The Hindu Business Line : ‘Indians can’t rest on their laurels’

As you sit down to chat up John McCarthy, Vice-President, Forrester Research, you wonder if there isn’t a vague resemblance to Aussie pace bowler Glenn McGrath. Mention it to McCarthy and he says yes, he has been told this a couple of a times, but also about a “Christopher Reeves resemblance. I don’t know where the Reeves reference came from.”

And as he settles into his chair, “I have been called a lot worse.” That’s taking a compliment gracefully and with modesty.

But his breezy way of touching on topics ends right there. Get him to talk about the IT services business in the Indian context and he lets you in on a lot of home truths. Here are a few topics he dwelt on:

A recent Forrester survey of clients indicates that the average offshoring experience is worse off now than it was in 2003.

McCarthy says that the advantage for pure play offshore players is clearly dropping. Specifically, 6 per cent of those surveyed said offshore vendors were worse off compared to traditional onshore vendors on Quality, 9 per cent felt the same for Value for Money and 4 per cent said offshore vendors were worse than onsite vendors for on-time delivery.

McCarthy says that the offshore challenge of talent and skill shortage is now telling on client experience. “Also, clients who have been around are moving more complex and sophisticated accounts offshore.

In addition, more and more new clients are coming in. “They are much less sophisticated IT practitioners.”

While on the topic, McCarthy says it is important to remember that “75 per cent of onshore IT projects fail.”

Govt has to wake up

“The Indians can’t rest on their laurels. Education is an issue. China is clearly investing more in education than India is. That has not yet tipped the scales in China’s favour yet but could do so in 10 years.”

In addition is the uncertainty around the tax issue, he says.

“Vendors aren’t investing in products but trying to figure out the tax issue. Big companies as well are clueless as to how the scenario would look post 2009. This is unnecessary.”

Strategy

“Strategy is about what you don’t do, not about what you do.” He feels that the rising complexity of client engagements is the biggest challenge for Indian vendors. For smaller players, it is focus. Ask him who he means by ‘small’ player and his prompt reply, “Anybody after Infosys.” He says, “Even Cognizant has had to make selective choices — It focuses on four verticals and does not go after every vertical.”

Large orders

Those two words extract a wry smile from him. He calls them the ‘mythical’ large orders. “Any order is large if you want to count years. I can make a $10-million order look big if I count for 10 years. Are you going to be alive in 2017 to evaluate a deal signed this year? Come on…” he exhorts.

But isn’t there a commitment from the clients’ side? His take is that no commitment in those orders is worth anything after the first three years. “Ten-year projects? The CIO is going to change five times over in that time. A vendor could be acquired… who knows?”

“The problem with big deals is that they don’t map to the business strategy of the client. No way can you write a contract today for 10 years unless you are psychic — I don’t know many psychic CIOs — to figure out what your business would look like in 10 years.”

A bit disturbed by this claim, you ask him what such announcements mean. “Anything beyond five years is unclear. Those businesses have to change and will change. Or, the deal might be indicative and possibly there are no formal agreements for periods beyond three or five years.”

Large deals get a lot of visibility but no one knows if they are actually profitable. It’s a showcase for the client — “The CEO looks good. The stock rises. These are prestige deals, you know, with the ‘in’ crowd. Also, it’s a classical Indian syndrome of the little brother keeping up with the big brother. For me, it’s like watching kids in the playground.”

$5-50-million deals

So what changes is he seeing in the marketplace? “The actual change for the last three years are the big numbers in the $5 to $50 million a year deals. Smaller deals — less than $1 million — are starting to plateau. With more offshore momentum, there is growth in the former category. Numbers in the latter category have stayed constant at 1600.

Reacting to the Rupee

He says companies are doing a variety of things to counter a strong Rupee. “Productivity investments, non-linear investments, alternate geographies, moving up-market, raising rates, hedging… these are more or less of a priority for all of the top six companies.” He cites Wipro as an example on the productivity improvement count. “They’d tell you they have tripled lines of codes per employee but only doubled the (wage) rates in the last 15 years.”

Slowdown? Not yet…

But aren’t revenues per employee going down? Isn’t that a cause for concern? “That could be because more and more people are being employed offshore than onsite. In the next 12 months, I expect revenue per employee to rise.

Near term, if there is a US recession or slowdown, it would force clients to shove work offshore.”

Press him for a time line and he says, “Expect increased offshore momentum in the latter half of next year, if the US slows down, which is not yet a given.”

On the slowdown front, IBM and Cisco have given warnings of signs of the US slowing down.

But Indian companies have not seen any real signs yet. McCarthy says, “I am not sure if Indian vendors are looking hard enough for the signs of slowdown. They may not want to. They may not see it yet, they may see it in the last two weeks of the quarter, when decisions are postponed.

Also, he points out that vendors in the product space see signs of a slowdown immediately while the services vendors tend to cite it with at least a six-week lag. “It’s the nature of the services business and the time lag that it brings.”

“So, when the IBMs of the world talk of a slowdown and Indian vendors say they have not seen it yet, both could be saying the truth.” Even if a slowdown hits us now, are Indian companies better equipped to handle it now than they did in 2000? There is no clear answer to that yet.

McCarthy says, “When a slowdown hits us, we are going to find out who has been paying lip services in the sales side and who has really been making investments there. There used to be a time when you get an order because you are from India.

That is all over, no matter what happens. The failure of captives has left a negative impact.”

He feels that vendors who can’t offer clear differentiation on returns on technology spend are the ones who would get hurt.

According to him, “I haven’t assessed all the top 20 guys to find out who has done a good job. But there will be one or two guys you won’t expect to get hurt, who will, and vice versa.”

Failure of the captives

“Our research in April has shown us that several captives have failed to make a mark here. What happens when they roll up and go home or sell out or transfer business out, is that there is a negative impact on the India tag.” McCarthy must have startled a few Indian clients last fortnight when he told them to “Pull out those slides again on ‘Why India?’.” He says Indian vendors have to now differentiate themselves from the captives and explain to clients why captives failed and why third party vendors are good.

Lower manpower addition is good

Business Line’s recent report on Net manpower addition has shown those figures to be muted for most Indian services providers. Is there a link to an impending slowdown here?

McCarthy feels that saying that would be stretching it a bit. “Everybody talks about non-linear growth. Some of those investments are bearing fruit. They are figuring out how to get more out of same. TCS added roughly 10,000 people last quarter. If they can double the productivity of those people in year two… see what I am saying?. And remember, they are driving prod clauses in annuity contracts so they need to do more with less.

On the M&A front, McCarthy has a simple take. “Don’t expect consolidation within the Indian market. However, you will see a lot more European companies come shopping in India like EDS and CapGemini did.”

bharatk@thehindu.co.in

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