The Hindu Business Line : Indian companies need to spot game-changing ideas

The outsourcing bar is being raised for Indian software service companies. Even as demand remains robust, the supply side pressure is likely to become greater. As multinational companies such as IBM and Accenture build their resource base in India, the war for talent is set to intensify; client expectations are set to rise as the model has reached a certain level of maturity. The move to new service offerings such as infrastructure management or consulting will call for employees with different skill sets. In this backdrop, Ms Frances Karamouzis, Research Director - Strategic Sourcing IT Services, Gartner, who made a presentation at the recently-concluded Nasscom 2006 talked to Business Line about the key trends to watch for in offshoring. With close to two decades experience in the IT industry, and, the last six at Gartner, Ms Frances offers a wide-ranging perspective on key developments. Excerpts from the interview:

What do you think are the short-term concerns for Indian players?

The immediate ones are the workforce, and, price and margins. Those are the two in the short term. The next will be new markets and new service categories. Beyond that it tends to be diversity of work force and the loyalty factor — clients staying with each of the Indian vendors.

How will the next wave of mega deals of above $500 million be structured?

My sense is that the next new wave of deals will not include asset-based takeovers. Just like the GM deal, EDS got 65-70 per cent of the total deal size. The Indian companies have to get only a portion of the `up-for-grabs' part of the deal. The trick is that the Indian companies get the part that is high margin, which works in line with their model. Even the ABN Amro deal, IBM got one billion dollars, but a lot of it was to takeover the assets and employees. That means it gets to deal with low margin infrastructure business. Infosys did not have to do that and TCS took over a very small portion of the employees.

Do you think Indian companies will also have to participate and takeover a significant part of employees in the newer deals?

I think there are plenty of $30-200-million deals for application business. There is sustainable demand for the next three-four years.

How do you see the demand for new service offerings such as infrastructure management (managing desktops, servers and networks from a remote location)?

There is unbelievable demand for infrastructure management in bundled deals. But in bundled deals, if you see the way HCL Technologies and Wipro are doing in infrastructure, it is a completely different model from what IBM, EDS and CSC are selling. HCL and Wipro’s focus will have to be on combining the best they have in infrastructure with what they have in the application model. If that starts catching on, that will create the new wave.

The clients are saying we want massive productivity gains in the infrastructure space. We do not want to give you labour arbitrage, which is an ancillary benefit. This is completely different from what IBM or EDS are selling today. What Indian companies are proposing is a paradigm shift for selling infrastructure. Will the markets understand conceptually what the business benefits are on both sides? And if they do and the corner turns, it will create to be a new wave for the Indian vendors.

After infrastructure, will consulting prove to be the next wave for India?

It will be infrastructure first, then BPO and then consulting. What will open up for Indian vendors will be operational and quality-related consulting and not strategic consulting. You cannot scale up in this area as you scale technologists. That is why it is not such a big opportunity today unless they make major acquisitions.

Is the time ripe for Indian companies to make acquisitions?

The Indian companies are not going to make any major acquisitions, because it is hard for them to combine culturally a Western company with an Indian company.

Will Cap Gemini make a disruptive acquisition in India as its CEO has been talking about?

Cap Gemini is divesting. They sold their healthcare practice in the US to Accenture and they sold another piece in Europe to Unisys. (If they make acquisitions), it will be just to build capacity to India, but not to get strategic business.

Do you think that the high margins of Indian companies are sustainable?

There is big portion of the demand cycle that is low margin and there is only a smaller sub-segment that is high margin. That is going to be a battle. Indian companies will have to develop a better qualifying funnel to identify the business they want and which they are willing to go after in terms of spending business development dollars.

How important is diversity of the workforce?

It represents the ability to execute and not just current execution. For example, companies such as IBM and Accenture are global and have several delivery centres across the world. Their interdependence outside India is also high. They have clients in the UK and Western Europe, and a much larger customer base. The ability to execute encompasses a lot of these different things. That is what raises their level when compared to Indian companies. They have a lot of process knowledge and their ability to scale up people is significantly superior.

How important will board-level relationships be for the growth of the Indian IT industry?

People such as Nandan Nilekani of Infosys and Azim Premji of Wipro are those who have such relationships. They clearly have got access, and are invited into the boardrooms to have dialogues and conversations. The question is: Do they have something to sell them.

Their fundamental offering today is mostly IT managers and application managers. That is why I was talking not just about access but also about addressability. Can they bring strategic thinking? They need not replicate the Accenture model and build Infosys Consulting. They will have to come up with new game-changing ideas. For example, if they said, why don't you pay us for ideas? For every new idea we come up with for your company, you give us the purchase order to deliver it. For the industry, it will depend on how many Nandans and Premjis you can replicate. You only have limited bandwidth, unless you can replicate more such high calibre professionals to address the issue.

This is the single biggest benefit that Accenture and IBM have. They are not dependent on the CEO or their President. They have an army of 2,000 people who have a certain level of board-level business cards.