Frisky, but not risky

C.R. Sukumar

RISK is inherent in business, especially in a dynamic industry such as IT services. But with the US slowdown and its impact on the Indian scene, risk-cutting has today become something of a buzz word.

Budgets have been cut across the board and projects postponed, leading to a drastic reduction in the size of the IT services market while boosting competition.

In search of the silver lining amidst storm clouds, Indian IT majors have started finetuning their risk-management strategies and focussing on the do's and don'ts, including that big risk factor -- the concentration or overdependence on specific geographical regions, businesses, technologies and clients.

Risk-taking is essential to grow but the negative fall-outs need to be managed effectively. Risk mitigation has to be undertaken at both the strategic and the transactional level. It would be no exaggeration to say that Indian IT companies' risk-taking abilities are being put to the acid test. A turbulent business environment, replete with revenue shortfalls, profit warnings and retrenchment across the globe, especially in the US, has precipitated the need for such initiatives. Here's a bird's-eye view of the different risk-mitigation models adopted by the key Indian IT players.

Pillars of stability

The business model of Infosys Technologies rests on four pillars - predictability, sustainability, profitability and de-risking (the PSPD model). The Infosys management claims that this model has helped it evaluate risk-return trade-offs and make effective, strategic choices.

Infosys focuses on long-term relationships with clients and seeks to become a strategic partner in their quest for competitiveness. This leads to a predictable and sustainable revenue stream. Its Global Delivery Model has helped it to be among the most profitable IT services companies globally. De-risking helps it react better to changes in the business environment, say company officials.

According to them, a comprehensive and integrated risk-management framework forms the basis of all the de-risking efforts. Prudent norms aimed at limiting exposure are an integral part of this framework.

``Excessive dependence on any single business segment increases risk and, therefore, needs to be avoided. To this end, the company has adopted prudent norms, wherever required, to prevent undesirable concentration in any one vertical, technology, client or geographical area.''

The Internet has emerged as a significant business opportunity for an IT services company like Infosys. However, due to the inherent risks associated with start-ups, Infosys has chosen to focus on Fortune 500 and other established corporations.

To avoid service concentration, Infosys has developed service offerings across various horizontal and vertical business segments. These are designed to offer the company end-to-end capability in delivering IT solutions to clients and also add stability and predictability to its revenue stream.

According to Infosys, excessive exposure to a few large clients can impact profitability and increase credit risk. However, Infosys has also understood that large clients and high repeat business lead to higher revenue growth and lower marketing costs. Accordingly, the company has decided to strike a balance and has chosen to limit revenue from any one client to 10 per cent of the total revenue. Besides boosting revenues from existing clients, it seeks new business opportunities and clients to cut client concentration levels.

Infosys feels a high geographical concentration could lead to volatility in business because of political and economic factors in the target markets. While against any rigid limits on geographical concentration, Infosys proposes to proactively look for business opportunities in new geographies and increase their contribution to total revenues, say officials.

The company has chosen to focus on certain vertical segments to leverage domain expertise and deliver enhanced value to its clients. However, to ensure that cyclicality in any one industry does not affect revenues, it monitors the proportion of revenue from each vertical domain, they say. Infosys is of the view that focussed marketing efforts in chosen domains help cut risks.

Undue focus on any particular technology could affect the company's risk profile, say officials. Industry characteristics and market dynamics should help determine the choice of technology.

A mix of the best

According to Satyam Computers, the main competitive factors in IT services are the range of services, technical expertise, responsiveness to customer needs, speed of service delivery, the quality of service and the perceived value.

Satyam acknowledges that continued dependence on a single region, North America, is an issue for concern. Accordingly, it has stepped up focus on non-US markets. The steps include -- setting up a dedicated centre for Enterprise Application Integration at Satyam's European Centre in the UK; opening a West Asia Solutions Centre in Dubai Internet City; and establishing an Asia-Pacific headquarters at Singapore.

As part of geographic risk management, the company plans to expand its presence in existing markets and also target new markets in Europe and the Asia-Pacific. Satyam is of the view that locally-hired technical associates and managers working from offsite centres will help the company increase local market share and compete better against local IT service providers.

`Applying thought'

The strengths of Wipro in research and development services place it ideally to take advantage of the rapid development and enhancement of new technologies, says the company.

To address risk related to concentration of services, Wipro provides its customers with comprehensive and integrated software solutions, say officials. It has over a decade of experience in software development, re-engineering and maintenance for its corporate customers and provides managed IT support services both at the clients' site and through Wipro's 28 offshore development centres (ODCs) in India.

Wipro was among the first India-based IT services companies to implement the offshore development model to deliver high-quality services at relatively low cost to international clients, says the company.

As part of its risk management and growth strategy, Wipro proposes to promote its global IT services business better besides boosting its presence in Europe and Asia.

Looking beyond the US

According to the Infotech Enterprises Chairman and Managing Director, B.V.R. Mohan Reddy, the company continues its efforts to cut overdependence on any single geographical market, customer or single line of business.

Revenue from non-American markets has gone up to 25 per cent of revenues for the last fiscal compared to 11 per cent in the previous year. The single largest customer now contributes 32 per cent of the total revenues as against 50 per cent in the previous year. While geographic information systems (GIS) and engineering continue to be the main focus areas, e-solutions, as a separate line of business, is contributing more to total revenues.

The revenue from the US and North America to business as a whole has decreased, from 88 per cent to 75 per cent, in the last fiscal due to de-risking initiatives. A Pan-European strategy has boosted revenues to 19 per cent from 8 per cent in the previous year, says the company.

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