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Bharat Kumar
Gaurav Raghuvanshi

The way up isn't always the best. Some people want to climb down too. Some others feel that staying in the middle helps. Or does it? Where should you be in what the IT industry calls the `value chain'?

A RECENT industry analysts' report gave an interesting perspective on the growth rates of IT software companies. The likes of Infosys and Wipro seem to have grown faster than their like-sized peers that are based out in the West. (`Like-sized' is important, for it's easy to grow fast on a small base and say your growth rates are bigger than rivals whose revenue bases are significantly bigger.)

Titled "Five major conclusions concerning offshore labour trend", the report, by Rod Bourgeois, Senior Research Analyst-Technology Services, Sanford C. Bernstein & Co, has the following highlights: At revenues of $1.06 billion, Infosys had a sales growth of 41 per cent, Wipro, at $1.35 billion had 49 per cent growth, while HCL Tech and Satyam Computers, at $509 million and $556 million, had growth rates of 35 per cent and 21 per cent. Cognizant, at $409 million, showed a growth of 61 per cent. Interestingly, Perot Systems, which has only slightly higher revenues than Wipro, at $1.55 billion, showed 16 per cent growth while Sapient, with $200 million, showed a 13 per cent growth rate.

This led us to the query: Are Indian firms doing much better than their US counterparts? Sure, they are. According to Bhupinder Ahuja, former analyst with Deutsche Securities, and currently a money manager, "While both Perot and Sapient have a significant offshore presence now, the model is still different from the Infosys or Wipro model where offshore is not just an expansion of delivery capability but at the core of how their business is run. This would mean a higher offshore component (in case of Infosys and Wipro) and easier and better integration with the sales process." Since the overheads are lower (with the entire headquarters-related administrative expenses being offshore) this means they can still remain cost-competitive and offer better value to their clients, he adds.

But the cloud to the above silver lining is, US firms such as Perot Systems and Sapient are aggressively building an offshore (read India) presence. If Indian vendors have for long used their offshore presence as a strength, it makes sense for US firms to do the same.

So, just as US firms are coming in here, Indian firms are trying to do in the US what US firms are doing: consult for clients. Infosys set up a business consulting arm in the US recently promising a $20-million investment and recruitment of 750 professionals in the US, Wipro Technologies bought out AMS' technology consulting practice for the energy sector and Cognizant has had a business technology consulting unit in the US since 2003.

The chief executive officer of a medium-sized software development company describes the entire industry as an imaginary hill. Consulting and client acquisition would form the top end of the business, followed by application design, application management, package implementation and finally, network and telecom infrastructure management, that make up for the bottom of the value chain.

In effect, if competition is coming downhill to take a share of your plate, you go uphill to grab a part of theirs.

Five years ago, Indian software companies were more content with their role of body shippers, sending hordes of highly competent engineers to fix minor problems in the US. At that time, the total turnover of the big three was just over $500 million and their combined staff strength was just 20,000.The situation now is vastly different, with the country boasting of three billion-dollar companies that employ close to 70,000 people and rake in nearly $1 billion in profits annually. In addition, there are quite a few Indian companies that employ close to 5,000 people and are growing fast.

"The purpose of consulting is also to consolidate the downstream business. We will offer more value, higher quality and global delivery. The integration will help us offer a combined value package," says Infosys' CEO, Nandan M Nilekani. For the international giants, the reverse is true. As they already have all the advantages that the Indian companies are seeking, they see merit in offshoring part of their activities to leverage the same economic advantages that their Indian counterparts have. In that sense, they are trying to climb down the hill in search of value.

According to estimates by IT research firm IDC, just four firms — EDS, CSC, Accenture and IBM — will add 50,000 employees in India. Sapient, which started its offshore centre three years ago, now has half its workforce in India and Accenture already has close to 5,000 people spread across its three Indian locations.

Interestingly, not everyone sees India climbing the consulting hill as the right way to go. Says Partha Iyengar, vice-president and research director, Gartner India, "Consulting is the wrong hill to climb."

He feels that the last thing that US clients (and those from other geographies) need is more consulting companies coming out of India. Iyengar says, "There is a tremendous value chain `hill' even with the core applications outsourcing and other service lines (such as infrastructure, enterprise applications, R&D and embedded software). Indian vendors are still at the bottom of the hill. This is what they should focus on." He is categorical when he says that Indian vendors' attempts to target the US consulting market "will fail and it is a completely misplaced and confused strategy."

Here he means strategic, management consulting as opposed to technology consulting. According to Iyengar, "I do not believe that Indian vendors should be eyeing `management consulting' flavour, for a long, long time." He feels that they have enough challenges to avoid getting `commoditised' in even their core offshore offerings. Management attention, time and resources need to be focused on moving up the value chain in the above areas, and "not in barking up a consulting tree," he says.

Indian vendors, who have had a taste of the technology consulting market, seem happy that they took that direction. R. Chandrasekaran, Managing Director, Cognizant Solutions Ltd, says that the company formed the Business Technology Consulting (BTC) group in response to growing client demand for strategic IT management consulting services. His clients actually asked for assistance to frame and detail offshore IT strategy, to assist in change management associated with strategic offshoring and to identify opportunities for business process outsourcing.

In this model, Cognizant's most senior consultants and principals work directly with clients onsite, both framing engagements and managing their delivery. Meanwhile, a pool of offshore analysts researches and provides analytical and documentation support.

Chandrasekaran says that the BTC practice is a logical extension of its core business. Cognizant has limited itself to BTC and does not provide the entire canvas of management consulting, that Gartner's Iyengar warns against.

Significantly, technology consulting helps generate revenues for application outsourcing work (or, that part which is lower down the hill). For every $1 that he generates from consulting, Chandrasekaran expects at least $10 of downstream revenue. And, how does it become a differentiator for the industry? He says that once consulting comes up in the introduction, the client is willing to have a deeper dialogue than is usual. According to Chandrasekaran, "Once the CEO or the CFO comes into the picture, we bypass the request for proposal (RFP) stage. And, after we do the consulting bit, we also invariably get the offshore outsourcing work."

But, isn't branding and building credibility in a new area such as technology consulting tough? Yes, says Ahuja. "Creating a presence in consulting is definitely going to be a big challenge and will need many years of investment for these companies to win large consulting assignments." A strong advantage for Indian companies though, is their direct relations, with their clients, which gives them access without intermediaries, he says.

Chandrasekaran feels it's not impossible. "Branding is easier as we have tremendous credibility in the IT outsourcing space." More than 30 per cent of his strategic (i.e., those who have the potential to generate huge revenues in future) outsourcing customers have already used his consulting services, and, "for many new customers, BTC has either been an entry strategy or the first strategic assignment before moving work offshore."

Some Indian firms that aren't big enough to be in the top five, have gone in for mergers with companies of a similar or smaller sizes - a third path to the holy grail. In November last, TechSpan, an Indian firm, merged with US-based Headstrong Corporation. "The merger was possible because of the complementary strengths of the two companies. It has helped us to benefit from strong consulting and system integration capabilities of the two companies," says the Techspan Managing Director, Harsh Singh Lohit.

But with a large gap remaining in terms of size, between Indian biggies and their US competitors, the question remains: can Indian companies actually grow up to challenge the international giants? Infosys and Wipro boast of a turnover in excess of $1 billion. But IBM Global Services has a turnover of $40 billion while Accenture clocked almost $12 billion in international revenues last year.

The answer lies in offshoring. According to IT research firm IDC, by 2006, the offshore component of US IT services markets would rise to 23 per cent from about 5 per cent as of now. Another study by Bernstein puts the latest figure at 9 per cent, but agrees that the international giants still have a long way to go. By inference, that would mean that Indian vendors have a head start.

While companies like GE and AT&T were the early birds, several Fortune 100 companies like Aviva and Prudential have started working with offshore vendors in recent months. Such large clients would normally prefer to work with a single entity (or a few entities that they could control and monitor easily), which would serve as single-stop shops for all their needs. This makes it necessary for Indian companies to diversify across a range of services and reach a certain critical mass.

Now, here's the flip side to the hill-climbing debate. When US majors wanted to set up an offshore base in the latter part of the 1990s, quite a few captains of the Indian IT industry sniggered. After all, offshore presence did not mean setting up a campus and hiring 10,000 people in three years, when Indian vendors have worked at getting there over two decades. Now, if Indian companies want to emulate their US competitors in establishing a significant presence in those shores, it would likewise be a tough job.

So, what pitfalls must they watch out for? Chandrasekaran goes back to the warning against "management consulting.' He says that companies that try to provide the entire canvas of management consulting, including corporate strategy definition, HR consulting and management, brand management and the like, could face an erosion of their credibility as it's not their core competence. "It could become their Achilles heel."

Picture by Bijoy Ghosh

bharatk@thehindu.co.in

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