Advertisment

A Quiver Full of Arrows

author-image
DQI Bureau
New Update

The stage is set for second-generation outsourcing deals. This time, deals

are smaller in size, users prefer best-of-breed solutions than end-to-end

solution providers, and what's more, new players have come to the negotiating

table. The $2.2 bn ABN Amro outsourcing deal handed to multiple vendors-including

Indian players TCS, Infosys, and Patni-typifies this trend. The arrival of

Indian players is perhaps the most significant outcome in the second-generation

outsourcing deals.

Advertisment

If user maturity is demonstrated in the way deals are being structured,

vendor strategies have not remained static. Outsourcing has become a global

affair as American and European vendors ramp their offshore strategy, namely

India, and Indian vendors, who pioneered the offshore model, now focus on

building new competencies to take them to the next level of growth.

At the same time, Indian vendors have been successfully pulling down the

psychological barriers that separated them from big players. They have won

sufficient customer confidence to be invited as primary vendors. These factors

have marked an inflection point in the strategic road map of Indian players.

Now the challenge for Indian players is to maintain that momentum of growth.

They need differentiated strategies that would not only win them big-ticket

deals, but also maintain their competitive edge. In this backdrop, it is

interesting to examine the strategies of two Indian vendors, namely Infosys and

TCS, as they prepare for their next phase of growth.

Advertisment

Nandan

Nilekani
CEO, president and MD, Infosys Technologies

Infosys'

High-Value Bet

  • Infosys

    Consulting can provide consultancy services at 35% lower cost

    than traditional consultants

  • It

    is headed by Stephen Pratt, the former global leader of CRM

    practice at Deloitte Consulting

  • Other

    high profile hires include Romil Bahl, the former VP of

    consulting services, EDS; Raj Joshi, the former CEO of Deloitte

    Consulting Offshore Technology Group; Paul Cole, the former head

    of global operations of Capgemini-Ernst & Young's CRM

    practice

  • Its

    current headcount stands at 20 and expects to grow to 500

    consultants by



    Q1 of 2007

Wipro, another front-running Indian outsourcing vendor, is at the moment busy

grappling with the sudden exit of several top management members, notably Vivek

Paul, vice chairman and CEO; Raman Roy, chairman and MD, Wipro BPO; and Richard

Garnik, CEO, Wipro America, in the last couple of months. Wipro is traditionally

a technology focused company with a large part of its revenue coming from its

telecom R&D business, with much longer sales cycle. Also, the revenue

realization is more stable but slower.

DNAs Reflect Contrasting Strategies



Two of India's most visible names in the global outsourcing industry,

Infosys and TCS have fired the investor community's imagination with their

unique growth stories and inherent strengths. Both are destiny's children

leveraging on global opportunities in a flat world, upstarts that have changed

ground realities, catching incumbents napping. Now as they aspire to break into

the charmed circle of top-league players, both are forced to redefine their

strategies.

Advertisment

Though their growth stories are similar, their DNAs are very different, and

this is reflected in their growth strategies. Infosys is a typical new age

company started by entrepreneurs when the country's economy was unshakled. It

rose meteorically, riding the power of the Internet and leveraging India's

powerhouse of software engineers. It is used to the fast-paced growth of the new

economy, and its vision reflects that. Its bet on consulting services and BPO,

both very high growth areas, will help the company maintain its momentum.

TCS on the other hand has bet on its ability to leverage its global

service-delivery (GSD) model, perhaps a more robust system, but which takes time

to build up. It is part of India's oldest industrial house, the Tata Group,

which has a huge empire spanning steel, automobiles, and heavy industries. The

Group has a legacy of working closely with global corporations around the world.

TCS, which started off as a solutions provider, has a long history of working

with customers at onsite locations. As its focus moved to software services, the

company proved adept at building its onsite presence. And it is this strategic

advantage that TCS seeks to leverage in its next phase of growth.

TCS: Flexing GSD Muscle



Whether it was legacy or a deliberate strategy, TCS' huge onsite presence

is paying dividends, winning deals in the US and Europe. Its revenue model was

always skewed towards onsite revenue. During FY 05, TCS had 61% onsite revenue,

while Infosys' onsite revenue stood at 51%. In fact, in FY '02 its onsite

revenue was as high as 71%, which it has steadily brought down to 66% and 64%

over FY '03 and FY '04 respectively.

Advertisment

Its higher onsite revenues may not be great for its bottomline but TCS has

cleverly positioned it as an asset in an industry where distributed delivery

commands a premium.

S

Ramadorai,
CEO,

TCS

The

Global Arsenal of TCS

  • TCS

    is present in 47 countries. It has 33 global-delivery centers,

    18 of which are outside India

  • It

    has 47,000 people, with 35,000 in India and the rest outside

  • In

    the US alone, it has close to 10,000 employees

  • Its

    presence in the US includes a technology center in California, a

    performance optimization facility in Minneapolis, an automotive

    center of excellence in Detroit, an RFID center in Chicago, and

    a training center in Buffalo, New York

For instance, in the US, TCS had been able to flex its global delivery muscle

to win a deal with the state of Indiana to upgrade the systems processing its

unemployment claims. TCS outbid its nearest rival Deloitte Consulting, and

Accenture by nearly $8 mn to win the deal at $15.2 mn.

Advertisment

TCS' growing strength has not gone unnoticed. Analysts are upbeat about its

global delivery capabilities. Michael Gilbault, an analyst who tracks TCS with

Boston-based Technology Business Research, says, "TCS's long-term

presence in developed markets, its professional image, and low-cost delivery

structure is highly competitive. As the US-centric IT firms rapidly grow their

offshore delivery capabilities, TCS' cost advantage will grow in

importance."

Indeed, as the GSD structures of major companies begin to resemble each

other, the offshoring argument will lose its edge, and cost and capabilities

become key in winning contracts. TCS has mastered delivery and execution

capabilities, a fact that is increasingly getting acknowledged. A recent Morgan

Stanley survey on offshoring amongst CIOs ranks TCS as the number one on

execution among offshore IT services companies.

Explaining its pitch for a global delivery network, N Chandrasekaran,

executive VP and head of global operations, TCS says, "We work for many

multinational clients present across geographies, and want a system integrator

to provide seamless service across the board. Second, some customers have very

regional character like those in Latin America: a Banco Penta, Telefonica,

Telemax, or Brazil Telecom-whom we cannot serve unless we have local

presence."

Advertisment

Over the last two years, TCS has been hiring local people and training them.

But the number has to go up significantly higher for optimum utilization levels.

In fact, its global delivery capability was a key factor in winning the ABN

Amro deal. Why else would a company hand over such a large application

development maintenance contract to a vendor which does not have operations in

those places, as everything cannot be offshored. This deal will see more than

500 TCS consultants work from its GSD centers in Brazil and Hungary to service

ABN Amro's operations in Brazil and the Netherlands, in addition to the

offshore support by consultants in India. TCS has also announced plans to ramp

up presence in Brazil. The Latin American portion of this deal is estimated to

generate revenues of more than $100 mn.

Infosys: Marrying GSD With Consulting



In reality, GSD is a strategic capability that all vendors have to build up.

It may be a different matter that Infosys does not want to play that card just

now, but it has always been leveraging on this model.

Advertisment

Infosys has two types of development centers: proximity development

centers and offshore software development centers. Proximity centers are located

regionally for projects that require close proximity to clients. It has nine

such centers, six of them in the US, and one each in Melbourne, London, and

Tokyo. It has 17 offshore development centers, 16 of them in India, and one in

Toronto.

In a typical offshore development project, Infosys assigns a team to visit a

client site and determine the scope and requirement of the project. Once the

initial specifications are over, the team returns to the global development

center to supervise a larger team. A small team remains on the client site to

co-ordinate the execution, and after implementation, a dedicated team ensures

the maintenance of the project.

Now, Infosys wants to leverage this model as a springboard for its consulting

services. It is a 1:1:3 formula, wherein for every single consulting specialists

on the job, the company would like to place at least one person onsite, and

another three offshore. The attempt is to create a potent force in the IT

industry by marrying consulting with its GSD.

The thrust of the vision is not merely the service offering, but the business

that will roll in from consulting. The Infosys board thinks its strategy will

generate enough downstream work to keep the organization on its high growth

path.

This will enable Infosys to provide consultancy services at 35% lower cost

than traditional consultants like Booz Allen Hamilton. Stephen Pratt, CEO,

Infosys Consulting, has already indicated that the company has beaten several

traditional consultancy majors to win some of its current engagements.

During FY '05 Infosys' revenue from consulting stood at $7.5 mn

contributing 3.6% of the total revenue in the first year of operations. Infosys

has done several high profile hires to lend credibility to the project. Pratt,

its CEO, was the global leader of CRM practice of Deloitte Consulting. It has

also hired Romil Bahl, the former VP of consulting services, EDS; Raj Joshi, the

former CEO of Deloitte Consulting Offshore Technology Group; and Paul Cole, the

former head of global operations of Capgemini-Ernst & Young's CRM

practice.

Guilbault of TBR who also tracks Infosys says, "The combined offering of

IT services and consultancy has helped Infosys move up the value chain by

increasing its involvement in high-level projects, associated with Sarbanes

Oxley compliance, the Anti-Money Laundering Act, and the Patriot Act."

With its consulting foray, Infosys has not only built brand differentiation,

but has effectively raised the barrier against Chinese IT services firms that

can offer rock-bottom prices.

Advantage TCS



One can't help addressing an inevitable question ragging everybody's

minds. So which model is going to win? The answer is, none of the players can

afford to ignore each other's capabilities. And honestly, they have been

building those capabilities quietly.

TCS has always been bundling its consulting services with IT, although it now

wants to position it as a separate offering. It has hired Per Bragee, former

managing partner and CEO, Ernst & Young's Management Consulting, Sweden,

to head its consulting business.

As Infosys is upbeat about building its global delivery capabilities, it has

recently announced setting up of development centers in China, and is ramping up

presence in East Europe.

Although, as things stand, TCS looks more favorably placed to bag the big

deals, because of its expanse of offering and sheer spread across geographies.

This single fact will put TCS far ahead of the pack.

While Infosys is known in the US because of the value it is creating in the

stock market, TCS has been able to do that by building its physical presence,

both workforce and assets.

Another fact that speaks loudly in favor of TCS is its higher onsite revenue,

a clear indication that it is doing a higher amount of package implementation,

wihch requires higher onsite presence. But it also commands greater margins, and

more understanding of the IT environment than ADM.

For the time being, Indian players will continue to outbid the US and

European IT services companies as they have mastered efficiencies in shifting

processes offshore, while most companies who have started the offshoring process

have a long way to go in the learning curve.

The dynamics of the globalized world have raised the curtains for Act II in

the outsourcing industry. The playing field is increasingly being leveled and no

longer will an American or European vendor get an undue advantage, simply

because they have been there and done that. The new age players will all be

wearing uniform outfits, and the differentiation will lie in execution, and

positioning of specific skill-sets, which will be key factors in swinging deals.

Balaka Baruah Aggarwal

Advertisment