The Indian IT industry has grown very rapidly in the last few years. The IT
services exports has grown from $1,100 mn in 1996-97 to $12,500 mn in 2003-04.
Nasscom-McKinsey has projected IT services exports from India to be $57 bn in
2008. There are a whole lot of interesting issues resulting from this growth.
One of them is the evolution of the multinationals and the Indian IT companies.
What makes it interesting is the fact that both have undergone significant
evolution over the years. While the MNCs are becoming more localized in the
Indian market, the Indian companies are fast adopting a global outlook.
Multinationals companies are the ones that are headquartered somewhere else
and have an operation in India. Some familiar names include IBM, HP, Accenture,
EDS and CSC. On the other hand, some of the Indian companies include TCS,
Infosys, Wipro, Satyam and HCL. Let us take a look at how the two are placed
vis-Ã -vis each other with their respective strengths and weaknesses.
Till about 2001, the two used to live in different worlds. The Indian IT
companies did some on site body shopping, small low-end projects and some
project work, done remotely. On the other hand, the global MNCs, till 2001, had
a good going. They had pretty much a monopoly on things like outsourcing,
Intellectual Property in IT industry, consulting, etc. They did a lot of big
projects and had long-term relationships with clients. There was limited price
competition between them as each one had its own niche. So, for the big projects
there was hardly any competition for them and the margins were also high.
today if one looks at where the two are, the situation has changed quite a bit.
While the Indian companies are increasingly enhancing their global presence, the
global MNCs are increasingly leveraging India in world sourcing.
If one looks at the headcount of the top 5 Indian IT companies-TCS, Wipro,
Infosys, HCL and Satyam-it is somewhere around 40,000 for the first three tier
one companies and immediately followed by tier two companies at about 20,000
employees. This compares very favourably with anybody in the world. CSC has
around 90,000 people, of which about half are dedicated to doing government
work. So, on the commercial side, which is where the Indian companies are
competing, CSC’s total staff is only about 45,000 people. Looking at their
size in terms of number of people, Indian companies are ramping up very fast and
growing. The growth in terms of headcount for Tata has been almost 30% over the
last 3 years. This is where the competition is going to be.
Even though revenue wise they are much smaller when compared with the
multinationals, that is also is growing rapidly. In terms of profits: the
profits for the top 5 Indian IT companies last year grew at somewhere around
Furthermore, the Indian companies are now listed on the New York Stock
Exchange and most of them are on Nasdaq. By having a listing there they are not
only getting visibility but also access to low cost capital, as the cost of
capital in the US is very low as compared to India. They are having phenomenal
Price Earning (PE) ratios. The top tier companies are commanding the kind of PE
that Silicon Valley startups command. Even in terms of market capitalization,
the top Indian companies compare very favourably with anybody.
The Indian companies are not serving some small shops, but the best including
the Fortune 50 and Fortune 100. Maybe, the relationships are at a lower level
today, but it can be leveraged to get more business from them… They are also
fast establishing global presence in terms of operations. These companies have
been showing positive signs on the acquisitions front as well. TCS, Wipro, and
Infosys etc have made a lot of acquisitions of foreign companies in the last two
years. But, the sizes of their acquisitions are still small when compared with
the size of acquisitions that an American company with similar kind of market
The Indian companies are expanding their global outlook and reach and setting
up centers globally in the US, China, Japan, Malaysia, Czech Republic, etc. For
instance, Infosys plans to have around 25% local staff by 2012, TCS is asking
every employee to learn a foreign language and Wipro CEO’s main office is in
the US. So, in another couple of years, we’ll have MNCs which are of foreign
origin and MNCs which are of Indian origin.
Some of the key strengths of the Indian companies vis-Ã -vis the foreign MNCs
is that these companies can take a longer term perspective as they don’t have
as much stock market pressure as the typical American companies. Furthermore, in
the West, every successful company piles up a lot of debt and that is how they
are able to leverage and do acquisitions. Indian companies are not doing as many
acquisitions and as a by-product of that have very strong financials. Another
factor working in favour of the Indian companies is their flexibility, as they
are not wedded to an approach. They are also investing for the future-in
training and process maturity. By contrast, the multinationals have a short-term
orientation, quarter-to-quarter focus, lack of much India experience, higher
cost structure in India and higher sales cost.
However, the multinationals score over the Indian companies in terms of their
size, financial muscle, and visibility. Even their relationships are typically
at the CEO level, whereas the Indian companies’ relationships with customers
are largely at the CIO or lower level.
Multinationals are now enhancing their local presence. Most understand the
change in environment and are building and leveraging their India resources,
using India as the main offshore option, scaling up offshore strength, doing
acquisitions in India, pursuing local markets, providing end-to-end services
from offshore, involving offshore in client facing roles and pricing
aggressively. Many of them are also using profit center and direct selling
approaches. Companies like IBM, HP, Accenture, CSC and even other IT MNCs like
Keane, Perot, Convergys are increasingly ramping up their Indian operations in
terms of their head count and customer base. India is becoming an integral part
of their global sourcing strategy, they are promoting India in the large deals
and are investing including in acquisitions. While initially they were
tentative, these companies now understand that India is the name of the game and
the good results are further reinforcing their strategy.
The net result of this evolution is that the differences between the Indian
companies and global MNCs are getting blurred in the short term but the gap will
widen in the long term. One can even expect three and possibly five Indian
companies in the top 10 IT services companies in terms of profitability by the
end of the decade, possibly in terms of revenue also. But the MNCs will
certainly gain and remain strong in the longer term with their sheer size and
ability to grasp humongous opportunities globally.