When the crumbs turn valuable

Kripa Raman

THE Managing Director of a middle-level software services company in India was fairly surprised when he found out that some of his fellow country cousins were bidding for the same overseas projects that he was.

Says he: ``We were looking at projects in the UK and in the Middle East.. One company which bid along with us in the UK was well over twice our size. With the Middle East project, there were two bidders from India, both quite high-profile and both much bigger than us, revenue-wise.''

His surprise is not so much at their pushing for the same contracts, as at the fact, as he claims, that they all bid lower than his company did. ``My company was the highest bidder for every one of these projects. These were all companies which earlier had a strong presence in the US. They are probably bidding lower because it takes time to establish yourself in new geographies, however remarkable your performance elsewhere.''

The smaller fish are certainly surprised that they have to stalk their prey along with the bigger fish who have left the feeding ground of the US and are now establishing themselves everywhere, both to spread their risks as well as to keep themselves going.

Next to exploring new geographies, which can be an expensive exercise on its own, the other resort for companies squeezed into a corner by developments in the US is to explore the domestic market. Where everyone used to boast about how export revenues accounted for most of their income, it has now become a situation where they hope the domestic market will somehow keep them on the move while they scout around for larger domestic projects or wait it out for better opportunities abroad. A Mumbai-based organisation has got done for itself a project as small in size as Rs 15 lakh by a company as large as Rs 200 crore. Says the Chief Technology Officer of the client: ``We were very surprised when they did this for us, considering each of the employees on the job must have been earning on the average anywhere around Rs 40,000 a month, at a ridiculously conservative estimate. Perhaps they wanted the experience that our kind of project gave them. But even if they did, it would be small. And it would be the medium sector which would demand this kind of work. It is pretty clear that things are difficult out there.''

``IT companies are now looking more keenly at the domestic market,'' says an official with TCS. ``Companies that have placed all their eggs in one basket are now faring badly. We have always held that the domestic market cannot be ignored. About 10 per cent of our revenues comes from domestic work. Many large companies used to have only 3-4 per cent of their revenues coming from domestic work. We are doing work in banking, finance and insurance, we have work with the BSE, the NSE, the RBI and the like.'' Of course, points out the official, TCS is spread across many geographies. ``We certainly cannot look at projects below a certain critical size. Even in India, we are at the high end of the market. It is not feasible for us to take up smaller projects.''

IT companies which were the early birds in the domestic space have quite cornered all the bigger plum projects. A company like Siemens Information Systems Ltd has mostly domestic clients. ``It is our policy at Siemens to have at least 60 per cent of our revenues come from our place of presence.'' However, companies who have not provided for even a modest domestic presence will find the going very difficult, say industry experts.

Ketan Sheth, Managing Director, Orient Information Technology, a Rs 90-crore company, says margins from domestic projects are too low to sustain the kind of overheads that have been piled up by the export companies. ``Just take a look at any exporting software company in India. Look at their office. Their computers are nothing less than Pentium 5, they have the most superior colour printers, decor that would be attractive to the foreign visitor to your establishment, the finest canteen, and other facilities. You cannot even pay your people if you take up a small project abroad or take up a domestic project.''

Companies in exports have also spent a lot acquiring quality certification, whether ISO or SEI-CMM level certification.

Yet, take up small projects they will. ``Firstly, everyone is hoping this is a temporary phase,'' says Vijay Mukhi, of Bombay Computer Club. ``Secondly, they want to keep their best people and want to keep them going on something or the other. When the Managing Director, Nandan Nilekani, of Infosys says that the competition is really tough out there, you can imagine what is going on.''

Everyone wants to retain their best people, says the HR head of a large software company. ``Even if you take up a small project which is challenging, it adds to the skill of our professionals even if it does not fetch us profits. This would be important when times are better, when our clients will want to know what kind of work our employees have been doing. We cannot tell them they have been doing nothing, or doing only base work.''

Pankaj Dodeja, a director with Melstar, says people built up ridiculously high structures because their employees were being paid ridiculous wages in the US which are now seeing a correction. ``People were paid $120 an hour. Now one has a more reasonable $70 to $80 an hour going, for some solid kind of work of course.'' At Melstar itself, where domestic revenues make for only four per cent of total revenues, a 100 per cent domestic subsidiary, Melstar Indiacentric, has been made active. ``Our technology people are the same as for exports. But we are getting marketing people across seven sales offices. We are looking at banking, insurance and finance sectors where we already have some presence here. Melstar has also floated a subsidiary in Singapore called Melstar Singapore Pty Ltd to establish itself in the South-East Asian market.''

Dodeja says the tax structure is what hits the largely export companies which take up domestic work. ``Quotations are lower, in the first place. Additionally, one has to pay 35 per cent tax, while tax on exports is zero. When a company is used to this earnings structure, then its set-up is different. Yet everyone now realises the importance of the domestic market.''

There is quite a scramble for larger domestic projects, both corporate and government, says the marketing manager of an IT company.

Ravindra Datar, Principal Analyst for Information Technology, India, with Independent Research Partner for Gartner in India, says the situation is typical of a new technology which provides immense benefits and where most of the major buyers have already made their purchases. ``This leads to a brief `pause'. At this point, a very intensive competition ensues.'' This, he says, is followed by a shake-out and consolidation. ``At the end of this phase, we can expect to see a few, well-entrenched big players slugging it out against each other at immense benefits to the buyer by way of lower costs, better quality of service and increased negotiating power.''

But, says Datar, this does not mean the end of all smaller players. ``Smaller players that survive the shake-out will continue to thrive on niche areas that are too small for the giants to address.''

Indeed, points out another analyst, some of the companies which have shown good growth, relative to the rest of their Indian counterparts, are those such as Mahindra British-Telecom, (though it is not particularly small) and Geometric Software, which are present in comparatively (against the large majors in the country) niche areas.

Datar says that while cost is a major consideration, the mere ability to offer the lowest cost may not be able to clinch the deals. ``Other factors such as reputation, quality certification, past experience and technical excellence play a major role in the vendor-selection process. Some buyers would also prefer one-stop shops where large vendors fare better than the smaller, focussed service providers.''

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