Nicolas Dufourcq is CFO of the euro 6.5-billion or Rs 34,450-crore consulting and outsourcing major, Capgemini Group. The France-based firm has been on a turnaround course after a bad patch in the first half of 2004 when it posted losses at the operating level. Things have changed since with the firm back in black at the operating level. At the helm of this transformation is Dufourcq who, in this discussion with BT's Priya Srinivasan on a recent visit to India, outlines the challenges that Capgemini faces at this point including the issue of plummeting prices (billings), courtesy competition from tier-one Indian it services firms. Excerpts from the interview:

The Indian IT services space has been abuzz with talk of a change in the spending pattern of clients if not an actual slowdown (in spending) this year. What is your take?

There is the beginning of an acceleration, in fact, probably the early stage of the restart of an industrial cycle. It is impossible to predict what it will look like or whether it will be anything like the previous cycles or how long it will last. There is a sort of electricity in decision making among customers. In the past years (2003 and 2004 in particular) customers were talking of total cost of ownership of their applications, they wanted to cut costs, and did not want to make big bets on technology, but there is a boldness today. When you need to open up the company and change its blood (circulatory) system, you need to be bold. We see now a restart of companies making courageous decisions, and if this catches on you will see big volumes. If there is volume growth, we may have to recruit in the US and Europe as well as boost operations here. If there is no cycle (upturn), we stabilise in Europe and increase (recruiting) a little in India, but if there is a cycle (upturn) we recruit everywhere.

How does Capgemini's global footprint look today?

First is India with 2,500 people, then Poland with 1,500 and then China with a BPO (business process outsourcing) centre, where we have about 700. The oldest centre is here in Mumbai. A big proportion of the rest is what we call application development centres (ADCs), which are everywhere in the world. This is where Capgemini people work for the customers as if they are in a laboratory environment. It's onshore yet offsite, and a big part of our strategy. We industrialise our production as much as possible through sophisticated processes.

Your financial results for the last year indicate a fall in operating profit in 2004 vis-à-vis the previous year but the share price on the Paris exchange actually went up following that. That's curious. Had the market expected worse? Can we interpret this as the beginning of a turnaround for Capgemini?

Absolutely, yes. What happened in Capgemini started with the internet bubble and the incredible drop in prices (of services) and the consequences of the multiple reorganisations that followed the merger with (the consulting business of) Ernst & Young. The cost of all this had to be evidenced through the accounts of 2003 and the first half of 2004-that was a picture of loss at the operating level for Capgemini. And in the second half of 2004, the figures showed the efforts of the restructuring efforts that had been started in 2003. Now, why did the share price rise? Well, the markets did not anticipate that the 'back to basics' programme (of 2003) would produce results so rapidly. In the second half of 2004, we had promised the market 2 per cent in operating income; we did 2.35 per cent. We had a good cash position at the end of the year and gave a comfortable guidance for 2005. I also said that Europe (operations) was at 80 per cent of turnaround and that we had then to tackle the us problem where, as of February, we were at below 50 per cent of turnaround and have a long journey.

Could you outline the key areas you tackled as part of your 'back to basics' programme of 2003?

First of all, (we) pushed utilisation of our systems integration practices to 80 per cent, and that of consulting practices to 70 per cent. Then, (we) reimposed the discipline of processes in delivery to crunch overruns.

What role has offshoring, particularly to India since that's your largest offshore centre, played in your restructuring?

Offshoring was important to flag off modernity. We called it right shoring. Distributed delivery, we said, is the new motto. The industrial model will never be as it was before and offshoring was necessary to flag off that 'never again' sort of political expression. All the managers of Capgemini had to acknowledge that what held good in 1995 wouldn't in 2005. Practically, it (the impact of offshoring) was very small. Now, we are at 2,500 people in India and we are a 60,000-employee organisation. The turnaround was done by the rest of the 57,500 people, so offshoring was important only symbolically.

"The industrial model will never be as it was before and offshoring was necessary to flag off that 'never again' sort of political expression. We had to acknowledge that what held good in 1995 wouldn't in 2005"

Has offshoring impacted your margins in any way, then?

Again, it all depends on the countries. This is not a homogenous company, but a decentralised one. Today, 60 per cent of the India activities are servicing the us operations, 25 per cent the UK one, and the rest Holland and Denmark. Last year, it was 95 per cent for the US; it all started there. The story is simple: the US operations had been heavily bashed by TCS, Infosys and so forth, the tier-one Indian players.

This is interesting; some global IT services firms claim they hardly see Indian players in their market segments, and some explicitly state that they are a threat. What is the real picture?

I see the results on the prices. In the us, the daily price at which you bill has dropped by 15 per cent a year for the last three years, and Accenture and IBM have developed offshore operations to sustain those price points. It's easy to say that Indian firms have vanished from the US market but the result is there for everyone to see. It appeared as inevitable for our US operations to work with India. Then, UK understood it was preferable to work with Capgemini India; this was in 2003. Then, starting the second half of 2004, it was Holland and Denmark. Holland was totally adverse to offshoring. They said it's not necessary; today, they are extremely profitable and positive about working with Capgemini India. You will see progressively the operations in Germany and France also starting to get convinced. In Germany, the first step (for offshoring) will be Poland. Then, it will be India.

Isn't offshoring a double-edged sword for companies like yours? While it reduces costs, it also reduces billings and therefore revenues, right? How do you resolve that contradiction?

It is not a contradiction. There is a market, the market decides the price and when you have this price you discover that if you want to be profitable you have to be offshore. There is no choice. The customer tells you I want a price decrease of 15 per cent, you make it or you are out. The topline does not take a hit. Let me give you an example: France Telecom. It launched in 2003 a reverse auction operation where those with the lowest prices get the job. It is extremely cruel. It lasts two to three hours and is very rapid; you see the price points cascading on the screen. At some point you say, "Come on, I am not doing it at that price," and then you get a phone call from the customer saying "If you don't, you're out." It's serious. We accepted a 15 per cent price cut from France Telecom and at the time we did business of euro 120 million (Rs 636 crore) with them. Huge. So you can imagine the (potential) drop in the revenue and profit. What did we do? In one year we completely reconfigured the operations for France Telecom. We increased the utilisation rate, cut costs and moved offshore to some extent. The result: 20 months later we do more business than before with France Telecom at lower prices. The machine is changing. The market is forcing us to change.

Do you find costs in India hardening in addition to the manpower crunch?

I see no problem for the next five years, but after that it is totally unpredictable. There is a recruitment crunch everywhere in the world. It's difficult to recruit even in the Western markets.

That's an anomaly; on one hand we talk of layoffs in the West, and on the other you mention a recruitment problem...

At Capgemini we laid off 1,800 people last year out of 60,000, but again it's the same answer: it's different from country to country. Last year we had to fire people in Spain and Italy because the cost base was too high and we had to lower (it) to break even. This year we are firing senior managers in the US; at the same time we would like to recruit in Holland, France and Germany, and it's difficult to find people. It is never a homogenous answer. In France we want sap people (those who can implement an enterprise package from German firm sap) and it is not easy, and in the UK we want to recruit Oracle people. Recruitment is getting systematically difficult everywhere.