Now, IT gets harder
Searching for niches
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| Ramping up: TCS plans to increase its headcount in China from1,000 to 3,000 in three years. |
On May 30, the top management of India's largest software exporter Tata Consultancy Services (TCS) found itself thousands of kilometres away from their Mumbai headquarters, at Guadalajara, the capital of the Mexican state of Jalisco and the economic nerve centre of the South American country. Guadalajara, often referred to as the City of Roses, would become yet another location for TCS' rapidly expanding network of global centres, as the company-and, indeed, India's rapidly growing it industry-scouts for locations beyond India to expand its operations.
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| "In the world's fastest-growing markets, the largest it vendor could be Indian" Phiroz Vandrevala Head (Corporate Affairs)/TCS. |
It wasn't empty rhetoric even. In the last five years, TCS has hired 5,000 people across 14 locations in Latin America and plans to take that number to 10,000 in the next two or three years. "The entire world is talking of the growth prospects of BRIC economies and we firmly believe that we will be among the largest it companies in these countries," says Phiroz Vandrevala, Head (Corporate Affairs), TCS. India's oldest and biggest it company is already the largest it player in Brazil, its joint venture in China makes it one of the country's top firms, and in Russia, TCS has struck large deals with local banks to boost its presence. "In the world's fastest-growing markets, the largest it vendor could be Indian," says Vandrevala.
TCS is not alone in this exercise. The Indian it industry, having virtually invented the global delivery model (GDM) of shipping work back to India with only a small front-end, is re-inventing itself. Having realised the limitations of the exisiting model, Indian it vendors are building up delivery capabilities with a vengeance. While GDM Ver 1.0 helped Indian companies pluck low-hanging fruits, now as they chase larger deals, it becomes imperative for them to have real global delivery capabilities.
More importantly, they must begin to differentiate themselves. So far, all the big players have been offering similar services such as application development & maintenance, package implementation, and testing. But now, to stand out in a commoditised business, they must emphasise their unique strengths (see Wanted: Differentiation).
Wanted: Differentiation
Slowly, but surely, the top Indian IT vendors are beginning to look different.
TCS
» Trying to be a global vendor to eventually rival IBM and Accenture
» Backed by a large global presence, with 10 per cent of workforce overseas
» Strong focus on domestic market
» Growing presence in fast growing verticals such as BPO and remote infrastructure management
» Using M&A to put together mid-sized synergistic deals
Infosys
» Strong presence in banking, insurance and financial services
» Has been the most aggressive player in consulting space with substantial upfront investment
» Emphasis on newer lines of businesses as well as getting greater chunk of revenue from newer markets
» Strong branding spend to get recognised amidst the clutter
» Focus on non-voice BPO
Wipro
In telecom country: Wipro centre in Rovaniemi, Finland.
» Large presence in outsourced R&D market
» String of pearls M&A strategy to quickly build presence in Europe and North America
» Early and large presence in BPO
» Strong presence in semiconductor industry
» Moving away from being a mere system integrator to a total solutions provider in the domestic market
Satyam
» Industry's leading package implementation service provider
» Trying to build strong consulting front-end
» Substantial expertise and presence in delivering solutions to the manufacturing sector
» Growing presence in business intelligence
» Differentiated BPO with focus on areas like animation
HCL Tech
» Moving away from excessive focus on the top-end of market to mid-end
» Blue Ocean strategy of targeting new markets not sought after by competition
» Strong presence in European BPO market and India
» Understands hardware, besides software
» Strong player in remote infrastructure management
It's a global play
Infosys' only acquisition till date of Expert Information Systems (now called Infosys Australia) was a move in that direction. Kris Gopalakrishnan, MD and CEO, Infosys, says: "While Indian vendors may have picked the low-hanging fruit in the offshore it market, we believe that we've targeted less than 10 per cent of the overall market. We are gearing up for the next wave of growth from newer markets, newer verticals and our ability to deliver across the globe." As part of that transition, he says, Indian companies will need to broaden their global delivery and target the larger contracts dominated by global giants such as ibm and Accenture. In the same breath, he says that Indian it vendors have matured over the years and, therefore, are bagging bigger deals that also involve business transformation, and not just managing processes. "I, therefore, believe that we will be able to sustain the 30 per cent plus kind of growth," he says. Infosys already has a presence in China and Eastern Europe (Romania) and is now looking at South East Asia for new centres.
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"Infosys has a presence in China and Eastern Europe (Romania) and is now looking at South East Asia" | "We've 8,000 people in the Americas and Europe and we will build and buy our way to several thousand more" Sudip Nandy Chief Strategy Officer/Wipro |
In the case of TCS, non-Indian employees constitute 5 per cent of the total headcount, but Vandrevala says that could easily go up to 10 per cent or more in the next couple of years. While TCS in Latin America is expected to scale to around 10,000 people by around 2010, its other geographies too will develop rapidly, with the company planning to scale its China operations from 1,000 currently to 5,000 in three years and set up a chain of development centres in Eastern Europe (of around 500-1,000 people each) to target that region's proximity (and foreign language capability) to the lucrative Western European market.
Eyeing bigger deals
Indian IT's globalisation surge, says John C. McCarthy, Vice President, Gartner, is being driven primarily by three factors: One, clients' need for support for their global operations outside India; two, the need to tap new talent pools; and, three, the quest to develop the ability to win and execute larger and more complicated contracts. "Service providers have invested in a global presence because they want to be global companies and serve their client's footprint, says Atul Vashistha, CEO, neoIT, an offshore advisory services firm. "They realise that their success depends on having diverse capabilities with consistent quality." Adds R. Chadrasekaran, President and Managing Director, Cognizant Technology Solutions: "Bolstering your presence in China, for example, gives you a foothold into the latent far-eastern (read: Japanese and Korean) markets, which are just beginning to open up for many Indian vendors."
Chandrasekaran says that China will be Cognizant's next big presence outside India, with regional and local centres supporting its larger facilities. While it has around 350 people in China currently, it says that the number will double in the next 12 months and that it will also expand its presence in Argentina.
TCS is already reaping the benefits of a larger global footprint, says Vandrevala. "New businesses account for around 18 per cent of our revenue and as we expand, we think this will grow rapidly," he says. Nandy of Wipro reckons that newer service lines such as remote infrastructure management and package applications would see Indian vendors moving away from non-production areas into more business critical segments. "To be recognised among the top 5-6 it vendors globally, Indian companies must undertake work that is more core to their customer and begin engaging in multi-billion dollar deals currently dominated by the likes of IBM and Accenture," says Sid Pai, Partner, TPI, an offshoring advisory firm.
The pluses and minuses
Infosys
» Strengths: long-standing industry focus across the enterprise, including sales and delivery
» Extensive inventory of industry research is establishing Infosys as a thought leader
» Deep bench of company executives to manage turnover and potential challenges
» Challenges: Lagging industry in evolution towards diversified solutions, including BPO and KPO
Wipro
» Strengths: Diversified business provides stability and diversified growth (1/3 of revenue is R&D)
» Aggressive investor and adopter of "integrated" offerings that combine applications with BPO
» Quality methodologies and programmes that extend far beyond Six Sigma
» Challenges: Unclear and inconsistent leadership since the departure of Vivek Paul in 2005
Tata
» Strengths: Strongest combination of depth and breadth of offerings and industry capabilities
» Diversifying geographical presence more aggressively than most competitors (Latin America)
» Distributed decision-making results in differing cultures or "personalities" within TCS
» Challenges: Aggressive pricing inhibits perception and positioning as value-based provider
Cognizant Technology Solutions
» Strengths: Subject-matter research team leads investment of targeted markets with expertise
» Renowned for managing effective transitions, including knowledge management & transition
» Culture empowers client teams to do the "right thing" first and resolve internal issues later
» Challenges: Late to expand SAP capabilities, which has been a key growth segment in recent years
HCL
» Strengths: Early investment in IT infrastructure and remote applications management
» Engages in wider variety of business models and solutions (e.g., joint ventures)
» Specialisation in embedded applications provides a unique tech niche
» Challenges: Dependency on a small number of larger clients constrains business development capability
Satyam
» Strengths: Expanding strength in packaged applications into business analytics and intelligence
» Presence in verticals (e.g., manufacturing and automotive) is largely unchallenged
» Primary presence outside Bangalore and Mumbai hot spots for talent and recruiting
» Challenges: Lags competitors in creating industry-based channels and corporate messages
Source: neoIT Research
Tier-2 IT companies, too, are following suit, with the likes of HCL Technologies and Satyam Computer planning significant expansions overseas. "A global operating structure with integrated services offering is imperative to our success," says Vineet Nayar, President, HCL Technologies, a company which has recently opened a centre in Poland with 100 local employees to enhance its focus on the European market. HCL is the largest ICT company in Northern Ireland and Poland, and has 600 people at its Canberra (Australia) centre. Satyam, meanwhile, operates out of 22 locations globally and like its bigger rival, TCS, says it plans to have around 10,000 people in China by 2010. "Three years ago, we were serving clients in 42 countries and we now serve them in 62 countries," points out Shailesh Shah, Head (Consulting and Strategy), Satyam.
While Indian it initially moved overseas to open up new markets and tap latent talent pools, the next few years will see them tapping local multinationals and even smaller companies in these countries. "That is part two and three of our evolution and will take three or four years to begin," says Wipro's Nandy. According to Nayar, the choice of location is determined by the nature of business opportunity. For example, one of the growth drivers in the Antipodes (Australia and New Zealand) has been the government sector.
Setting up centres abroad, acquiring companies, and bagging bigger deals, of course, entail certain risks. "The biggest challenges are multi-cultural and complexity issues," notes Forrester's McCarthy. "Systems have to be updated to support multiple languages, for instance." An equally big challenge is offering the sort of deals that IBM and Accenture do. "If you look at the big contracts, the customers are asking for a 'risk-reward' kind of engagement, which essentially means the engagement is based on clear business outcomes and delivery across multiple countries, perhaps at 60-80 countries," says Sandeep Arora, Lead Executive, Accenture Delivery Centre for Technology, India. His point: The MNC it majors aren't just geographically diversified but have wider capabilities.
Also, the physical expansion of Indian it companies so far has been limited to developing markets for obvious reasons-they offer low-cost benefits like India. But "to challenge IBM and Accenture, they must now get ready to scale up their operations in the us and Europe and be willing to bear a significant margin dilution as a result", argues TPI's Pai. That will be a big hit, since the IT stocks in India have been D-Street darlings because of the huge profits they have been churning out year after year for a decade now. But, then, the IT companies-perhaps even the investors in them-may not have much of a choice. The road hereon is unlike the one they have travelled so far.
M&A on the horizon
Big-ticket acquisitions by Indian vendors are unlikely to happen, but MNCs could buy locally.
On June 29, the stock price of Capgemini jumped 6 per cent. Why? There were rumours that Infosys Technologies was bidding for Europe's largest IT company. As it turned out, the rumour was denied by both the companies, but a relatively small Infosys (2006-07 revenue: $3.1 billion) acquiring a much larger competitor (2006 revenues: $10.35 billion) is a tantalising idea. And what makes it theoretically possible is the fact that Infosys' market cap of $27 billion is more than three times that of Capgemini ($7.86 billion). But it's safe to say that such big-ticket acquisitions are unlikely to happen: Arithmetically, the average of a $27-billion company and a $8-billion firm would mean less than $18 billion. Why should Infosys agree to such a deal? If the argument is that such a purchase will be required for high-end (consulting) skills and, therefore, long-term competitiveness, then the counter argument could be that Infosys can always a) build such competencies organically, b) acquire much smaller competitors of Capgemini for much less, or c) simply poach some big-name consultants by dangling a nice deal in front of them (a strategy it has pursued). Says the CEO of a large Indian IT company in silent period: "Large cross-border acquisitions don't have a good track record of succeeding. It takes up management bandwidth in integrating such an acquisition and takes our eyes off the market place." However, some Indian players are not averse to large deals. "We have made small acquisitions because we first wanted to learn to walk before we started running. Now that we have developed some expertise in managing and integrating acquisitions, we will look at larger deals," says Sudip Nandy, Chief Strategy Officer, Wipro. What's also likely is acquisition of India tier-II IT companies ($500-$1 billion in revenues) by large MNC players.
