Sunday, November 06, 2005

The Big Fight

TCS picked up a $260-million order straight from ABN Amro, which split the $2.2-billion order between multiple vendors.

For the past couple of years, the Indian IT services majors have been working towards precisely this goal - to get clients to start inviting them to bid directly for the really big deals. They have added on to their front ends to get invited to the deals. They have hired top talent from global consultancies, picked up specialised consultancy firms, and worked at consciously increasing the breadth of their offerings.

On the other end,IBM is looking for its next big ticket acquisition in India. EDS is on the verge of acquiring a Tier-II IT services firm in India.Computer Services Corporation is hunting for a suitable catch.

Have a look at the Outsourcing Prize for 2008:

The Prize: (All figure estimates for 2008)
Global Outsourcing Pie:$700 Billion
Offshore slice of the Pie:$94 Billion
India's slice of the Pie: $48 Billion

Just how prepared are Indian IT services majors for this whole new game?
How will the MNCs work towards getting a big chunk of the Pie.?
The Businessworld India magazine covered all this in an interesting article here.

Here are some observations from the article:

Big Six
Affiliated Computer Services (ACS)
Computer Sciences Corporation (CSC)
HP Services.

Indian (Desi) Three
Tata Consultancy Services(TCS)

The Trend to Outsource:
In the pre-2002 era, a global vendor would typically offshore a part of the
application development and maintenance (ADM) piece (usually requiring between
500-2,000 people) to an Indian vendor. But post-slowdown, because of the cost
pressures, the offshore component of the orders shot up. From the usual $1
million-10 million slice of a $1-billion order, the offshore component suddenly
jumped to $20 million or even $50 million routinely. And there were offshore
contracts of the order of $100 million.

Along with cost, customers are also looking for best-of-breed solutions and negotiating with vendors who can offer that. As the ABN deal illustrates, the infrastructure management part and the applications development part would now be outsourced to separate vendors, in line with their specific expertise.

The MNC Strategy
-The global Big Six have been ramping up their offshore development capabilities on a war footing.

-To counter Indian IT's India-centric offshore sourcing proposition, they have been touting the advantages of their 'global offshore' sourcing strategy. Their proposition to clients is: we can offer you not only India development centres, but also others around the world.

The Indian Companies -Challenges and Strategy
-One of the biggest challenges Indian companies face is in the 'sweet spot' they enjoy - application development and maintainence(ADM), a highly commoditised business.This currently accounts for 50-60 per cent of the Indian industry's revenues. But in the global context, ADM is not more than 30 per cent of the total work. Tier I firms like Infosys, Wipro and TCS are trying to change their dependence on ADM by building domain expertise in specific high-growth industry verticals like healthcare, retail and utilities. These top three players started re-organising their businesses along specific industry verticals two years ago.

-The second leg of the strategy of the Indian IT firms has been to move up the value chain into areas like consulting and remote infrastructure management. Unlike its peers, Infosys stands out as the only Indian company to have invested in building a pure consulting practice. It has invested $20 million in Infosys Consulting till date and will have 500 people by the end of the year. TCS is aiming for a similar strength by the same time and is looking at a combination of organic and inorganic growth.

-Another big challenge that Indian firms face is their dependence on just 2-3 marquee customers. Market leader TCS, for instance, derives 13 per cent of its revenues from GE, which is known to drive a hard bargain on billing rates.

-The biggest challenge that Indian companies face and will face even more this year is on the people front. This applies equally across levels - entry and middle and even within the senior management. With the MNCs planning to recruit from campuses this year, the Indian firms are bound to feel the heat at the entry level. But the crisis really is at the middle manager levels, where resources are usually built through lateral hires for a specific skill or domain expertise. An Accenture or IBM typically pays 25-30 per cent more at the middle level than a Tier I Indian IT firm.

The Future:
-If the market focuses on best-of-breed solutions, the Indian majors will continue to get the commoditised application development jobs, while Accenture will pick up the plum consultancy jobs and EDS will continue hogging the integration jobs. And if offshoring is limited to only application development jobs, the global MNCs will, in the short run, have an overwhelming advantage over the Indian players while bidding for the high-end jobs.

-In terms of sheer numbers, therefore, IBM and Accenture can hope to throw in the same number of people for offshore work that TCS and Infosys can. On the other hand, the Indian majors still have a long way to go before they can boast of front ends that compare anywhere near any of their global rivals. Infosys and TCS will have 500 consultants each this year, but that's a far cry from Accenture's 2,000 global consultants

-IBM is the only player in the world that has the range of services to bid for a full job.

-Accenture and EDS are far more narrow-focused. Accenture is primarily a consulting firm still - and consulting is growing at a mere 1 per cent a year. Unless it can change itself radically or unless consultancy starts growing faster once again, it has a big handicap.

-EDS is strong in large end-to-end systems integration projects but also weak on the application development and maintenance side. These are precisely the factors why clients are shopping for the best of breed vendors today.

-Of the Indian biggies, TCS has demonstrated its skills in handling really big orders. Infosys and Wipro have those capabilities too - but they still have a long way to go. Finally, even in the top three, only TCS has a full bouquet of services to offer.

- Infosys is still primarily an application development firm now building up a consultancy division, and also throwing in some BPO capabilities into the range. Wipro has a strong technology remote infrastructure management focus, but also glaring gaps like consultancy in its armoury.

In balance, the MNCs seem to still hold some advantage over the Indian players in bidding for the really high-end jobs. And that can be seen starkly from the way the orders have been going so far in places where the players have come face to face.


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