The Hindu Business Line : Hurdles ahead

THE battle-lines are slowly being drawn. Over the past nine months, multinational third-party vendors such as IBM Global Services, Accenture or Cap Gemini have been building up offshore outsourcing capabilities to mount a credible challenge to the Indian frontline companies such as Infosys or Wipro. With offshore getting mainstream, the need for the MNC players to offer an offshore value proposition to clients has never been greater.

In order to build up credibility in the offshore game, these MNC vendors are working on three fronts:

One, in large outsourcing deals in which the likes of Infosys or Wipro are participating with them, the MNC vendors have been able to match the offshore billing rates offered by Indian companies in these project bids. They expect that bagging these deals will force them to build offshore capability and take the battle to the home ground of Indian companies such as Infosys or Wipro.

Two, even if they do not succeed in ramping up the Indian operations in a big way in the short run, these MNCs will be able to impose a cap on billing rates. And in turn, this will keep the gross and operating margins of Indian companies under pressure.

Finally, these MNC vendors have also been hiring at a fairly brisk pace, though the hiring seems to be in line with demand. For instance, at the Accenture Analyst Conference Call held in mid-July, Harry You, Chief Financial Officer, responded to a question on India saying, "We have about 2,000 people now in India and I think we continue to aggressively grow at the same time as we have always said and we won't grow supply in advance of demand. But we're seeing very good demand here in the year ahead." And as recently as September 17, in the Investors and Analysts Conference held after announcing their earnings performance for 2003, Harry You said that in recent weeks, Accenture has been hiring 200 employees every week.

In this backdrop, we spoke to a cross-section of CEOs and CFOs of Indian software companies to gauge the impact of these trends. Most of them were rather dismissive of the threat from the MNC front. Practically all of them feel that MNC vendors may have to contend with several challenges such as:

Systems and Processes: All the Indian offshore players claim that the offshore model is not only about hiring people (though they are the most important asset for software companies). It is also about putting in place sound and viable offshore delivery capability. The much vaunted "Global Offshore Delivery Model" or the "Smart sourcing Model" is based on project methodologies, systems and processes have been perfected by Indian companies over several years in the past decade. In turn, the biggest challenge for the MNC vendors will be to make the offshore model work in a short time-frame and match the rich productivity payoffs derived by the Indian frontline and tier-II companies.

Critical mass/Revenue per employee

: Given the strong balance sheet strength and deep pockets, Accenture or IBM Global should be able to match the offshore prices of Indian frontline companies for a reasonably long period of time. But the sustainability of these players will hinge on their ability to clearly articulate an offshore delivery strategy and quickly build a critical mass of delivery capability in the country. Secondly, these MNC vendors will have to contend with pressures of a sliding revenue per employee as they move predominantly onsite centric activity to locations offshore. As the consulting business in the US, which had been in the doldrums, shows signs of a nascent recovery, it remains to be seen whether these vendors will continue to remain committed to their offshore strategy.

SG&A reductions: The biggest challenge in this case for these companies is to bring down their sales (and marketing), general and administrative (SG&A) expenses in line with the drop in revenues. So far, Indian frontline companies have consistently claimed that lower SG&A has been the key differentiator between Indian and global MNCs in the offshore business. Over the past three quarters, the Accenture CFO has reiterated that the focus of the company is to bring SG&A down and it has considerable leeway in achieving this objective. In fiscal 2003, for Accenture, the SG&A expenses were around 23 per cent of its global revenues, almost 5 percentage points lower than the previous year. But they were still substantially higher than SG&A expenses of around 15 per cent of revenues of Infosys for the year ended March 31, 2003. The challenge for Accenture will be to bring this key expense head down on an ongoing basis to compete head-on with Indian frontline companies.

maverick@thehindu.co.in

Picture by Praveen Kumar

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