Financial Daily from THE HINDU group of publications
Monday, Jan 03, 2005
Info-Tech - Insight
Small today, big tomorrow
WHEN Cognizant Technology Solutions was added to the NASDAQ-100 Index last week, it dispelled any lingering doubts about "offshore outsourcing" entering the big league. One could quibble that this is a recognition that has come a year too late. But nitpicking apart, with this distinction Cognizant joins a select band of stocks consisting of Microsoft, Dell, e-Bay, Cisco, Amazon, Siebel, Pixar, Yahoo and Flextronics that have ushered in and defined new business paradigms.
The offshoring wave is not only gathering momentum, post-US elections, it is also probably a trend that is here to stay for a while. Adding to the excitement is the expected surge in global IT spending, increasing client visits to India, stable billing rates, receding fears of an outsourcing backlash and massive recruitment drive, and infrastructure investments by Indian software companies.
The appreciation of the rupee against the dollar is the only variable threatening to spoil the party in a small way. In this backdrop, eWorld attempts to capture four significant trends/themes in offshore deals for the top six Indian software companies in 2005:
Deal size and complexity
The core strategy would remain turning a $1 million, $5 million or $10 million existing client into a $50 million client to sustain revenue growth. This time-tested strategy, also dubbed `customer mining' or `increasing the client's wallet share', will be closely watched by analysts and investors alike on a quarterly basis.
Focus will also be trained on the nature of new deals, in terms of either domain capability (say manufacturing or financial services) or service competence (such as data warehousing or packaged implementation). Take, for instance, the multimillion dollar deal bagged recently by Tata Consultancy Services (TCS) to provide infotech and engineering services to the Formula One carmaker, Ferrari. The ability to secure deals of this kind will go a long way in establishing the credibility of the frontline companies to participate in the $50-100 million category deals.
Differentiation in services
With three billion-dollar companies, namely TCS, Infosys Technologies and Wipro Technologies, jockeying for space in the $-15 billion software services sector, there will be greater emphasis on differentiation than in the past. Most first-time outsourcing clients, as also some research outfits think these companies are alike in terms of services, competence, employee base, pricing and client service. Adding to the urgency are Satyam, HCL Technologies and Patni Computers, which have occupied the sub-billion dollar slots vacated by the other three earlier this year.
TCS and Infosys have strikingly similar business models. They are charting out a course that might take them in fundamentally different directions over the next three years. Infosys is banking on its foray into consulting to expand its relationship with existing clients. TCS is hoping to leverage its deep relationships with clients such as P&O Nedlloyd, Standard Chartered and AIG, and its ability to bag mega deals (such as the National Health Service, UK) as a differentiator.
The MNC vendor thrust
Going by the recent aggressive infrastructure upgrades and recruitment drive by frontline Indian companies, there is growing pressure on multinational vendors such as IBM, Accenture or Cap Gemini to act. The only way they can resist the offshoring wave is by enhancing their offshore presence as part of client services worldwide. These moves will gather greater vigour in the coming year. The challenge for Indian companies will be to enhance their presence across other low-cost geographies around the world. TCS has made good progress in this direction. Its global development centres at Uruguay, Brazil, Hungary and China are servicing nearly 35 customers. Such a move will also help counter competition from countries such as China or Russia in the low-cost offshore marketplace.
Two kinds of acquisitions are likely in the Indian software arena. The first kind would be big and disruptive when made by a company such as IBM, Accenture or EDS. Here a frontline or mid-sized company would be acquired to gain the size and employee resources required to compete with the likes of Infosys, Wipro or TCS. Obviously, this prospect is likely only if there is a substantial drop in the valuation of Indian companies.
The other kind of acquisition would be made by Indian companies going for small-sized complementary acquisitions in the US or Europe to help them gain either domain expertise, geographic exposure, horizontal capabilities or forays into BPO (business process outsourcing). Wipro's acquisition of AMS and Nervewire, Infosys's Expert Information Services and Cognizant's Aces International, Infopulse and Ygyan has shown that this route can be used quite effectively for business growth.
Picture by Anu Pushkarana
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