Another stellar show: TCS holds on to its last year's
Mohan Nilekani, CEO, infosys Technologies, is fond of pointing
out how it took his it company 23 years to hit $1 billion in revenues,
but only 23 months to rack up the next $1 billion, and how Infosys
will top the $3-billion-revenue mark in just 12 months-that is,
by the end of this fiscal. It's the sort of growth most CEOs would
give an arm and a leg for, but if Nilekani, 51, isn't getting
complacent over Infy's giddy growth, it's because his two other
big competitors-Tata Consultancy Services (TCS) and Wipro-are
clipping too. When the soaps-to-software company Wipro announced
its results for the quarter ended September 30, 2006, it reported
a 46 per cent jump in profits and a 41 per cent hike in revenues.
TCS too beat Dalal Street expectations, clocking about 43 per
cent increase in both revenues and net profit.
ability to cross-sell a number of services means that the
number of its customers has increased in every band of spend
The troika's numbers, received with euphoria
by the stock markets, tell an important story about them. If last
year (2005-06) was when TCS, Infy and Wipro broke away from India's
it pack to emerge as the clear leaders, then this year they may
have hit a higher gear, which will further propel them away from
the others, closer to their global rivals. "We have created
a business model that is faster, better, cheaper and more innovative
than (those of) legacy companies in the industry... We have been
able to demonstrate a compelling value proposition to our clients,"
Nilekani told the media soon after he announced the q2 results.
(Infosys' top management declined to comment for this article,
citing an impending secondary ADR offering.)
Coming of Age
In an industry dominated by long-established
multinational vendors such as IBM, Accenture, EDs and hp, the
big three Indian vendors have defined a whole new paradigm, providing
not just cheap, but also high-quality it services to global customers.
"India is becoming a premier destination for offshoring and
customer confidence in sending large portions of work offshore
is increasing," says Wipro's Chief Strategy Officer, Sudip
While the $2.2-billion ABN Amro deal of last
year-where work was unbundled and given away to Infosy, TCS, and
IBM-may have been the single event that put Indian it vendors
on the same pedestal as IBM, the dynamics of operating in a 'flat
world' have only increased the focus on the rapid growth of these
companies. "The use of global talent and vendors helps companies
squeeze value out of their it investments and we see significant
reliance on Indian vendors to help streamline it operations,"
says Atul Vasishtha, CEO, global sourcing advisory NEOIT. Moreover,
he adds, as it is being critically looked at as an integrator
of globally dispersed business functions, the value that Indian
vendors can add to this process will be critical to their success.
have created a business model that is faster, better, cheaper
and more innovative than those of legacy companies in the
As recently as two years ago, questions were
being raised about the Indian it players' ability to sustain their
pace of growth. MNC competitors such as IBM, Accenture and EDs
were (and still are) ramping up their India base. Analysts had
then said that this would erode the cost advantage that Indian
players have long enjoyed. IBM in India today employs close to
45,000 people, Accenture around 20,000 and EDs acquired Mphasis
this year to boost its India numbers to around 15,000. As Nilekani,
in a post-results earnings call to analysts, pointed out, "The
fact that we are growing at 40 per cent this year clearly demonstrates
that legacy players may come, but it doesn't impact our fundamental
competitive position, our brand, our recruitment strengths."
There has also been a lot of talk about a
slowdown in the US and that affecting India it vendors. In fact,
George F. Colony, Chairman and CEO of research firm Forrester,
told BT recently that he expects it spend in the us to slow down
from the current year's 8 per cent growth to just around 3-4 per
cent next year. But Indian players say, Colony added, that because
of their disruptive business model, they are actually benefiting
from this. S. Mahalingam of TCS, however, says that contrary to
reports of a slowdown, global CIOs are spending more on new programmes
in addition to the support. "(Also) there is a huge demand
from our existing client base," he says. "One can see
that all our top customers have grown and you can see the number
of customers increasing in every band (of spend); 10 million,
20 million, 50 million. It is primarily happening due to our ability
to cross-sell a number of services."
A key reason for the bullishness of both
industry and investors is the sheer size of the market (according
to technology research agency Gartner, the global market for outsourcing
is worth $624 billion, with barely 3 per cent tapped by Indian
vendors) and the sheer value proposition offered by the industry.
Specifically, there's still a good 30 per cent-plus cost arbitrage
that is available to the offshorers. "There is a long way
to go before this market gets saturated," says Gartner's
Vice President, Partha Iyengar.
| The Twin Bogey
| Apart from their
sterling results, guess what came centre stage at the announcements
of Q2 results by Infosy and Wipro? Bangalore's crumbling infrastructure.
At Infosys, several of its senior executives had to stay back
as late as 10:30 p.m. on the day the results were announced,
and some had even slept over in the guest house on the campus
the previous night. As for Wipro, "Poor infrastructure
affects efficiency and it's an issue the government will have
to rapidly address," Chairman Azim Premji said on October
18, when Wipro announced its second quarter numbers. But,
as the industry is discovering, poor infrastructure is a problem
across Indian cities. At Pune, where Wipro has acquired 60
acres of land, the airport, loaned from the Air Force, has
already run out of space, while the new airport at Mysore
is yet to get off the ground. Elsewhere, an expressway connecting
the tech hub of Bangalore to the town of Mysore has been stuck
in litigation, while the doubling of the existing highway
is yet to be completed. There are problems with Tamil Nadu
(Chennai) and Kerala (Trivandrum) too.
Shortage of skilled people is another of the industry's
worries. Nasscom's Sunil Mehta estimates that barely 15
per cent of the engineering graduates are employable. While
the IT/ITeS industry is expected to employ some 1.3 million
people by the end of this fiscal, it is estimated that another
1 million more will be required over the next three years.
The demand for "employable" people is evident
in the pace of training at Infosys Leadership Institute,
which can train up to 4,500 persons at once. When fully
commissioned in May 2007, this palm-fringed campus will
be able to train more than 30,000 recruits, Infy's Mohan
Das Pai told this magazine in Mysore recently. Clearly,
a colossal problem needs a colossal solution.
| IT's Emerging Opportunities
| As Indian companies
move up the technology value chain, they are moving away from
their traditional strongholds of software development and
maintenance to emerging opportunities such as engineering
services, remote infrastructure maintenance and knowledge
process outsourcing. According to a recent study conducted
by consulting giant Booz Allen Hamilton, spending on engineering
services ($750 billion in 2004) is projected to increase to
$1.1 trillion by 2020. The market is highly fragmented by
industry, with automotive at 19 per cent, aerospace at 8 per
cent and utilities at 3 per cent in 2004. High-tech/telecom
is the dominant and fastest growing sector, with 30 per cent
of the market. While today only $10-15 billion of engineering
services is offshored, the market is expected to grow to $150-225
billion by 2020. India's current revenue base in the offshored
engineering services market is about $1.5 billion-relatively
small, compared to its IT and BPO revenues. The study also
found that India is well-positioned to increase its market
share of engineering offshoring from 12 per cent to 30 per
cent by 2020.
Meanwhile, industry analysts also feel that IT infrastructure
maintenance offers another large opportunity (pegged at
$126 billion globally) for Indian vendors. According to
estimates from technology research agency, Forrester Research,
mainframe-related outsourcing is a $29-billion market, network-related
outsourcing $7 billion, while the desktop outsourcing market
is worth $18 billion. It's not just on the IT services,
where new opportunities beckon Indian vendors. In the BPO
market too, companies are now looking beyond the conventional
call centre and back office market into the higher-value
knowledge process outsourcing space. According to research
from UK-based RoCSearch, the KPO market in India may reach
a size of $5 billion by 2010. KPO covers everything from
outsourced legal work to data analytics and this market
is growing at an estimated 15-20 per cent annually. "As
of now, these are just projections. Indian companies will
have to build scale in these areas," says Alok Shende,
Director, IT Practice, Frost & Sullivan.
| THE PROS & CONS
Opportunities for Indian IT are
plenty, but so are challenges.
» The offshore
delivery model is by now tried and tested, and competencies
and, hence, cost advantage continues to be significant enough
for global offshorers.
are beginning to cross-sell products and services, and offering
an integrated services model
problems and growing wage bills, partly due to supply constraints,
are potential pitfalls
overemphasis on India shoring rather than best shoring.
Organic growth is still preferred over acquisitions.
rivals are ramping up India operations, and there are other
low-cost countries emerging as challengers
Cost arbitrage aside, Indian companies have
begun to re-engineer their businesses to move away from lower-end
application testing and maintenance tasks to higher-value application
development and even consulting roles. "Our consultancy group
has evolved by building industry domain competency, front-ending
large deals by creating integrated business-it solution package
for customers and at the same time, creating beachhead for consulting
assignments across eight verticals," says Wipro's Nandy.
"Our endeavour is to build on these successes and drive the
business for further growth."
clocking 46 per cent jump in profits in Q2, Premji feels Bangalore's
poor infrastructure is affecting productivity and efficiency
Simultaneously, the it troika is expanding
its basket of offerings by entering (and rapidly expanding) into
emerging opportunities such as engineering services, remote infrastructure
maintenance and knowledge process outsourcing (see it's Emerging
Opportunities). "More than 40 per cent of our revenues are
coming from services we have added in the last 4-5 years,"
Nilekani told the media. The country's largest it company, TCS,
has also made rapid progress in the engineering services market,
notching up revenues in excess of Rs 960 crore-a 62 per cent annual
growth for the last couple of years. "We see a fair success
rate in increasing global presence and gaining competencies in
higher-value services through the inorganic growth route,"
says NEOIT's Vashishtha. "Clients have started to look at
components of their it requirements as a diverse portfolio-similar
to personal investment approach. Leveraging global talent pool,
global vendor competencies, ownership models and delivery locations
tie very closely to this portfolio approach," he adds.
The Speed Breakers
Despite the positive sentiment and rapid
growth witnessed by the Indian it industry, infrastructure and
human resources continue to remain two very visible pain points
for industry executives. The shortage of skilled manpower is another
thing that could spoil the industry's party (See The Twin Bogey).
For instance, Infy's Pai recently pointed out that the industry
would need to spend some $2.3 billion over the next three years
to train a million people. "It is becoming clear that the
supply of skilled it labour is not unlimited and that (companies)
are already scratching the bottom of the barrel," says Forrester's
|The IT troika is expanding its basket
of offerings by entering into emerging markets such
as engineering services and knowledge process outsourcing
According to Gartner's Iyengar, companies
today face this shortage because their current business model
focuses on hiring thousands of engineers to undertake relatively
lower-end application support tasks. "Companies need to increase
the value per employee rather than just hire thousands of bodies
for the same kind of jobs," he contends, adding that the
introduction of technology and automation could make many of these
low-end testing tasks redundant.
Despite Indian vendors' turbo-charged growth,
global competitors are catching up. Players such as Capgemini
(following its recent acquisition of Kanbay) and Logicacmg have
expanded rapidly in India. But given the valuations that the stock
markets have bestowed on India's it Troika, investors clearly
expect them to manage the issue as smoothly as they have managed
to reinvent the IT services business model.