The Hindu Business Line : `Sharpen skill sets, broaden risk appetite'

Indian companies will have to face an internal challenge from a skill set and development of services that cannibalise one set of skills for another type of services.

Despite our pulling him out from the lunch table at Hotel Grand Hyatt, David Tapper, Director of IT Outsourcing, Utility and Offshore Services, IDC, brushed aside our apologies.

"This is part of the job, happens all the time," he added gamely, during the Nasscom 2006 organised recently at Mumbai.

Quickly settling down in the lobby sofa, eWorld peppered him with questions on the sustainability of the offshoring model and where Indian service providers stand vis-à-vis their multinational peers. Read on for his unconventional views on the mega deals and how offshoring has to change in the years to come.

What are your views on the recent mega deals bagged by Wipro from General Motors and TCS/Infosys from ABN Amro?

I recently wrote a piece on the GM deal. I felt that GM awarded the bulk of its deal to one supplier to say that while multi sourcing is interesting, at some point in future, `I am not going to need many of them. Once I transform my network to a converged network and my software to a SOA framework, which can talk to each other, I will need only one company to run it all for me.' That means that if you are in the game and you transform, but if you are not the critical driver, then you are not going to be a part of the partnership 5-10 years down the line. This is an interim model.

In the ABN Amro deal, I said that the sum of the parts is worth more than the whole. A plus B is equal to C. C is the whole. IBM got A and Infosys/TCS got B. If you look at IBM's business model, they might have even said that they would not mind losing the support work, because the support work is going to go away over time. IBM says `I got what I wanted. I can operate this thing and everything has to go through my data centres. I have a strategic influence with the customer on what gets put there with the customer and gets billed.'

In a sense, are Indian vendors being short-sighted in their business model?

Yes, they will have to broaden their risk profile. Indian companies will have to partner with new types of companies such as online companies so that they can build new types of service delivery models. They may have to take the risk of becoming a real outsourcer. Look at HCL (Technologies), which is using Web hosting now. That is an innovative model.

Indian companies are myopic about that right now, but they will have to broaden the scope of their risk profile.

Compared to the 25-30 per cent margins enjoyed by Indian companies, multinational vendors clock only 8-13 per cent margins? Are Indian companies set to catch up in the outsourcing race?

Out of its revenues of $15 billion, Accenture does much of the higher-end work of business consulting and technology.

That cannot be compared to that of the Indian companies. Much of what Indian players do is not outsourcing, which runs into hundreds of millions of dollars. Most of offshore that is done by Indian players is not outsourcing. You cannot compare the two, as they are two different business models.

So, you have to look at the other side of the offshore model too. How are you going to scale a company up to one of the Big Fives, which will require hundreds of thousands of people? Is that manageable?

I think the global players still have the edge substantially over the offshore players. Offshore providers are in the right direction but they still have a long way to go. Most of what they are getting is still project-based orders.

They will have to make significant adjustments to compete at that level. They need to not only broaden their skill sets, but also their risk profile.

What will be the key challenges Indian service companies will face in the coming years?

Indian companies will have to face an internal challenge from a skill set and development of services that cannibalise one set of skills for another type of services. Look at new technologies, say VoIP (Voice over Internet Protocol), which is a simple networking technology or service-oriented architecture (SOA), which is objects-oriented. I will not need anybody to maintain these anymore. While I get rid of my skill set around mainframe and move towards SOA, I also get rid of the need to do maintenance of these services. I do not need people to maintain, but to design stuff. So we are faced with a shift in skill sets and shift in business model.

Doing project work is one type of business model, but running big operations such as data centres such as what IBM or EDS is another. Even HCL Technologies has started to do that with its recent order from DSG International. The business and investment model for this is very different. You have to take the business risk, own the capital and run the operations and if something fails, you are going to be responsible for it. In a project-based model, there is little responsibility. I build it and give it to you. If something breaks down, you can come in and fix it. Whereas when you are running my applications and it shuts down, the entire company shuts down with it.

As I said, some of those services will get cannibalised and go away. Today, India has a huge population of maintenance jobs. What are you going to do with these, once they go away? There is also an integration of IT and process, delivered in an automated fashion on an application. Indian companies will have to figure out ways of reducing one and increasing another. For these companies, scale will remain an important factor. By global standards, they are still small compared to IBM or Accenture.

Do you think the dimension of `what can be done offshore' is changing and that will change the overall outsourcing scene?

Almost everything can be done offshore, except for business consulting which is typically done with the client. There is no question about that. There is tremendous pressure on them (the multinational vendors) to redistribute their support mechanism and move them to offshore locations. They will continue to face price and margin pressure.

Do you think the application development and maintenance part of the pie has matured significantly for Indian offshore providers?

I would agree. I think that the maturity of the business itself is evident from the type of services being provided. At the same time, the evolution of technology is getting simpler. The industry is moving away from what is today legacy stuff, namely Cobol, mainframes to packaged development and service-oriented architecture. The combination of these two is pushing them in a direction where they (Indian firms) will have to extend themselves up to some of the higher level services such as technology consulting or even business consulting.

In your view, should Indian service companies think strongly about building a hybrid product-cum-services model?

I am a fundamental believer that product companies should be purely into products and service companies into services. The culture of these businesses is very different and business model and specialisation is also different.

maverick@thehindu.co.in

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