Abraham Thomas, MD, IBM India: After three successful years in India, he is set to move out

To those weaned on the software capital's images of lush green corporate campuses dotted with gyms, food courts, and even mini golf courses, IBM India's four-storey headquarters on Bangalore's Bannerghata Road will seem unremarkable. It is a squat, rectangular building, with an overdose of glass and chrome. Inside, the grey-blue cubicles that hog the chunk of the building's 100,000 sq. ft. of space are starker still. They are sparsely furnished, 10x10 ft., and designed perhaps not so much to win architectural awards as customer orders.

That's fine by Abraham Thomas, the company's Singapore-born Managing Director of Indian origin. Although the sun outside is unusually hot for an April afternoon, the 41-year-old Thomas (or Abe to friends and colleagues), dressed in IBM's corporate colours of dark blue suit and white shirt, and sporting his trademark goatee, is in high spirits. That's easily explained. Just 10 days ago, IBM announced its acquisition of Daksh eServices, a Gurgaon-based, 6,000-employee BPO, for an estimated price of $160 million (Rs 720 crore). As he walks into the conference room, Thomas hollers a cheerful hello to CFO Amit Sharma, who reveals that he is finalising a deal for an additional 80,000 sq. ft. of office space next door. "Don't talk about our growth or numbers, Business Today is here," Thomas tells Sharma in mock alarm.

Yet, growth, rather turbo-charged growth, is all that Thomas and his team, it seems, have talked about ever since he came in from Singapore to take over the India operations in January 2001. The figures speak for themselves. In the last three years, IBM India has nearly doubled revenues to Rs 2,800 crore; the headcount has soared from 3,000-odd to more than 9,200; in hardware, where IBM then was a distant number three to hp and Compaq, it has risen to leadership status in notebooks, tied with hp in the server market, and bucked the trend in commercial desktops, where MNC brands have been either stagnating or shrinking.

On the exports front (IBM would not disclose country-specific numbers), BT learns that it has doubled its manpower to 8,000. The one piece of the services jigsaw, BPO, missing for long, has been fixed with the purchase of Daksh. Sure, IBM did have a small 450-member operation going, but it neither had scale nor the big-ticket customers that one would expect Big Blue to have. Daksh, with its huge workforce, international presence, and big telecom, insurance and internet customers, makes an ideal fit (more of that later).

In fact, things at IBM India are looking so good that six months ago the global headquarters in Armonk, New York, decided to deploy a "BRIC" strategy of its own and appoint a pro-consul to do the long-term strategic planning. Their choice: Inder Thukral, an Indian-American, who has joined the team as Director of strategy and marketing. Although Thukral, 39, would not comment on the specifics of his role, BT understands that apart from long term strategic planning, one of his responsibilities would be to look for acquisitions such as Daksh. Says Thomas: "Our intention is to become the number one player in the domestic it market, be it software, hardware or services."

In the Footsteps of Armonk

Three years ago when Thomas arrived in Bangalore, IBM India was primarily a box seller. Of the Rs 1,600 crore in revenues, nearly Rs 1,400 crore came from hardware and exports. A bare 10 per cent came from services. But with Samuel Palmisano taking over as the CEO from Lou Gerstner, it was expected that there would be greater thrust on services. After all, it was Palmisano who first led IBM down that path-at least in any significant way. Today, services account for almost half of IBM's $89 billion (Rs 3.9 lakh crore) global revenues, but a staggering 60 per cent of the profits. Not surprisingly, IBM India wants to go the same way. And it has already made a big start.

Over the last three years, the wholly-owned subsidiary has bagged some huge services contracts. In March 2004, IBM signed up Bharti Tele-Ventures for a 10-year outsourcing deal valued at a whopping $750 million (Rs 3,300 crore). Before that it had bagged contracts from Siemens, Tata Steel, Whirlpool, Syndicate Bank, ABB, Bajaj Auto and Indian Oil in the face of competition from home-grown tech champs and global peers. Currently, almost 30 per cent of its revenues come from software and services.

It's easy to see why IBM wants a bigger piece of the services cake. It's not just more profitable, but growing. What started out among Indian companies as small-scale payroll or hr outsourcing has turned into large turnkey projects involving system and network integration, maintenance and development. Ravindra Datar, Principal Analayst at Gartner India Research, says that the market for such outsourced it services in the country was worth $1.45 billion (or Rs 6,600 crore then) and could double by 2007. "As Indian companies globalise, they are looking at partners who can help focus on their business by taking away pain points in technology and that is why it outsourcing will continue to grow," Datar points out.

It's not surprising, says Ashish Kumar (Country Manager), IBM Global Services, that IBM has been walking away with the bigger deals. These are large annuity-based (meaning recurring income), long-term deals that involve everything from consulting to systems integration to application development and deployment to routine maintenance. And IBM, Kumar points out, has done this internationally. "We understand the entire generation of technologies that have evolved-right from mainframes to mini-computers, from client-server technology to network computers to today's e-business on demand," Kumar asserts.

Surprisingly, pulling the services business up by its bootstraps didn't prove too difficult for IBM. For instance, Thomas points out that when they did the Syndicate Bank deal they had international experience of having done a similar deal for DBS bank. "Similarly, we had done an outsourcing solution for an international pharma giant. When an Indian pharma company was looking for a solution, IBM had exactly what it was looking for," he says. While the international experience helps, it is also clear that Thomas himself has been driving the push in services. Simply because the parent derives half of its business from services, and the Indian subsidiary must get there too.

In hardware, price cuts, better positioning of products and a wider product offering seem to have led to the upswing. For example, in servers, where the $371-million market remained flat for two years before registering an impressive 25 per cent growth last year, IBM the year before rationalised an array of servers esoterically tagged I, P, X and Z that made sense to IBM but not the customers, under a simple and uniform eServer range. Although cleaning up the alphabetical clutter may seem like a non-event, it seems to have had an impact. While the overall server market grew by 26.5 per cent last year, IBM notched a 56 per cent growth to tie with hp's marketshare of about 32 per cent.

It even managed to crack the low-end server market, which has traditionally been its Achilles' heel, and emerge the leader with a 38.2 per cent share. Says Swarup Choudhury, VP and Country Manager (IBM Systems & Technology Group), IBM India: "We have achieved this phenomenal growth due to IBM's strong technology roadmap for its products, proven price to performance superiority, focus on the top end as well as on the small and medium businesses market, backed by our e-business on demand strategy. We intend to further consolidate our marketshare this year."

In notebooks, a $183-million (Rs 823 crore) market, IBM has for the first time emerged the top seller both in terms of units and value. In 2002-03, it sold 23,750 notebooks worth an estimated Rs 269 crore ($57.1 million). What helped? Partly the market itself; demand grew a whopping 72 per cent thanks to a sharp drop in Customs (from 39 to 19 per cent) and Excise duties (from 16 to 8 per cent); increasing demand from mobile workers and the SOHO segment as opposed to traditional corporate users; and the complete absence of a grey market in the notebook segment.

Now IBM wants to consolidate its lead, says VP, Personal Computing, Alok Ohrie, by pushing a laptop under the psychologically important price barrier o Rs 50,000. In desktops, where it is present only in the commercial segment, the company has managed to buck the trend and increase its marketshare by a significant 2 per cent in two years. It is now expanding its unit in Pondicherry, where it assembles and tests its PCs, laptops and entry-level servers. Thomas, however, wouldn't reveal the quantum of investment.

Apart from long-term strategic planning, pro-consul Thukral's responsibilities would include scouting for acquisitions such as Daksh Inder Thukral/Director of Strategy & Marketing/IBM India

A Balancing Act

There are two reasons why IBM has been able to gain a quick headway in the domestic outsourcing market. One, of course, is the sheer depth of its offerings-it not only makes hardware, but has the expertise to plan, deploy and maintain it infrastructure of any scale. The other reason is the Indian it services companies' lack of focus on the domestic market. But that is fast changing (See Beating Them at Home).

In an unprecedented move recently, billionaire-newbies and arch rivals Infosys and Wipro joined hands to bid to wire up 360 branches of Vijaya Bank. Although almost all the service providers bid for it, the local vendors walked away with it partly because they quoted a relatively low price of Rs 90 crore to do the work. Infosys will bring its banking software solution Finacle to the table and Wipro will do the end-to-end implementation of the solution. Both the supremos of Infosys and Wipro-N.R. Narayana Murthy and Azim Premji, respectively-said that such partnering could become more frequent. As Premji put it, "We will compete in the morning and partner in the afternoon."

For IBM, the new-found friendship doesn't augur well. While almost nobody questions its competence, it does have a price structure more expensive than that of Wipro or Infosys. (Thomas, of course, denies that IBM India's costs are higher.) Says M.S. Kapur, Chairman and Managing Director, Vijaya Bank, "Compared to other players including some MNCs, Wipro and Infosys suited our requirements better."

Then, IBM has to grapple with the "one throat to choke" criticism often levelled against it-primarily by rivals. The argument goes that since IBM makes everything itself, it often puts its own interests above those of the customer. Thomas bristles at the accusation. "Not true. There are several instances where we have partnered with companies like Infosys or i-flex," he says. "Whenever somebody brings value, we are willing to collaborate. After all, the final arbiter is the customer." Going by IBM's recent wins, the customer doesn't seem too bothered by the alleged throat choking.

In hardware, especially desktops and notebooks, IBM will have a renewed hp to reckon with. According to Shuchi Sarkar, Head of Marketing (Personal Systems Group), hp, there were certain product changes and supply problems that affected its sales in notebooks in 2002-03. "But those issues are behind us and hp will re-emerge as the market leader this year," asserts Sarkar.

More Than a Market

While IBM is here to sell its products and services, it also sees India as a huge resource base. Its exports are $235 million (Rs 1,057.5 crore), and in the last one year alone it has doubled its headcount in this unit. Thukral emphasises that software exports is not just about low-end coding, but high-end software development. "The software products are sold not just in India but globally," says Thukral. But by all accounts, the exports unit is a bit of a drag. Although it has 8,000 people, or 80 per cent of the workforce, on its payrolls, revenues aren't growing as rapidly. That's another thing Armonk wants fixed.

How does Daksh fit into this changing story? Given the sensitivity of the subject (outsourcing), Thomas is reluctant to say anything more than what Armonk has already said in its press release announcing the acquisition. But the answer is not too hard to see. For a little over a year now, IBM has been operating a 450-people BPO unit in Bangalore. But ramping up operations or attracting some heavy-weight customers hasn't been easy. With Daksh, it not just gets a three-year-old company with more than 4,000 seats and 6,000 employees, but big customers such as Yahoo!, Sprint PCS and Amazon, besides an international presence in Manila, the Philippines. Some of Daksh's customers, such as Hewlett-Packard, may leave post IBM's entry, but many others may want to send more business Daksh's way. "In an era when customers are looking at vendor consolidation, a player like IBM automatically gains an edge if it has more competencies," says Thomas.

Perhaps, but IBM may have a road bump coming up. BT learns that Thomas is moving out (his family has returned to Singapore, and Thomas himself has checked into the Oberoi hotel in Bangalore) and that a replacement will soon be announced. "It is not for the media or even me to decide on my role," is all that Thomas would say when asked about his moving out. In the past, IBM has hinted that a local Indian executive may one day get to run the show. But it doesn't seem to be happening this time around, although Alok Ohrie, VP, Personal Computing Division; Ashish Kumar, Country Manager, Global Services; and M. Ganesh, Director, SMB Business, are being seen as those in the running for Thomas' job. However, it's more likely that an expat such as Frank Luksic (ex-Country Manager, Software Group, India) or Thukral himself will get the corner room.

No matter who succeeds Thomas, the task is cut out: That person must not just keep up the momentum provided by the soon-to-depart MD, but accelerate it. Armonk will be watching.