A Quiver Full of Arrows

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.

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.

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.

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.

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.

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.

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."

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.

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