Destination Europe

It is going to be a cold long winter in the US. And Indian software companies

are going to find it as tough to keep warm. Of course, it started like any other

fairy tale. The quest of India’s troop of low cost, skilled, English speaking

workforce for the ideal market ended in the US. But the sequel to this fairy

tale did not have a happy ending. The tag of "Made in India" set up by

the trailblazers soon became commonplace as second and third tier companies

chose to follow en masse to seek the American dream.

The success of software exports meant that India had finally arrived. Indian

software exports pegged at Rs 676 crore in 91-92 leapfrogged by over 36 times by

the end of the decade. And of course, the lion’s share was from good old Uncle

Sam. According to DQ estimates for 2000-01, about 63% of the SW exports came

from services undertaken for US companies. This held true for all Indian

software vendors. Even today a major chunk of the business is still from the US

market. As of FY ending March 2001–barring Wipro Technologies with 64% exports

to US–the other software giants in the DQ Top 20 list had over 70% of business

coming from the American shores. Well the going had been good…so far. Until

the evil goblin of the slowdown reared its head closely followed by the WTC

attacks. It’s been the gloom and doom scenario since then. Analysts have been

mercilessly cutting growth and profits projections of all the software

companies. In retrospect, it seems like India Inc has put its best eggs in a

single basket.

Looking for a new basket

Ever since the slowdown, the IT industry has been talking of diversifying its

risk and over dependence on a single market. Prior to the slowdown, barring the

big daddies and few European bases, diversification to other destinations was

clearly not the top priority for the Indian software industry. And why not? The

US was and continues to be the biggest information and communication technology

(ICT) market in the world and business was not hard to procure thanks to the

technology lead by US enterprises and the similarities of business environment

in India and US. And of course, the US is the number one destination for Indian

software professionals. While the first reason still remains, the other factors

have dramatically changed in the past one year. Hence the need for a new market.

The hot favorite is Europe–the second largest IT services spending market in

the world. According to IDC estimates, Europe will account for over 31% of the

total estimated $430 billion global IT services spend by the end of 2001. This

is expected to grow to $183 billion by the end of 2004. Not a small market by

any standards, yet surprisingly only about 20-25% of Indian software exports

originate from European destinations.

Destination Europe

Today, nobody has to spell out the advantages of

diversification to Indian software companies as they move aggressively to other

destinations apart from the US. But some companies have managed to grab the

early mover advantage. The first lead was taken by India’s top IT software

exporter, TCS, which made its European foray way back in mid-eighties. Other IT

majors like Wipro and Infosys made their entry in the European market in the

mid-nineties. Comments Sudip Nandy, vice-president, European operations, Wipro

Technologies, "Our conviction in our value proposition, delivery

capabilities and the soundness of the European economy are the reasons for our

impetus on Europe."

Of course the key reason has been diversification. Agrees

Nandan Nilekani, MD, President and COO, Infosys, "We entered the European

market as a part of our strategy of diversifying our client base and exploring

new and emerging markets." However, revenue percentages, as mentioned

earlier, are still below 30% of overall revenue. In terms of revenues, TCS

continues its biggest software exporter tag to Europe with revenues upwards of

Rs 600 crore (See table).

While a majority of companies are going the old fashioned way

of building their base from the scratch, others like HCL Technologies sensing

the growing importance of Europe are adopting different routes. Rather than

start from scratch and build upwards, the company bought a majority shareholding

in the Bangalore-based Deutsche Software and immediately could cater to its

parent, the financial service giant, Deutsche Bank. While as per year ending

March 2001, HCL Technologies had a single digit 7% of its exports originating

from European destinations, and with the buyout, the European percentage will be

ramped up quickly.

Waiting market

However, industry watchers are debating the bigger question

whether the US slowdown will kill the European dream even before it has begun.

To begin with–like the US–Europe too is grappling with the continuing

paucity of skilled workforce. According to the latest European IT Observatory (EITO)

reports, by the end of 2000, Europe will have a combined crunch of 1.87 million

people in ICT, e-business and call centers. This number is expected to more than

double to 3.87 million in the next three years. According to the report, the

skill shortage could lead to a 3% loss of potential GDP in 2003 and can hit

business productivity and the pace of Web development. The natural progression

of such huge a shortage will be the rapidly escalating cost of domestic labor.

The solution to this problem has been to import skills. Skill shortages coupled

with enterprises opening up to outsourcing will usher in a big potential for

Indian players. European enterprises after seeing the success of US in

outsourcing are becoming more amenable to it from countries like India. Examples

of countries like Germany trying to woo Indian software professionals are being

seen as desperate attempts to bring Indians to European countries to tackle

their never-ending IT skills shortage. While the US was quick in the adoption of

technology, European companies were on a wait and watch approach. Seeing the

potential, a majority of the European enterprises are jumping on huge IT

deployments and that presents a huge market opportunity for Indian players.

So while the potential exists, the US slowdown could act as a

factor for tougher negotiations but Indian software industry is yet to start

exploiting the potential of the European market. Comments Santosh Madbhavi,

corporate head, Europe, "There is a market and huge potential for Indian

software companies."

Hold the horses!

But before Indian companies decide to pack off their top

shots to source business from the European markets, they have to realize that it

is unlike the US market, which they are familiar with. Unlike the homogeneous US

market, Europe is a varied market with different cultures and languages.

Comments Nilekani, "With its varied languages, Europe is indeed a different

market from the US." Also advertising case studies are replete with

examples of big companies goofing up when trying to address another culture. For

example Scandinavian vacuum manufacturer Electrolux used the following in an

American ad campaign: "Nothing sucks like an Electrolux." Another

classic was goof-up was Parker pen’s marketing fiasco in Mexico. Its ads were

supposed to say, "It won’t leak in your pocket and embarrass you."

Instead the ads said "It won’t leak in your pocket and make you

pregnant." Indian companies are going cautious on this front.

Doing it right the first time

So each company carefully needs to assess its skill sets and

see what it can offer to companies in the European market. Claims Sawant, "TCS

has, therefore, followed different approaches in different countries, after

factoring in the cultural differences." And the few companies with a

presence have already taken a cue and are doing the same. Says Arun Jain, CMD,

Polaris, "The focus in Europe has been to establish long term relationships

with the rich banking and financial services sector. Polaris’ offering is a

long-term, ENTITY (Extended Technology Facility) relationship and e-services to

the banking and financial services sector." The company has a presence in

Switzerland, Germany and Ireland–the key European banking and financial

services hubs. To tackle the language problem DSQ and Infosys are doing local

recruitment. Comments DSQ’s Kannan, "All our European offices are manned

by locals, so no problem of non-English speaking customers."

‘The times, they are a’ changing’ and it is time Indian

companies spread their wings beyond the US horizons. It won’t be easy, and

companies will need to do some quick reorientation before they can ably tap the

new business opportunities.

Yograj Varma in New

Delhi