The year 2001 has been tough. IT budgets that were generously sanctioned in
the past are under close scrutiny and CIOs are under pressure to show return on
investments for every dollar spent on IT. Gartner examines some of the issues
facing Indian IT services vendors and shows ways in which they can sustain
themselves.
Focus on quality and continuity
The geo-political situation in India has made potential buyers wary of doing
business with vendors from this region. Thereby it has become imperative for
vendors to put in place disaster recovery policies ensuring business continuity
in the face of unpleasant events. It is also necessary to communicate clearly
with potential clients that the reality is not as scary as made out to be.
It is time for Indian IT services vendors to identify ways to deliver value
that can justify the cost of their solutions. It is important that they
demonstrate their ability in providing value for investments made through either
one or all of the following:
- Improved
business efficiency — faster pace of operationsl; - Reduced
costs; and - Improved
competitive strengths such as increased agility.
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Client companies would be more open to total IT outsourcing deals once
convinced of vendor capability in managing such arrangements reliably. This is
because any successful total IT outsourcing arrangement can result in
substantial cost savings for the client and at the same time allowing them to
focus on their core business. A case in this point is the recent $ 100 million
deal made by TCS with GE Corp, where TCS will manage GE Corp’s IT requirements
across 30 countries over the next three years. Another example is the joint
venture between Bumiputra Commercial Bank (BCB) of Malaysia and EDS Corp wherein
the entire IT staff of BCB was transferred to EDS, to provide IT solutions to
the banking sector. It is a win-win situation for both EDS and BCB.
Explore the JV route
The offshore model offered by Indian IT services vendors are well known in
the US and European markets. This has led to an increasing number of IT services
companies to set up offshore development centers in India and at par with the
prices offered by Indian IT Services vendors. This represents a significant
challenge for those Indian vendors that have so far relied only on the cost
advantages of the offshore model.
Indian vendors now need to explore opportunities to form joint ventures (JVs)
with IT services companies in countries they are trying to make a local presence
in, while the other company benefits from the offshore facilities of the Indian
partner. However this does not mean that the local company does all the high-
end work while the Indian partner focuses on low-end work. Indian companies can
use the JVs to establish identity and understand the target markets better. The
Indian partner could also work on high-end work along with the JV partner that
can be passed on to the offshore center. If the JV partner is higher up in the
value chain, this could help the Indian partner pick up new skills and move up
the value chain faster than it would have done on it own.
Indian IT services vendors can also consider acquiring IT services and
product companies in target countries to speed up their efforts in moving up the
value chain. Acquiring a company in the target country would add direct revenues
to the bottom line, and to add technical capabilities and or domain competencies
to the buying company’s portfolio. Also, many non-IT companies that don’t
outsource their IT requirements are setting up their IT facilities in India to
take advantage of the cost & quality mix. Indian IT Services vendors can
consider tapping such potential clients by offering outsourced services and
highlighting the cost and time advantages of outsourcing rather than setting up
captive facilities.
Look beyond the US
The United States has been the largest source of IT services export revenues
for Indian IT services companies. With the shrinking US markets, Indian vendors
are now exploring opportunities in the European, Asia Pacific (including Japan)
and Middle East markets. However, it is important to understand that these
markets are very different from the US markets. While the US market is huge and
largely homogeneous across its geography in terms of language and business
culture, the latter markets differ substantially across geographies. This means
higher costs of marketing and operations since each market would require setting
up smaller business units tailored to meet their unique requirements. Also,
these markets are culturally not as open to outsourcing as the US market and it
would require considerable time and effort to make significant progress. While
acquisition of companies in these markets could be one of the faster ways of
establishing a foothold, but integrating the employees of the acquired companies
with the buying company could present formidable challenges due to significant
cultural differences.
Build strengths in verticals
Indian IT services vendors should look for opportunities in verticals
hitherto unexplored. While banking and financial services as a vertical has been
the dominant IT buyer followed by the manufacturing sector, retail, distribution
and healthcare are the verticals that are expected to see increasing spending in
IT in the medium to long term. Some leading Indian IT services vendors are in
the process of addressing the emerging bioinformatics market. It would be
prudent of them to build strengths in such emerging vertical markets.
The telecom vertical is also expected to see substantial IT spending in the
medium to long term. Technology as a vertical also offers exciting
opportunities. There are opportunities in hardware design and embedded systems
design. With increased convergence between technologies and increasing consumer
demand for intelligent products, the demand for embedded systems is poised to
rise dramatically.
SME opportunity
Earlier spending on IT to improve business efficiency was mostly restricted
to the large corporations, but tough economic conditions are forcing smaller
companies to consider using IT for business competence. Large US IT companies
might find this market unattractive due to the smaller size of deals, but Indian
IT services vendors can use their success stories with Fortune 1000 companies as
case studies to tap the opportunity in this sector. Though the SME market, even
within the USA is more geographically dispersed and the value of individual
contracts would be much smaller than those of Fortune 500 companies, the SME
sector represents a large potential market in terms of volumes. Indian companies
might want to explore the possibility of developing solutions for the SME sector
and establish a strong position in this segment of the market.
Explore the BPO option
Many Indian IT services vendors have developed strong process management
skills while building quality processes for software development and IT services
delivery. These process management skills can be easily extended to manage other
business processes using IT as the link. By virtue of the relationships already
in place with large US corporations, Indian IT Services vendors can set up
facilities to provide business process services to these existing clients. The
relationships can start by way of outsourced help desks and further expanded to
other business processes as the client gains more confidence. The vendor in the
meanwhile builds strengths in other processes. Companies like Wipro, Infosys,
HCL and TCS have already moved into this space.
IT services companies can also collaborate with their clients using their own
technical and process skills and their client’s functional skills to set up
companies offering business process services to other companies. While the
changed global economic scenario has resulted in many challenges for the Indian
IT industry, it has also opened up many new opportunities as seen in the
preceding paragraphs. While considering all these, it would also be worthwhile
developing opportunities in the domestic market as well.
Like in the process of biological evolution where only those species survive
that can adapt rapidly to the changing ecological forces, in the business world
too, only companies that can adapt to changing economic forces are the ones that
will survive. And the rest will go extinct like the dinosaurs.
The author is the senior analyst (IT services), Gartner India Research &
Advisory Services
mail@dqindia.com