Homing in

"Wipro has been one of the largest systems integrators in the domestic market" Suresh Vaswani President/Wipro Infotech.

Even as you read this story, IBM may be sewing up yet another multi-million dollar it outsourcing deal in India. This time around, with Vodafone Hutch. IBM is Vodafone's it vendor elsewhere in the world. And there is strong buzz in the industry that it is in the race with Accenture for a similar contract from Reliance Communications, India's second largest cellular services provider. IBM already offers outsourced it services to industry leader Bharti Airtel in a deal said to be worth between $750 million and $1 billion, and to Idea Cellular ($680-800 million). If it bags Reliance Communications as well, then it will be a record of sorts for IBM, not just in India, but globally.

IBM's surging success, however, drives home the irony of India's shining it story: the home-grown tech giants-TCS, Infosys, and Wipro-are almost completely missing in the domestic large outsourcing deals. Why? It's a simple matter of economics. Their code jocks are cheaper compared to those in America and Europe, not other Indian it professionals working in local companies. The domestic deals, generally smaller than those overseas, offer lower margins-sometime as low as 7 to 8 per cent. More importantly, domestic it outsourcing deals were few and far in between.

But that's fast changing. This year, NASSCOM estimates, the total domestic it market (hardware, software, services and BPO) in the country will be worth $10.5 billion, compared to $4.3 billion five years ago (see The Top 10 Deals). What turned the tide in favour of domestic outsourcing? Apparently, the success of IBM's landmark deal with Bharti. Struck three years ago, the deal proved two things: One, that there is a huge potential for local outsourcing and, two, that it could be a win-win proposition both for the vendor and the client. Says Nipun Mehrotra, Director (Global Technology Services), IBM: "While it is true that the Indian customer is discerning, it is wrong to say that the emphasis is only on price. He looks for value. Instead of just focussing on cost cutting, IBM has helped its customers grow revenues."

While IBM clearly has been the market leader, other Indian companies like Wipro, TCS, HCL and Infosys, apart from international players like Accenture, Perot Systems and hp, are focussing on the domestic market, where outsourced it services are worth $3.7 billion. Suresh Vaswani, President, Wipro Infotech, the domestic-focussed arm of Wipro, says: "Wipro has been one of the largest systems integrators in the domestic market and in the last three years has won a number of outsourcing deals." Last year, Wipro Infotech did about $650 million of business, which is 20 per cent of Wipro's $3-billion plus topline.

TCS has also tried to enhance its presence in the Indian market. Says S. Mahalingam, CFO, TCS: "We value the domestic market more than ever before, and we are convinced that this will be a market that is likely to grow." Although the margins locally are smaller compared to offshored deals, Mahalingam says TCS could not have done the complex deals abroad if it had not done the domestic deals.

'Cooptition'

"Instead of just focussing on cost cutting, IBM has helped its Indian customers grow revenues" Nipun Mehrotra Director (GTS)/ IBM.

For all the players, the dynamics of the domestic market have meant a strange combination of competing and co-operating at the same time. In the $150-million Bank of India deal, hp and Infosys came together. In the it outsourcing deal at Vijaya Bank, arch rivals Infosys and Wipro jointly won the contract. (After the telecom companies, banks have been active it outsourcers.) The domestic it market is thus no longer a pariah for large tech companies as a multitude of companies from Dabur to Bharti, and from Bank of India to Indo Rama begins to make serious investments in their technology set-up. "it is no longer a luxury for many of these companies, since they are now part of a global ecosystem and need to have systems in place with their global customers, vendors and suppliers," says Arup Roy, Senior Analyst, Gartner, an it consultancy. Agrees Nagaraj Bhargava, Director, sap India: "A small auto parts company in southern Tamil Nadu, for example, must be able to integrate seamlessly with its German customer's database systems or supply chain tools."

While some big-ticket deals have been announced over the last few years, most industry watchers and analysts believe that this is just the beginning. "There will be heavy investment in the government sector, since the defence sector alone is expected to spend around $500 million on communication and technology needs, besides which the national e-governance project too will soon roll out," says Nagendra Venkasamy, Managing Director, Juniper Networks India. "We will see companies soon break up their contracts into specialised deals for each specific technological requirement," reckons Gartner's Roy. "For the moment they have only outsourced their IT department to an IBM or an Accenture to manage their existing it systems. They will soon invest in upgrading, overhauling and re-inventing their technology set-up."

While most of the spending on it was initially restricted to large corporations (and local arms of global multinationals), the last couple of years have seen strong investment from the SME market, says sap's Bhargava. He should know. The company's sap BusinessOne, targeted specifically at the SME market, has won over 260 customers to date. "Small businesses across industries are beginning to realise the value of it and in some highly competitive markets such as auto components, customers are drivers for investment in it," says Roy. And since managing it is not the core business of any of the SMEs in the manufacturing sector, they are only too happy to outsource to a specialist.

No doubt, the same market forces that drove companies elsewhere in the world to outsource, will drive more and more companies in India to follow suit. The IBMs and Wipro Infotechs know that, and they are waiting.