Beyond The Us

A majority of Indian IT exports, 61%, ends up in the United States market,

though Europe and the Asia-Pacific region offer a bigger opportunity–a market

worth over $200 bn, lakhs of potential jobs, and fewer players. Here’s how

Indian companies targeting new geographies can achieve the best business, legal

and cultural fit

It’s a whole world out there. And it’s largely unexplored. Traditionally,

nearly 65-70% of Indian IT services exports have been to the United States. That’s

a lot of eggs in one basket and its fallout was most keenly felt as that basket

rocked in the last two years of the downturn–Indian services exports rocked

with it in tandem, almost quarter by quarter.

Most companies have become acutely aware of this. The larger exporters have

been buffeted, the smaller companies even more so, as they are not only

dependent on one key geography but on one or two key customers in that

geography.

In the last two years, therefore, most companies have said they hoped to

change their US-to-rest-of-the-world export ratio. Though overall exports to the

US have fallen some in this period, not all companies have managed to make that

shift. Apart from the natural barriers in addressing non-English-speaking

geographies in particular, further discouragement came when the downturn hit

European shores.

There are, however, other geographies well worth exploring–both

English-speaking ones like Australia and Canada, and a host of

non-English-speaking ones. And the downturn is probably a good time to begin.

Very briefly, here’s why–while the United States is the largest IT

services market in the world and will remain so for quite some time, the others

are also huge and can only be ignored at one’s own peril. For instance:

• Japan is the second-largest IT
  
  market in the world at $108 billion. Its total outsourcing market is
  
  estimated at $53.2 billion. Of the software services component, Indian
  
  companies have less than 0.5% of the marketshare.

• Language alone hasn’t been the
  
  key barrier. Even in English-speaking countries like Canada (the only big
  
  customer here is Nortel), Australia, the Netherlands and Sweden, Indian
  
  exporters have less than 1% of the marketshare.

• Together, Canada, Japan, France,
  
  Germany and Italy account for 27% of the global IT spend (Nasscom figures).
  
  Add China, Scandinavian countries and countries in the Asia-pacific region.
  
  Together, they account for a good one-third of the world’s IT services
  
  market.

• During the downturn, this
  
  potential market is more willing to outsource than ever before. There are
  
  pockets of resistance–some driven by growing unemployment in host
  
  countries, and some by an inability to make the mental shift to offshoring.
  
  But if ever offshoring has gained legitimacy and immediacy, it is now. And
  
  if ever there’s been a time to get a foot in the door in a new geography,
  
  today is it.

Go/No go



Which geography a company chooses to explore will depend on each company’s

specific strengths. Entry strategies will, therefore, vary with each company,

geography, vertical and even with the kind of services offering.

"Getting down on the table is the first step. And the toughest

bit," says Srinjay Sengupta, AVP and regional manger of Europe for Infosys

Technologies. He should know... he learnt it the hard way. Six years ago, when

the company decided to first enter Europe, it sent Sengupta to London. Just like

that. His brief was as vague as "go find prospects in London".

So London he went, and explored all avenues he could think of pretty much

indiscriminately. He hit the phones; spoke to commission agents, PR agents and

local SIs; if a prospect seemed possible and also had a presence in India, he

got his top management to speak to the Indian counterparts, who then spoke to

the L ondon counterparts. And he used whatever local India connections he

could find. It wasn’t easy.

Today, of course, that approach has changed. The company still does all the

same things but in a more discriminate and deliberate manner. The first step now

is a pre-entry study of the market, which includes the state of its economy, the

size of its outsourcing market, the propensity to offshore and local political

conditions. "We no longer enter a market before studying it first,"

says Sengupta. Post the study, the company takes what is called a "Go/No

Go" decision that depends on the country’s profile and the company’s

own ability to service that profile. If the management decides on

"Go", three to six months are spent in working out a country strategy.

And then comes the first step in.

Foot in the door



The introduction–and often, that’s the key and must be tailored to each

country’s business and social cultures. If the first contract is built on an

Indian connection back home with the customer, things might be relatively

easier. If not, and the geography is virgin territory to the company, then it

often has to be as elaborately planned out.

Here’s why. There are key entry points to every geography. "In the US,

you know analysts carry weight. You know that your potential customer will first

check you out with his analysts. So you go to them first. Pitch the company,

sell it to them, get referrals and half your entry work is done," says

Sengupta. According to Vivek Paul, CEO, Wipro Technologies, "A listing on

Nasdaq or the NYSE also really helps if a company can afford it. The progress of

your company comes straight on your prospect’s desktop. Recall value,

therefore, is very high and he can follow your progress and your figures."

But that doesn’t really work in Europe, where enterprises don’t put such

a high premium on analyst briefings. Also, they don’t really appreciate the

bull in the china shop approach, finding it too "Americanized and

distasteful". When i-Flex Solutions went to Europe with its banking product

Flexcube, it found that participating in and organizing industry events was a

good starting point. Says i-Flex CEO (international operations and technology) R

Ravishankar, "You have to find the banking circles–take part in their

events and eventually organize some of your own. They will remember you better

that way."

Sengupta agrees. "In continental Europe, you don’t just barge in, give

a presentation and ask–so do you want to do business with us? That’s the

American way. Europeans don’t like it. Subtlety and the down-played approach

is key." So when Infosys decided to go to the continent, it announced its

presence with a survey instead. It tied up with Germany’s leading daily and a

local market research agency–the equivalent of IMRB in India–for a survey on

CIOs’ willingness to outsource. The company’s name was all over the

newspaper... the CIOs remembered that.

On the other hand, in Japan, neither approach works. Language is a big issue

and the Japanese enterprise segment is extremely brand-conscious. When Mascot

Systems entered Japan in 1997 for the first time, it started out with seven

people. Nothing moved for a very long time. They couldn’t find too many local

Japanese people to join them or find new prospects. Devdas Parakkal has been

associated with the Japanese market for 12 years and was with TCS before he came

to Mascot. He’s also fluent in Japanese. Now heading Mascot’s Japanese

operations, Parakkal says, "The best entry strategy we found was to go to

international MNCs or their branches located in Japan. They’re

English-speaking and usually would have had some experience with outsourcing.

They can make local decisions on outsourcing, but not big ones. So what you get

are small-ticket orders which are, however, very prestigious. That’s the foot

in the door because you can then use those names to approach local

companies." Equally important, says Shreedhara Shetty, Wipro’s head in

Japan, "is to pay attention to detail. Japanese companies are obsessed with

detail. If you’re planning to do business there or set up a center, do your

homework. Go with a clearly defined IP and value proposition."

Setting up shop in none of these geographies is difficult. And perhaps the

easiest to do so in is Singap-ore. Most start out in Singapore with a one-man

Rep Office (representative office) and take their time before expanding their

base. But you can’t run an RO for more than 2-3 years and in any case, it is a

very restricted role. Reps can undertake promotional and liaison activities on

behalf of the parent company, but they cannot engage in "business

activities". A Singapore RO, for instance, cannot close a deal–so all

papers have to come from the Indian office on an Indian letterhead and have to

be signed off from here. Setting up a subsidiary or a branch office has some

catches. Says Shyam Kodavarthi, GM for business development at Sasken’s

semiconductor business unit, "Each subsidiary has to have two directors,

one of who has to be a natural citizen of Singapore. But compared to the rest of

Apac, where a local partner is a must, setting up shop in Singapore is very

easy."

Most importantly, says Kodavarthi, who’s had experience with setting up

base in Singapore with his earlier employer, "Make it a point to find out

about the local rules and follow them to the dot. To-the-dot." Several

years ago, the offices of a large software exporter in Singapore were raided

because the company was working out of a residential area. Breaking the rules–any

rule–in Singapore, can be very expensive.

That first deal



No new geography is easy to break into. "And if the company’s top

management doesn’t have the patience, there’s little point in trying,"

says Sengupta. The move from the introduction to the first deal can happen

quickly–if you’re lucky. Mostly though, it can take a really long while.

"In Japan," says Shetty, "patience is the key. Building

relationships is extremely important. People will sign a deal with you not

simply because you have a good proposition, but only if, in addition to that,

they are comfortable with you."

So there are some do’s and don’ts of working that first deal. "In

Japan, always carry a business card," says Mascot’s Parakkal. "It’s

difficult to do business without that. Also, keep their cards in front of you

throughout the meeting." Second, learn some basic etiquette on meetings.

For instance, you need to know the exact hierarchy before you go to a meeting.

The senior-most person has to be given that business card first. In all of Apac,

Japan included, that’s also to be done with both hands. One-handed exchange is

rude. Ruder still–taking that business card out of your back pocket wallet.

"People can walk out on you for that," says Parakkal. In Singapore, an

additional must is a tie. "And if the senior-most person walks out of the

meeting for some reason, wind it up in five minutes," says Shetty.

"Else, it’s considered rude."

Just as Japanese businessmen obsess over details, in Germany, the key is

attention to specifics. "It’s important to take extensive notes in a

meeting, for one," says Sengupta. "The client needs to know you’re

paying attention to what he’s saying." Unlike the US, where relationships

can be very brusque, the key in Europe," says Sengupta, "is

networking. Don’t push that first deal too hard. Don’t sell a project or

your company too aggressively. Be prepared to spend time with the customer in

office, and out of it."

Digging the trenches



The first deal might come from pretty much anywhere. It may even be a

prestigious but small order. Digging the trenches, however, requires a greater

understanding of the market and a clear idea of which segment a company wants to

concentrate on. It is key to identify countries, verticals and companies with a

higher willingness to outsource and offshore. This is important for all

segments, but is imperative for the financial services sector... for multiple

reasons.

The banking and financial services sector is traditionally among the most

conservative verticals anywhere in the world. More importantly, things like

online banking are not only strategic but also critical to the sector’s core

business. The fundamentals of outsourcing so far have been based on one simple

axiom–outsource what is either strategic to you or critical to you. Do not

outsource what is both strategic and critical. By its very nature, banking

institutions have to flout that axiom when they outsource.

Which is why when i-Flex decided to target the US, it took a bit of a tangent–it

first went to London. From there, it moved to the continent. And only last year,

after 30% of all Flexcube installations had begun to come from Europe, did it

turn toward the US market. The icing on the cake–London is the financial hub

of Europe and a good gateway to the continent. The icing on that is that Germany

is vying to be the financial hub of Europe and its financial institutions are

opening their doors to outsourcers.

Positioning



Whichever country or vertical a company enters, a key issue is positioning.

There is, of course, a default positioning that all Indian services companies

have–"good but cheap". But it may not always work.

By and large, it will work where the difference in billing rates is high.

Through most of Western Europe, billing rates for local workers can be between

$120 and $150 an hour. In comparison, an Indian programmer based overseas is

billed at about $60 an hour. In addition, a large portion of the project happens

offshore in India at billing rates closer to $24. So yes, the cost proposition

is quite unbeatable. In Germany, for instance, an Indian services provider could

well do a job at less than 50% of the cost that a local vendor would quote.

But in countries where billing rate differences are not too high–Eastern

Europe, Japan and through most of Apac, West Asia and Africa–a cost-based

positioning can give you only a marginal advantage. A good example is Japan–the

second-largest IT services market in the world. Two good case studies here are

Wipro Technologies, which gets 6% of its export revenues from Japan, and Mascot

Systems, which has also cut itself a nice slice here.

Because of some key peculiarities of this market, the more successful Indian

companies here have positioned themselves on value. The peculiarities include an

especially significant problem with the local language; the sate of the Japanese

electronics industry, which is among the most advanced in the world; a slower

rate of IT adoption; and a comparatively lower difference in billing rates.

When Wipro decided to enter Japan, it took a very focussed approach–the

Japanese electronics market had a growing need for embedded software; Wipro had

the expertise. More importantly, embedded software is a horizontal where local

language capabilities are not key. The company has 120 people working in Japan

at various sites, of which even today, only 15 are local Japanese employees.

However, of the 700 people in India doing the offshore component of Japanese

projects, about a 100 are trained in the language.

Says Shetty, "Before you open a center, the important thing is to do

your homework and go with a clearly defined IP. And always try to have a support

base locally. Remote management is not acceptable." The positioning was IP.

The company carried that position when it targeted enterprises in Japan–65% of

its Japanese revenues come from here now.

Says Mascot’s Parakkal, "In the Japanese market, all software–OS,

databases, middleware and packages are largely from the US. They are in Japanese

but it will be, for instance, the Japanese version of Windows 2000. By the time

a new software is released in the US, and to the time the Japanese start using

it, there can be a gap of as much as 20 years. The result–a lot of Indian and

MNC IT services companies working in Japan use that as a differentiator."

So Mascot Systems’ value proposition to its Japanese clients–"...specially

to large customers interested in time to market, high technology solutions–a

lot of this software was done in India. We know this software–be it WebSphere

or eJV." Says Parakkal, "Indian programmers are early adopters of

technology. It’s a real value proposition."

Finally, write that fine print



You can never over-define a service level agreement. What’s surprising is

that a lot of small and medium IT companies don’t even bother to sign an SLA.

They usually proceed on a purchase order that sets out the broad scope of the

project. A couple of years ago, for instance, when a small Bangalore-based IT

services company decided to do a maintenance project for an existing MNC client,

it did a back-of-the-envelope calculation and assigned five people for onsite

maintenance. That’s it. No project definition. No timing definition. No

project scope. Quickly, it found that it was forced into committing more and

more resources to the client’s site as the maintenance issues just seemed to

grow endlessly. Till came a point when doing the project was no longer

financially feasible. Both parties subsequently ended the contract.

So an SLA is important–for both parties. And a great deal of care has to be

taken when committing to one, including on intermediate landmarks. "In

Germany," says Sengupta, "the client would not only want to know what

you’re going to do, but exactly how you’re going to do it. You have to take

him through the process step by step." "In the Japanese market,"

adds Shetty, "schedule is sacrosanct. If you’ve committed to a time, the

project must finish in time. A Japanese client may be willing to cut the scope

of a project somewhat, but will never compromise on delivery dates."

The most fundamental question, though–when is the time to explore? And when

is the time to consolidate on existing businesses? That’s a question most

companies will have to answer for themselves.

Sarita Rani, with TV MahalingaM,

in Bangalore Inputs from Shubendhu Parth in New Delhi

United Kingdom

Growth Verticals



l Financial and

Business Services sector: Largest sector contributing to about 20% of the

GDP. UK houses the third largest stock exchange in the world and is the leading

financial center of Europe. The financial services segment alone employs over a

million people and accounts for over 5% of the GDP. Is now leading Europe’s

moves towards outsourcing software to India. Stepping stone to the continent and

to the American market.

l Communications

Sector: Has one of the most liberalized telecom markets in the world.

Vodafone–the world’s largest cellular services company based out of here.

Market however suffers form over investment and falling prices. Has also been

hit the huge 3G license fees that operators had to pay up though the first 3G

network is expected to go live this December.

l Manufacturing:

Accounts for 20% of the national output, though growth rates are slowing down as

in the rest of the developed world. A substantial chunk of government policies

now aimed at pushing this sector including tax rebates and law reform.

SWOT



l Strengths:

The second largest IT market in Europe after Germany accounting for 20.3% of the

European pie. Very open to outsourcing and currently accounts for over 11% of

all Indian software export revenues.

l Weaknesses:

IT and Telecom market very significantly hit by the post Y2K slump, the dot-com

burst and the downturn. Hardware prices on the downslide, services market growth

down to half and telecom sector suffering from over-investment.

l Opportunities:

Ad hoc projects have hit a breaker but companies now looking more for

operational management and total outsourcing deals with low-cost centers like

India. Also, large government commitment to e-initiatives including the UK

e-government policy. Public sector IT spend increasing 2.5 times the rate of the

rest of the UK IT services market.

l Threats:

Growing local concern and trade union discomfort with outsourcing seen as a

threat to British jobs. Early signs of a visa clampdown. Could get worse of the

downturn lasts much longer.

Germany

Growth Verticals



l Manufacturing:

Largest IT consumer with 25% of all IT spend from manufacturing and engineering.

Accounts for largest number of companies and is largest employer. This includes

the German automotive industry–which is the world’s third largest producer

of automobiles.

l Financial

Services: Frankfurt vying to be the financial capital of Europe. Currently

houses more than 330 banks including the German Central Bank and the European

Central Bank. Also houses the fourth largest stock exchange in the world after

New York, Tokyo and London. Overall, Banks and Insurance companies account for

12% of German IT spend. Recent spate of consolidation in the industry makes it

more amenable to outsourcing.

SWOT



l Strengths:

Is the largest European market for information and communication technologies

accounting for about 23% marketshare in W. Europe; large IT skill shortage

estimated at 25% gap between demand and supply; cost driven push toward

outsourcing

l Weaknesses:

Very export dependent economy hit hard by the Asian market crises of 1998 and

the current downturn. Slowing GDP growth and double digit unemployment in the

erstwhile East Germany. Very regulated market especially in relation to labor

laws. Knowledge of local language very important.

l Opportunities:

A very healthy financial services sector more open to outsourcing than its

American counterpart. Manufacturing sector slowing but strong. Growing Ecom

market. Can provide access to other German speaking European markets like

Austria and Switzerland.

l Threats:

Downturn, slowing GDP and growing unemployment has led to a subdued but growing

resistance to outsourcing. Over investment in Telecom and the long delayed 3G

experiment has hit what was otherwise a robust sector.

France

Growth Verticals



l Financial

Services: The services sector accounts for 72% of the GDP. French stock

exchange seventh largest in the world. Leading French banks like Credit Agricole

and Banque Nationale de Paris (BNP) are headquartered in France. The French

insurance sector has consolidated its position as the fourth-largest in the

world, and the latest economic indicators are signalling a stronger Q3 and Q4.

l Manufacturing:

Construction and civil engineering contribute about 4% of the GDP. France is

the fourth largest producer and fifth largest exporter of pharmaceuticals. Is

also the third-largest exporter of cars in the world with groups like PSA and

Renault.

l Telecommunications:

The French Telecom market was valued at $55 bn in 2001, of which 83% was

telecom services–the rest telecom equipment. Market expected to grow to $ 72

bn by 2005. French giant Alcatel is the fourth-largest manufacturer of telecom

equipment and the world leader in transmission systems and submarine cable

networks.

SWOT

l Strengths:

France is the world’s fourth-largest economic power in terms of GDP,

accounting for 27% of the total Western European IT market. 37 of the Fortune

500 companies are based here. Firms like Airbus and France Telecom are

already offshoring from India.

l Weaknesses:

Telecom sector badly hit by the slowdown. Especially the telecom equipment

market. Labor laws and tax structure not weighed in favor of the IT industry.

Local language capability crucial.

l Opportunities:

Research in the ICT sector represents 25% of industrial research in the country.

Demand in network and telecom architecture, IS security management and embedded

software likely to increase. The French market for semiconductors and related

devices expected to growth by 50% between 2001 and 2006 to over $7.3 bn.

l Threats:

Geographically closer countries like Romania preferred over India for

outsourcing. Outsourcing to distant non-French geographies seen as a threat to

French jobs. IT skill shortage not too high.

Japan

Growth Verticals



l Manufacturing:

Contributes about 22 % of the GDP. The electronics and car industries

continue to dominate and successfully penetrating international markets. Japan

is the second largest auto producing company in the world and the world’s

largest maker of machine tools. Real estate and automobile industries account

for 46% of the total B2C market in Japan

l Financial

services: Services contribute about 66% to the Japanese GDP of which the

financial sector alone accounts for 21.7%. The Tokyo stock exchange is the

second largest in the world after New York and the country has some of the

largest government backed banks. The down side is these banks are mired in bad

loans estimated at $ 420 billion though the government has announced its resolve

to halve them by 2005. Annual premiums in Japan totaled up to $ 389 billion in

2000 making the country the world’s largest life insurance market.

SWOT



l Strengths:

The world’s second largest IT market after the United States and way ahead

of European giants like UK and Germany.

l Weaknesses:

Language capability crucial. Sales cycles are inordinately long. Revenue base

grows slowly. Inadvisable to enter if you don’t have staying power.

l Threats:

The banking sector’s woes have real repercussions on the rest of the

economy. It has even led to a fair amount of political unrest in the rest past.

The economy has been slowing for years with sub one percent growth rates. The

Economist however claims that the Japanese economy showed a negative growth in

2001.

l Opportunities:

R&D services and systems software space. Also local Japanese IT services

companies are relatively slow adapters of newer software. India increasingly

seen as a country that can provide the skills and the volumes required for high

technology, time to market solutions.

Singapore

Growth Verticals



l Electronics

Manufacturing: Manufacturing accounts for 23.4% of Singapore’s GDP. Is the

world’s leading producer of disk drives and has heavily invested in

wafer-fabrication plants. The electronics industry accounted for 52% (or $70.1

billion) of manufacturing’s total output in 1999. It grew by 15% in 2000 and

dropped by 12% in 2001.

l Financial

and business services: Accounted for 27.7% of the GDP in 2001. As of

February 2001, Singapore had 58 merchant banks, 11 finance companies, 185

Accredited commercial unit and 134 commercial banks, of which eight were locally

incorporated and 126 were foreign. The Monetary Authority of Singapore (MAS) is

the country’s central bank. As of 2000-end, Singapore Exchange Securities

Trading Limited (SGX-ST) had 480 listed companies with a combined market

capitalization of Singapore $393.5 billion.

SWOT



l Strengths:

One of the largest IT markets ($7.5 billion) in the APAC region. Highly

developed business culture. Very open to outsourcing and well established Indian

business presence–over 300 Indian business houses and 90,000 NRIs based out of

here. Is India’s eighth-largest investor with direct equity investments of

about $1.3 billion at end-2001. India’s investment in Singapore has also grown

by 14% over the past decade.

l Weaknesses:

Stiff competition from geographically nearer and more language compatible

geographies like Chinese. Especially firms based out of Shanghai.

l Opportunities:

Is the heart of Southeast Asia and ideal for tapping into closer markets like

China, Malaysia, and Australia. APAC headquarters of most MNCs based out of

here. Big business opportunity in that sector.

l Threats:

Very dependent on electronics exports to the US. Any drop in demand, like the

one witnessed in 2001 will affect the market radically.

China

Growth Vertical



l Electronic hardware:
From an outsourcing opportunity perspective this is the big one. China’s

hardware exports last year were an estimated $26.4 bn. It has an expanding

consumer electronics market, fast growing telecom infrastructure and wireless

computing industries. China’s domestic demand for ICs is expected to have

already crossed $10 billion. In three years it is slated to be the largest

market in the world for mobile phones, second-largest for PCs and the

third-largest for semiconductors.

SWOT



l Strengths:

One of the few economies that continued to grow well in the downturn. Large

local semiconductor market and industry that will require software support

specially in the embedded systems area.

l Weaknesses:

Language issues and cultural incompatibility. Global perceptions about China’s

political structure and lack of IT investment friendly legal proce