Tata Consultancy Services (TCS), Infosys Technologies and Wipro, three Indian companies the world knows best, members of the exclusive club that is Tier-I of the Indian software services business and darlings of the stock market won't admit it, but they are, all of them, participants in a race to touch the $10-billion-in-revenues (Rs 45,000 crore) mark. All three should reach this mark by 2010, maybe sooner. At stake are bragging rights and universal recognition that the company in question has indeed arrived on the international it firmament.

They have size on their side and in industry-lingo, this provides traction. As Nandan Nilekani, CEO, President, and Managing Director of Infosys, points out, it took his company 23 years to reach the $1 billion (Rs 4,500 crore) mark and another 23 months to reach $2 billion (Rs 9,000 crore). They also have the dynamics of the global offshoring business on their side. A report by India's software lobby NASSCOM and consulting firm McKinsey puts the size of the offshoring business at $110 billion (Rs 4,95,000 crore) by 2010. If India were to maintain its current share, that would mean an industry worth $60 billion (Rs 2,70,000 crore). With some luck, that could be $75 billion (Rs 3,37,500 crore). And it is more than likely that a little over $30 billion (Rs 1,35,000 crore) of this will come from TCS, Infosys and Wipro. Each of the companies has something going for it: TCS, the ability to win big, really big deals; Infosys, the very fact that the company in its entirety is one mean (and very effective) marketing machine; and Wipro, its innovative streak and willingness to make as many strategic acquisitions as need be. So, who'll get there first?

Same, Yet Different

From the outside, there isn't much separating the three companies. As Alok Shende, Head (Infotech, Communications and Telecom Practice) at research, analysis and consulting firm Frost & Sullivan says, at a macro-level, "customers see them similarly, albeit with each having strengths in certain areas". Yet, the three companies are working towards building unique differentiators. "Both Toyota and Honda have a similar portfolio of cars, yet are very different companies," says James V. Abraham, Director, Boston Consulting Group (BCG). "It's the same with these it majors; we are seeing early signs of a differentiation built around capabilities."

TCS boasts the broadest range of offerings, and is the most multinational of Indian vendors. It also has the lowest billing rates among the Big Three and is perceived as being conservative with its marketing and branding efforts. Infosys boasts the highest net profit margins, has a halo around its head, and is a strong player in the banking, financial services and insurance (BFSI) segment that contributes a third of its revenues, although it is largely absent from several other key verticals (think healthcare, life sciences, auto and government). Wipro has significant strength in R&D, technology services and infrastructure management, but it boasts the lowest net profit margins among the Big Three (although this can be explained by the company's diversified nature; software services, including it enabled services or ITEs accounted for 8.4 per cent of its revenues in 2005-06). Interestingly, there are no 'exclusive' verticals or service lines with each of the three either having or planning a presence in most.

Reinforcing this nascent differentiation around service offerings is the fundamental DNA of the three companies. Infosys, explains BCG's Abraham, has always emphasised on branding, systems and processes, and culture (these, the company believes, will result in superior quality and higher profit margins). Wipro has an innovation-led approach, is willing to experiment and has an appetite for risk. And TCS comes with a strong engineering base. Even here, however, nothing is exclusive: Infosys does experiment, Wipro does focus on systems and processes and TCS believes it has a strong culture. Each company, believes Siddharth Pai, Partner, TPI International, a sourcing advisory, has its own strategy. Thus, one might entertain notions of becoming the world's best software factory. Another could try and move up the value chain, becoming a business transformation specialist like Accenture in the process.

"It will be imperative for an Indian firm that lacks the on-ground capability of an IBM or an Accenture to acquire in complex geographies" Partha Iyengar Vice President (Research)/ Gartner India	"As the Big Three move towards the $10 billion mark, they will find themselves having to build a presence in countries like Germany and France" Alok Shende Head (ICT Practice)/ Frost & Sullivan	"The margins cannot be sustained. Savvy M&As, particularly in domain-specific consulting and systems integration, will be the key to profitable growth" Dana Stiffler Research Director (Consulting & IT Services)/AMR Research

The Common Challenges

For any strategy to work, however, adds Pai, the three companies will have to focus on two areas that they have traditionally overlooked. "The first is a global presence that none of the three has." "The second is the willingness to incur more risk by bringing the clients' operations and people onto their balance sheet." This last, of course, is outsourcing of the sort global biggies such as IBM and EDs do. There are other challenges the three will have to address as well: scalability, managing a multi-cultural workforce, engineering M&As and protecting their margins. It is their high net profit margins that give the Big Three their huge valuations, of between eight and 10 times revenues. Infosys' market capitalisation to revenues ratio, for instance, is 10.21, Wipro's 8.49 and TCS' 7.22. In contrast, those of IBM, Accenture and EDs are 1.42, 1.47 and 0.7, respectively.

That'll take some doing. Dana Stiffler, Research Director (Consulting & it), AMR Research, an IT advisory, is convinced that in the long run "these margins cannot be sustained". "As these companies pursue more high-value businesses, requiring them to pay higher salaries, it will adversely affect margins," she adds. Then, Indian IT firms do have to live with low-cost competitors from emerging destinations such as China, Vietnam, the Philippines, even Pakistan.

Already, claims Partha Iyengar, Vice President (Research), Gartner India, an IT research and advisory company, "the global firms are proving that they can compete in this (the low-cost) space as well". Today, IBM employs around 40,000 people in India; Accenture, 18,000 and EDs, should its Mphasis buy go through, 15,000. Indian it firms may have pioneered the global delivery model, but the multinationals have clearly caught on, and caught up fast. "It is only a matter of time before they perfect it," says Sanjay Purohit, Head (Corporate Planning), Infosys. And so, the three Indian firms are moving beyond cost arbitrage.

Accelerating this move is the need the large Indian it firms feel to hire locals. Today, 6.5 per cent of TCS' workforce is composed of people of nationalities other than Indian. The corresponding proportion for Infosys is 3.5 per cent. These proportions will have to increase if these companies want to be seen as global players. Doing that will also insure them against a potential backlash against outsourcing. Infosys, for instance, made 500 offers on Ivy League campuses this year. The flip side? Global hires push up costs.

The Big One: Will It Happen?

TCS, Infosys and Wipro are each sitting on close to $1 billion in cash. Then, there is their highly priced (and prized) equity that can be used as M&A currency. For, it is increasingly becoming clear that the three companies will have to make acquisitions, if not in the short- or medium-term, then eventually. "Savvy M&As, particularly in domain-specific consulting and systems integration, will be the key to profitable growth," says AMR's Stiffler. The lady is right: companies can develop such skills in-house, but that will take time. The thing about M&As is that they are so difficult to get to work. Wipro, the most aggressive Indian firm in this context with a string of acquisitions, has had mixed results with them, says Frost & Sullivan's Shende. As they move towards the $10 billion mark, the three firms will find themselves having to build a presence in countries such as Germany and France. These are complex geographies, says Gartner's Iyengar, and "it will be imperative for an Indian firm that lacks the on-ground capability of an IBM or an Accenture to acquire".

"Both Toyota and Honda are very different. It is the same with these IT firms; we are seeing early signs of differentiation built around capabilities" James V. Abraham Director/Boston Consulting Group	"The firms will have to focus on two areas. First, a global presence that none of the three has and second, the willingness to incur more risk" Siddharth Pai Partner/TPI International

Acquisitions could also help TCS, Infosys and Wipro address an issue that no one seems to be doing anything about. The profile of employees within the three companies is overwhelmingly biased towards techies. However, as most it firms have realised, customers no longer want technology-solutions; they want business-solutions. India may have a surfeit of techies (at least, right now), but it doesn't boast too many domain specialists or consultants (which is the kind of profile the Indian companies need to hire).

Blue-sky Threats

It may sound like science fiction, but the big threat to the offshore model popularised by TCS, Infosys and Wipro is emerging trends in automation. Intelligent technology infrastructure that manages itself, systems and code that maintain themselves, and other such could render the people-heavy model Indian companies operate on irrelevant and obsolete.

In their growth towards the $10-billion-in-revenues mark, Indian it's Big Three will also find themselves being constrained by the country's education system. Today, the technical and business education system in the country is equipped to churn out armies of doers or order-takers, not thinkers.

So, which of the three Indian firms will get the $10 billion mark first? Size favours TCS, the market, Infosys (the company's forward looking 12 months price-earnings multiple for 2006-07, at 25.82, is higher than TCS' 25.6 and Wipro's 25.13), and the sheer willingness to go out and acquire a company, Wipro. On the basis of an assessment that goes beyond these basics (see Who Will Get To $10-billion-in-revenues First?), this magazine has reason to believe that TCS will indeed be the first to reach the mark. Still, this is one of those races that holds forth the promise of a surprise or two. And it is one of those races where the running promises to be as exciting as the finish.

-additional reporting by Rahul Sachitanand