• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Bharat Kumar

`As long as companies build good brand recognition and can demonstrate delivery capabilities with appropriate pricing, they will succeed in the offshore markets at any point of time.'

The Chinese use two brush strokes to write the word, "Crisis". One brush stroke stands for danger and the other for opportunity. In a crisis, be aware of the danger — but recognise the opportunity.

— Richard M. Nixon

WHAT you see above is Ravindra Datar's favourite quote. You find it appended to each e-mail that he sends out. And when eWorld, after spending an hour with him in his Mumbai office, discovered to its dismay a recorder fault had failed to capture part of our conversation, Datar turned the crisis on its head. He not only e-mailed back detailed answers but also took the opportunity to add further meat to them. Datar is Principal Analyst, IT Services (India) and BPO (Asia-Pacific) at Gartner India Research & Advisory Services Pvt Ltd. Excerpts from the chat and the e-mail exchange:

Indian software companies and their US counterparts seem to target markets outside their own. Comments?

The US market is more mature than the Indian market in terms of using IT and is part of an economy that is growing slower. Companies there outsource with the objective of cutting costs substantially without having to compromise on security of information and quality of service. Conversely, buyers in the Indian market are in the early stages of IT adoption and the economy is growing much faster than most other economies, despite being the fourth largest economy in the world in terms of purchasing power parity.

The buyers here are eager to catch up with more mature IT users and do not want to go through the learning cycle (when others have already been through it). With global competition at their door step, they are hungry for services that will help them leap-frog technology evolution and adopt global best practices in their domain very quickly.

This makes the (IT purchase) choices — of buyers in the Indian and the US markets — very different. Indian service providers have what the US market wants and vice versa. For Indian service providers, the US market is more attractive with its tax-free dollars and higher margins. They are also at a significant advantage on the "value for money" front as compared to their local competitors in the US market.

The US market is much bigger than the Indian market and the level of offshoring in that market is miniscule as compared to the total spending in the US market. This means there is a huge, untapped opportunity, making it a natural choice for Indian service providers to target.

With higher cost structures, the US-based service providers are feeling the heat of competition from Indian service providers that come with CMM Level 5 certification at a fraction of the cost. They are now driven to look for opportunities in other markets since the local market is heating up with competition, but not growing fast enough to remain attractive for them. Emerging markets like India are attractive because they grow faster and where they can leverage on their knowledge of global best practices.

Recent reports observe that Indian IT services companies had grown faster than West-based companies of similar, or even smaller, sizes. But these US companies are said to be "aggressive" offshore adopters. Is it too premature to write them off or are they late?

Selling offshore services involves a lot more than setting up offshore facilities. There is a huge effort and expense involved in building a brand in a foreign market to the point where potential clients in the new market recognise the brand/company name and associate the right values with the brand. Then, they would feel confident enough to entrust their work to a company that would get the work done from a location thousands of miles away in a different hemisphere, in a country that they do not know much about.

There is nothing like early or late in the offshore business, since this is a very long-term trend. What we are witnessing now is the early days of this long-term trend. As long as companies succeed in building good brand recognition in the target market and can demonstrate their capabilities with appropriate pricing , they will succeed in the offshore markets at any point of time, even 10 years from now.

For companies that started out with large offshore bases in India and other low-cost, good-quality countries with a much smaller resource presence in the target countries, there is a good early-mover advantage. Companies that started out in the reverse have an advantage of being "American" or "Local" which helps in promoting their brand. They, however, have a huge challenge of working on their offshore delivery capabilities which could take up considerable time, effort and cost and also the challenge of reversing the on-site/offshore ratio, especially since it could mean asking people to leave in their home market.

Indian IT vendors feel that after investing, say, a third of their annual revenues in disaster recovery centres (DRCs), clients don't refer back to it. Is this expense avoidable?

That's not true. Security and privacy of information and business continuity in times of crisis still have very high weightage in selecting location and vendors. Sometimes the weightage is even higher than cost savings. Especially after the psychological impact of the 9/11 disaster, DRCs form an important part of a vendor offering. It is not something whose value is seen in times of calm and peace in that the concerns become more accentuated in times of crisis and just after a major disaster, though the consideration exists even in peaceful times. The major difference that service providers might experience is that if levels of DR capabilities are similar for most service providers, then DR capabilities cease to be competitive differentiators and become a hygiene factor.

Gartner's hype cycle applies here. For any hype, there is a trigger phase, followed by rapid growth in hype leading to a peak of inflated expectations. Then there is another rapid change into a trough of disillusionment. After the hype dies out, the markets see the concept for what it is.Then starts the phase of the plateau of enlightenment, where the technology or the concept is deployed with more realistic expectations. This works for both the positive and negative hype around events, technologies and concepts. The concept of DR is now in a state close to the plateau of enlightenment. Enterprises now realise the importance of having DR capabilities, but are not unduly concerned about the negative hype.

The world has now realised that no place is immune to danger and that contingency plans are critical.

Some Indian IT companies seem more successful in Europe than others. And those very companies seem to struggle in the US. Your comments?

Companies successful in Europe have a different approach. They develop the domestic market first, then enter smaller markets such as Europe and then want to go to US in full strength. The issues of leader versus challenger apply here. If you are late in the game, you can't use the same approach as the first one. Companies that are tapping the domestic Indian market first and taking the Europe, West Asia, South African route are, in most cases, product/solutions companies that are building a solid case history, references and a successful track record before tapping the US market. They are not "struggling" in the US market, but it is just that they have not made significant efforts in the US markets first.

Now, most IT companies have BPO arms. Is it a prerequisite for BPO companies to sell in tandem with IT parents? There are some pure-play BPOs but they seem to be getting acquired - Spectramind and Daksh are examples. What's your view?

This reflects the way companies are sourcing. Tracing the evolution of sourcing helps us understand how service providers are building their business models. At Gartner, we have developed a model to simulate how sourcing of services in different countries and vertical sectors is different now and how it is likely to evolve over the next 10 years. We analysed over 200 forces driving sourcing strategies and identified two major forces that have a significant impact on how sourcing strategies are evolving. Most outsourcing decisions are made to take the effort and complexity of managing a non-core, non-critical process away from the managers of an organisation and also to save costs. This means they would prefer to outsource to BPO companies that can also take care of the IT requirements of the process. Also, when outsourcing IT services, they would prefer companies that have BPO capabilities and that can help them reduce their internal efforts and costs in managing those processes. This is reflected in how service providers are changing their own business models. It is based on what their clients are asking for.

When the IT industry hit the slump, predictions abounded that all buying would be on the basis of fixed price (FP) contracts (and not those based on time and material x T&M x consumed) so that clients know what levels of expenditure they are committing to. All through the slump, the ratio between FP and T&M did not change much. Now, some companies, such as Infosys, are seeing a rise in contribution of T&M revenues to total revenues. Your comments.

The pricing model preference is based on a whole lot of factors. It is not a straight, black-and-white trend from FP to T&M or vice versa. A lot depends on the level of maturity of the demand and supply side. Also the complexity of monitoring effort varies across projects. Neither model would die out. It is just that these are relevant in different scenarios and will be used based on the unique requirements. As markets mature further, a combination will emerge.

Do you have a view on what percentage of receivables or revenues should be used to hedge against dollar-rupee movements?

Every time the rupee-dollar or the dollar-euro exchange rates change sharply, the markets are in a tizzy about how to reconcile the costing and budgeting. It is also not possible or advisable to keep re-negotiating contracts every time there is an exchange-rate fluctuation. A globally acceptable index needs to be evolved - an index that relates the dollar, the Euro and the rupee and some other major currencies; a sort of global index to which pricing and payments are linked. This is very easy to speak about, but would involve some complex considerations and may gradually evolve, driven by market forces.

bharatk@thehindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Heard the news?

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line