BRAINWAVE                                                     

The evolution of the Indian Information Technology (IT) Offshoring industry goes way back to the late 1960s. It was a new area and risk-averse Indians preferred to stick to trodden paths. But most software firms were basically indulging in body shopping, doing very low end jobs with negligible value addition to the clients. The flowering of the Indian IT Offshoring industry came in the early 1990s riding on the back of fruits of seeds sowed by Neheruvian concept of indigenous technological and managerial skills in the form of IITs and IIMs, which also coincided with the opening up of the economy. The evolution of enterprise resource planning, business process outsourcing and the Y2K scare all provided further engines of growth for the Indian IT Offshoring industry through the 1990s.This was capitalized by the unleashing of entrepreneurial spirits of large number of Indians who once were key members of global MNCs. If we can look back at the IT Offshoring industry in our country, it had been enjoying a steady growth ever since the early nineties. The turnover of the sector in 2002-03 was US$10 billion1 and it now accounts for 2.87 per cent of India’s gross domestic product (GDP) and by 2008 the industry aspires to be a huge US$87 billion2. The killer USP behind the steady growth of the Indian IT Offshoring industry has been the labor arbitrage (India-US$0.3, Philipines-US$0.4, Ireland-US$0.7 cost per transaction)3 and reputation for quality. So if we analyze, these were the crucial factors, which shaped Indian IT Offshoring industry in the crucial periods i.e., the cheap and well skilled resource availability and they still today are. That is the prime reason why so many multi national corporations (MNCs) have moved a part of their base to India. But even at a growth rate of 25%, and an industry creating jobs for millions- not everything is hunky dory. Let’s look at how the road ahead for Indian IT companies looks like.

Having realized that cost arbitrage and skilled manpower are not sustainable competitive advantages, Indian IT companies are now making the next logical move up the value chain by getting into consulting services. With increasing perceptions amongst the global clients that the services by Indian IT companies are getting commoditized with no concrete differentiation has led to dilemma where the clients are finding it tough to choosing their vendors. The perceptible lack of domain expertise and the very cost centric approach by Indian IT companies itself now proving to be stumbling blocks to upward movement in the business value curve.

The MNCs with setting up their development centers in India, coupled with their global reputation, are able to provide their customers the same service quality at the same cost as the Indian firms. And because of their global branding, they are able to snatch the business away from the Indian IT firms, which is proving to be disastrous for the Indian firms. In such a situation the Indian firms need to look for other USPs to stay in the global competitive market and to survive the threat from the MNCs. The presence of MNCs in India can be looked from two different perspectives

     Ø      one posing threat to Indian companies and

    Ø     the other more realistic is to look at them for best benchmarking and actively pursue strategies which will be win-win for both the parties.

Therefore, we need to devise a plan for the Indian IT firms to survive the threat and emerge winner so that they remain the preferred off shoring partner for the global clients and at the same time co-exist with the MNCs whose Indian presence is going to remain a harsh reality and actually increase even more. To do so we would need to do a critical analysis as to where do the Indian IT firms and the likes of Accenture, IBM, EDS, CSC, and CG&EY stand today. We will need to look deep into the strengths and weaknesses of both the parties and map them to the opportunities and threats present in the global environment to chart out strategies for Indian IT forms to survive. We are going to analyze the same with the help of concept of the strategic tool TOWS matrix and the steps that Indian IT companies essentially need to follow to stay competitive in the global marketplace (apart from the cost factor) without being eaten out by the mighty global giants in the process.

Diagnosis of the Situation

Each player will have to bring to the table certain value propositions to the clients irrespective of whether MNCs having operation in India or Indian IT companies. The MNCs like EDS, CSC, and Accenture no doubt have incredible global brand and proven expertise in their field. But just coming to India and execution from here to offer the same cost advantage to the clients is easier said than done. Still the MNCs account for only 15% of the total IT exports out of India which nevertheless growing year on year. The average size of an MNC’s development centre in India is only 400-1200 (with the exception of IBMGS) and it will take at least 2-3 years for them to grow to the maturity level of Indian IT companies in terms of offshore delivery expertise. Also with scaling up their operation the MNCs will have to apportion high fixed cost on a lower revenue base which will not offer much cost benefit to them. But since they are global companies, it won’t take much time before they catch up with their Indian IT companies e.g. Cognizant Technology Solutions already walks shoulder to shoulder with our Infys and Wipros. Let’s take a look the strengths and weaknesses for both MNCs and Indian IT companies which will pave the way for the strategic alternatives the Indian companies need to pursue.

The Global Giants…

Strengths

     • Ability to carry out large scale IT Outsourcing projects

     • Brand Name

     • Network of alliances

     • Aggressive in acquisitions to broaden the service portfolio

Weaknesses

     • High cost structures

     • New to offshore delivery (will require business model re-engineering)

     • Per capita revenue loss while off shoring – US$98000¹

            The Indian Players…

            Strengths

     • Proven track record with mature processes

     • Validated global delivery model for offshore execution

     • Decent client relationships

Weaknesses

     • Minuscule domain expertise

     • Inadequate Sales and Marketing talent

     • Lack of Brand Identity

     • Perceived only as low cost service providers

     • Absence of products in the stable

A comparison of the Indian IT firms and the MNCs is shown in the table below:

Source: Nasscom-McKinsey Report 2005

The future would involve a paradigm shift for companies where in the emphasis should be stressed on creating valuable software rather than low end generic software. The following diagrams give a glimpse of the road ahead to be pursued by the software industry to remain successful.  

Strategies to improve competitiveness

Tradeoff between Innovativeness and Reusability 

Given the Opportunities that are presented by the ever increasing industry and the Threats posed by the development of ODCs by MNCs, the Indian firms would need to capitalize on their Strengths to take advantage of the Opportunities (SO strategies) and avoid the Threats (ST strategies), and overcome their Weaknesses by cashing on the Opportunities (WO strategies) and avoiding the Threats (WT strategies).

 TOWS MATRIX

PRESCRIPTION FOR SURVIVAL

             SO STRATEGIES

             True Globalization Of Delivery Model

The Indian firms need to validate their delivery models across the globe. This is imperative because still today majority of the revenues earned by the Indian firms come from the US (70%). The Indian firms have not been able to make a dent in other strong markets such as Eastern Europe and Japan. Therefore, the delivery models need to be shown to work in these markets as well as put the global delivery model in the consulting arena also which can provide unique value proposition unmatched by MNCs. This can be done one, by following aggressive sales and marketing activities in these markets and two, by forging relationships with the players there by taking up work jointly and three, by making strategic acquisitions to increase the client kitty and gaining recognition there.

             Moving Along The Value Curve

Application development and maintenance form the bread and butter for the Indian firms. Though some of them have ventured in high value add services like System Integration, Package Implementation and Business Consulting (only 6% of revenue of Infosys comes from Consulting), they have not been able to make much of their presence felt in the eyes of the clients. They still are looked upon as low cost service providers of low-end jobs. This needs to be changed and the Indian firms need to do a ramp up in terms of boosting their image by increasing the share of the high-end work in their revenues. They can do this by doing acquisitions of small consulting firms (a case in point being Wipro’s acquisition of AMS in 2002 and Nervewire in 2003). This would not only arm them with new clients but also bring on board domain talents.

Indian software services companies are realizing the importance of acquiring products and intellectual properties. Local companies have spent over $500m in buyouts and are willing to pay a higher price for companies having both products and services. The spreads between a pure services and product combined with services play is increasing. According to data collected by ET, patents with the target companies have helped boost valuations. Wipro acquired Austria-based NewLogic that had revenues of only $17m for over $56m. Sasken Communication Technologies bought out Finland-based Botnia Hightech  for $45m, a revenue multiple of 2 times.

           ST STRATEGIES

             Maintaining Leadership In Existing Business

Notwithstanding the threats posed by the MNCs, Indian IT firms still have great level of trust among the clients in being a quality service provider. They need to hold on to and capitalize this through innovation and by creating strong entry barriers to corner maximum share in the application development and maintenance support which is pegged at US$70 billion worldwide and a CAGR of 8%⁴. The leadership position will have to be maintained in terms of being the preferred partners for providing the services because it will be tough for MNCs to affect this position given their high cost structures and immaturity in proven offshoring delivery model.

Increasing Degree Of Interface With Clients

The reach of Indian sales and marketing personnel at their clients’ place has been to the offices of the CIO’s only. They have been following the so called “foot in the door approach” highlighting the savings by offshoring which has a limiting effect on the interfaces they have and the image they have been able to project of the Indian firms i.e. of technology solution providers. The interfaces need to be expanded by resorting to multiple touch points in the customers’ value chain by reaching out to the corporate leadership and projecting ourselves as business partners providing them solutions to their business problems creating positive impact on the shareholder value of the clients. This is important from the point of view of bringing about a paradigm shift in the way Indian firms are looked at.

            WO STRATEGIES

Understanding Client’s Business Inside Out

Indian firms need to ramp up their skills, both technical and managerial and more importantly build the ability to convert business problems seamlessly in to technology enabled solutions. This requires the understanding of the clients’ businesses in and out and hence they need to develop domain expertise in various industries. This can be achieved through verticalization and developing domain talent. Though some of the players like Wipro and Infosys are hiring domain consultants, they need to prove their abilities to win the confidence of the customers. The sales team has to be conversant with the customers' key business indicators e.g. percentage account receivables outstanding or percentage vacancies of leasable space , all of this before a single dollar has changed hands!

From Peanuts To Pies

Indian firms typically have been garnering projects of size two digits ($ million) only hovering over a period of at the max a year or so. Where as most of the big clients prefer to give longer and larger contracts to vendors who have the credibility and the ability to not only complete the project but sometimes to take over a part of infrastructure of the client e.g. HP’s contract of US$3.5 bn from P&G over 10 years also includes the transfer cost of P&G’s IT infrastructure⁵. The silver lining is that the traditional big IT spenders are looking to give some jobs also to Indian IT companies over their preferred IT vendor e.g. it is claimed a large RFP from General Motors is floating in Indian IT arena despite EDS has been the preferred IT vendor for GM⁶. We need to be aggressive enough to tap such golden opportunities by providing sustainable value addition to clients, which will in turn generate a continuous stream of revenue, and ramp up the capabilities to handle such assignments.

From Competition To Coopetition

India, though being considered as an IT hub, still gets around 3% of the world’s IT business⁷. One of the biggest drawbacks in the Indian IT industry has been that the Indian firms see each other as rivals and not partners. Still when we see, the customers like GE, J P Morgan Chase and others outsource various parts of the same project to different vendors in India. e.g., when software professionals from TCS go onsite to work on projects, they find people from Satyam, Infosys etc. working on the same projects. When this can happen onsite, why can’t this happen offshore? It is high time that Indian firms should start partnering and bid for large projects jointly. This would bring benefits to all in terms of reduced sales and marketing cost and will provide a continuous stream of revenue with higher margins. This will also help develop required financial muscle power to carry out huge investments in future and make acquisitions. A case in point is that EDS, IBM Global Services and PWC are working together on a 10-year $3 billion deal for UK’s social security system⁸. This joint strategy can be adopted by leading Indian vendors to collectively bid for a large project. However, Indian players do not seem to be ready for such an arrangement.  

Expanding The Portfolio

The number of Indian firms that are into software product development can be counted on fingers. Barring FlexCube of i-flex and Finnacle of Infosys there is no other product coming out of stable of Indian firms which even the people in software industry would be aware of. This is the front on which Indian firms need to ramp up and ramp up fast. Proprietary products bring on not only revenues but also respect in the eyes of the customers and peers. Indian firms need to invest a lot in R&D to prove their point on this front that they are not only experts in service providers but also have abilities to develop quality products. The fact that even the Indian subsidiaries of MNCs (Texas Instruments, CSC) doing high end R&D jobs do employ Indian talent indicates Indian companies also can do similar jobs.

            WT STRATEGIES

Brand Management

Indian IT firms still fall behind in the race when it comes to brand recall. Branding is an indispensable component in cornering competitive advantage in today’s competitive IT landscape. One can go on talking about the ramp-up time, quality and delivery, but what you are selling is trust, which unlike a packaged product, is intangible. Therefore, branding is even more relevant for software services. Branding software services usually involves corporate branding. Slogans such as Wipro’s “Applying Thought” and Infy’s “Driven by values. Powered by intellect” are some good examples of how branding can be used to gain mind share among outsourcers. Gartner carried out a study among the IT services buyers where it found that “Brand Awareness” was the key determinant of their views on overall brand strength, brand loyalty and brand attributes for the service providers⁹.  

Diverse Culture

When it comes to interacting with the customers and wooing them to outsource projects, it is quite natural that a local person would do a better job than an Indian counterpart. Indian firms need to project an image of a truly global firm and this will be underscored by hiring local talent for sales and marketing jobs. Companies like TCS, Infosys, Wipro do have local talents in many of their markets but this still is more of an exception than a rule. At Infosys, only about 300 of its 17,000 employees are from other nationalities, the rest are of Indian origin¹⁰. Therefore, it is now imperative for Indian firms to ramp up their foreign hires. An interesting example is Infy’s decision to put Senator Larry Pressler on its board of directors. This gives the company a leg up on its Indian counterparts when it comes to wooing clients in the US, especially in the government segment. Moreover, it adds credibility to the Infosys brand¹¹.

Conclusion 

The increasing presence of MNCs in India will no doubt help in expanding the total market size in the short term which is beneficial to both MNCs and the Indian companies. But once the comfort level of MNCs increases in India as far as delivery and offshoring are concerned, they can potentially pose threat to Indian companies if the Indian companies are caught napping now. There is an urgent need to provide a new sense of direction and purpose to the company to take on the mighty giants. The culture shift that will arise out of this new direction of a global company that is equally at home in any geography in the world will facilitate re-establishing the market leadership. Focusing on a domain will help Indian companies to develop intellectual capital, come up with readymade solutions for a specific industry and Consulting will enable to understand the customer extremely well in terms of strategy, the organizational culture and its processes. Both MNCs and Indian IT companies have their strengths and weaknesses and in this situation it is best to find synergies amongst the both parties and hone their respective skills to strive for creating growth in the business rather than pursuing narrow business. At the end of the day, only those will survive in this changing and uncertain global environment who can clearly demonstrate value to the customer and hence to the entire economy.