businesses, including India & Asia Pacific stood at $1.33 billion, an increase of 36% year-on-year, for the year March 31, 2004.
While it is certainly time for euphoria, for reaching the $1 billion mark is no mean achievement, we take a contrarian view of things. Without spoiling the party, we will look at the implications of the billion-dollar revenue on the trajectory these companies will have to evolve (and the troika is working on that) to try and bag multi-million, multi-year contracts. This begs the all-important question: how soon will the current billion-dollar triumvirate and the aspiring quartet match the global leaders amongst outsourcing service providers—the Indian players are still small fry, and light years behind. How can they catch up?
Being There, Doing That
That’s because very few Indian players, unlike an IBM Global Services (IGS) or EDS, are yet to become global companies and that includes even the newly crowned billionaire troika, which is the closest Indian companies have come to becoming world players. In fact, not many Indian companies understand that becoming a global company involves changing their mindset, culture and positioning, all of which have been acquired over the years. "Most Indian IT companies feel that having physical operations located across the globe makes you a global company. But that is not at all true, you cannot become a global company overnight, or over a month or even in one year," asserts George Forrester Colony, CEO, Forrester Research.
There can be no better example of a global company than IGS’s application management services (AMS) business unit. This division only had 35,000 employees across more than 30 countries in 2003. Of these 90% were IBM employees, while the remaining 10% were partners and preferred subcontractors fully trained in Big Blue’s service methodologies. Compare this with the profiles for the whole of TCS, Infosys and Wipro during the same period: the numbers would be 24,000, 21,000, and 16,000 respectively, and none spread beyond 10 countries at the most. The numbers would be smaller still for the billion-dollar aspirants. Apart from reinforcing the idea that Indian service providers still have a long way to go before emerging as global companies, the manpower comparison also throws light on the productivity measurement, as well as the huge increases in scale even the billion-dollar entities have to make to achieve global company status. (See Table How Productive are our Billionaires?)
While not much is likely to change on the productivity front soon, the billionaire companies have adopted the global delivery model, with the aspirants following suit: Infosys is reportedly aiming at having a minimum of 25% foreigners at overseas offices by 2012. Typically such model involves conforming optimally to all its three components—offshore, onsite and, now most importantly, nearshore. While all the billion-dollar companies and the aspirants have always excelled in offshore, the onus is now on onsite and nearshore, primarily with regard to establishing development centers and full-fledged business development offices in multiple locations, staffing them with local professionals in the client interfacing teams. Predicts Rita Terdiman, vice president and director, Offshore sourcing, Gartner: "The future for Indian IT service providers is to consider cooptation with the emerging nearshore destinations to garner a large share of the global opportunity."
That’s precisely why today TCS has delivery centers in eight countries across five continents, Wipro in seven countries across four continents. (See Table Spreading their Wings to know about the locations of the two development centers.) Contrast this with two sets of figures: IBM and EDS now have Offshore Development Centers (ODCs) in over 30 countries across all continents, which ensure nearshore utilization. No wonder then that the Indian billionaires are lagging well behind the global leaders.
Sudip Banerjee, president, Enterprise Solutions, Wipro, illustrates the importance of local delivery centers in multiple geographies. "A typical example is Japan which incidentally contributes nearly 20% to the global outsourcing pie. While global leaders like IBM or EDS always had local delivery centers there, Wipro was the first Indian company to set up one in Yokohama to tap this large market," he says. Both TCS and Infosys and even Satyam or Patni have now followed suit, though all are yet to leverage their full potential. Therefore, the first lesson for all aspiring global companies is to follow a suitable global delivery model by establishing strong local presence in multiple geographies. Apart from being a recipe for growth, it could also turn out to be the perfect de-risking strategy in times of crises like the US downturn.
Enlarging the Matrix
Forrester highlights the importance of vertical focus or domain specialization in pitching for large outsourcing projects. This vertical expertise must then be tied with developing skill-sets in different technology horizontals. The most crucial gradient in this matrix is the vertical domain expertise. A recent IDC study corroborates this theory-the IBM, EDS or CSC focus on verticals has helped them build differentiations in their business models.
Once the matrix is complete or almost so, companies should strive to complement it with a whole mix of different service lines for delivery. These would include, among others, packaged implementation, application development, remote infrastructure management, data center outsourcing, BPO, business intelligence, portfolio analysis and now, high-end consulting. One instance of a successful mix can be seen in the package Wipro offers utilities major National Grid Transco, incidentally one of Wipro’s largest clients. It services Transco in different ways— offering infrastructure management and SAP implementation as well as application development and maintenance. The service lines range from packaged implementation to application development to back-office processing, and even Six Sigma consulting. Vertical focus can also be successfully married to the global delivery model—witness once again Wipro’s strong focus on both mobile manufacturers, mostly Scandinavian, as well as on the embedded products development market, establishing an ODC in Sweden to cater to mobile device makers as well as one in Yokohama, Japan to cater mostly to the electronics majors.
But developing this expertise in every cell of the matrix is easier said than done, especially for the Indian companies. For one, each of the service providers would have to substantially increase their domain expertise in the maximum number of verticals possible. While horizontal growth or even building new service lines might not be that difficult, acquiring domain expertise is a real challenge. This, Isola explains, is because companies either have to train managers in business domains or laterally hire practice leaders, and both call for substantial investments. In case of IGS/EDS, an entry-level domain expert in US would cost nearly $250,000 and the ratio is typically one expert for every 50-100 developers.
Roadmap for Growth
Gaining vertical expertise or for that matter adding new service lines can be done organically, but global leaders have preferred the inorganic route. Indian billion-dollar entities are no exceptions. "Acquisitions are made? for different reasons—to gain either domain expertise or to acquire a new service delivery method or even to gain foothold in new geography," explains Forrester. Some acquisitions achieve all three in one fell swoop. Wipro’s track record in the last two years has been pretty impressive in this respect. Its acquisition of the energy businesses of AMS and Nervewire brought it tremendous domain knowledge in terms of the utilities practice.
Explains Banerjee, "Utilities is the largest deregulated sector in US and Europe and to service this domain, we needed to understand the nuances of the business." Another recent example is Infosys’ acquisition of Expert Information Services in Australia.
Besides domain expertise, another essential prerequisite for any globally aspiring service provider is to develop long-term client relations. This is achieved once a service provider is able to offer a client an entire gamut of services top-down, from consulting to more mundane activities like application development, maintenance and support work. Globally, an IGS acquires a PricewaterhouseCoopers or an EDS buys out AT Kearney precisely for this reason. Their Indian billion-dollar counterparts like Infosys hire over 100 consultants from Accenture and KPMG at one go, while Wipro bags AMS and Nervewire.
Typically, this has been one of the crucial differentiators that separate the men from the boys amongst outsourcing service providers. The billion-dollar entities have now realized the importance of long-term client relationships that yield continuous streams of revenues. The aspirants, Forrester advises, should desist from technology-based selling like Y2K that leads to only short-term projects. Selling purely technical skills means the vendors are paid on time and material, and clients keep driving down the prices. While the supplier can become more efficient by squeezing his costs, there is a limit to that as the resources are humans and not machines—not the ideal strategy for long-term revenue flows.
This brings us to another crucial point about the ideal mix of the type of projects a service provider should follow. According to Banerjee, all the Indian biggies today have both fixed-price, time- and material-reward projects as well as risk reward projects in their portfolios. But more important, according to Diana Farell, Director, McKinsey Global Institute, is that they have the flexibility to optimize their usage of all of these types of projects. For example, in case of risk reward model, Indian companies too should insist on having a bonus component in its SLA in case of delivery before time, and at the same time be prepared to face a penalty clause for crossing the deadline.
The Indian triumvirate has also copied the typical composition of the sales force of, for instance, an IBM/EDS, and the aspirants would do well to emulate the example. Ideally, the force has four components. First is the pre-sales team with horizontal expertise, which can therefore approach clients from every industry. Next is the actual sales team, which, however, should be by and large vertically aligned, since for them it is more important to understand the business requirements of the clients. The third component would be the consultants involved in both selling and execution, and lastly, there should also be a team engaged only in client relationships which can offer long-term business consultancy so that the service provider becomes a business partner for the clients.
Rajneesh De in Mumbai