IN THE EYE

Global IT industry crosses an inflection point
This article analyzes the twin trends of 2003 that have made a significant impact in shaping the future of the Indian IT industry.

2003 was a defining year for the global outsourcing industry. Two trends were clearly visible:

Offshoring becoming mainstream and global IT majors evolving a clear offshoring strategy
Indian IT majors globalizing their operations, profiles and re-inventing their offerings to position themselves at par with consulting organizations.

Offshoring has become mainstream

India is being widely acknowledged as the global IT and knowledge hub. This has manifested in several ways-

First tier IT services companies are growing at a healthy pace and beginning to forge strategic relationships with their customers. They are seen competing with the Accentures and IBMs more often, and increasingly bidding for large, multi-year contracts. Offshoring is now on the CEO’s and CFO’s agenda.

Mid sized service providers seeing a lot more traction, partly owing to an increase in the offshore pie (with mid sized buyers looking offshore), and also by repositioning themselves as the next tier players servicing larger service providers.

Global consulting and IT service providers such as IBM Global Services and Accenture announced and implemented an India based offshore strategy. Accenture has made public plans to increase headcount in India to 10,000, and IBM is planning to add over 4000 engineers in India.

The BPO industry has benefited immensely and is estimated to have grown to $3.6 billion by the end of 2003, a growth of over 50% over the earlier year. So far, however, the profile of work carried out by the third party vendors has been at the lower end of the value-chain. Few companies like Progeon and Quintant have tried consciously to get into the higher end work like data analytics and claims adjudication. There has also been an emergence of next-generation third party service providers focusing more on non-voice, transaction processing services.

Technology majors such as Microsoft, Intel and Oracle, Motorola, Texas Instruments, PeopleSoft, SAP, Honeywell, and Dell strengthen their India presence; they also shift strategic work to India, after more than a decade of presence here. Motorola, for example, has plans to expand to 1200 people at Bangalore; this team will focus on next generation technologies and create software for Motorola's infrastructure, subscriber and semiconductor products. SAP’s Bangalore development center is its largest outside Germany. The center focuses on development work for the manufacturing sector. Numerous mid sized product companies from the US and UK announced their India plans- Sphera, SEEC, Supportsoft, i2 , Adobe and Invensys are some examples.

Buyers or user corporations are also setting up, or ramping up their own captive centers either for software services, BPO operations or higher end knowledge services – GE, GM, JP Morgan Chase & Co, HSBC and so on. JP Morgan and Morgan Stanley have hired over 1000 people each for their Indian captive units.

Analyst attention on Indian IT companies like never before- Gartner created an offshore magic quadrant and profiled top tier companies. They also have a core team of high powered analysts focusing exclusively on the offshore space. Forrester CEO, John McCarthy made multiple visits to India last year. All analysts have been unanimous in predicting that 2003 was an inflection point for the global IT industry with offshoring slated to become more strategic as well as significant in the coming years.

Consultants have never had it better. Companies such as McKinsey and neoIT, two of the strongest proponents of the merits of offshoring, advise buyers on offshoring decisions and have played an important role in shaping buyer perceptions. McKinsey, for instance, has published a lot of research on the economic gains of offshoring. On the other hand, involvement of consultants has made the evaluation process more rigorous and longer.

The international media has also given India its due. Consider these facts- Business Week carried a cover story “The Rise of India” and also featured companies like Infosys and Wipro prominently in their recent issues. Forbes went a step ahead and its readers voted offshoring as the most important business trend of 2003. And, Kiran Karnik, President of NASSCOM was voted the Face of the Year. The Economist carried no less than half a dozen articles on the Indian IT industry last year. “The new geography of the IT industry”, “America’s pain, India’s gain” and “Relocating the backoffice” are some examples.

The irreversible trend of offshoring becoming mainstream has not been without its negative effects. A wave of protectionism has spread in the US and UK and the Indian IT industry is now facing the beginnings of an “offshoring backlash”. The State of Okalahoma pulled back from a TCS contract and the government of New Jersey passed an anti-outsourcing bill. This is also a challenge for service providers like Accenture and IBM who are planning to shift significant number of jobs to India. Dell and Lehman Brothers pulled back jobs from India, and while quality was given as a reason, it is believed that the backlash also had a role to play. Large VCs from the US are expected to increasingly look at India as a conducive investment destination. Big names in the private equity space such as Oak Investment partners have announced mega plans for India. The $320 million kitty with which it has entered India will be invested in companies operating in IT-enabled services (ITES), IT services, and BPO space.

Indian companies becoming more global

Even as Accenture and IBM strengthen their India presence, larger Indian companies have expanded their global footprint.

Infosys acquired an Australian company Expert Information Systems for $22.9M in December 2003. It was a careful step for Infosys on the inorganic path; the clear motivation for this acquisition is the bagging of the Telstra account. With Expert under their belt, it appears that Infosys is trying to position itself as a one stop shop for IT services, clearly fructifying its intention to move up the value chain.

Infosys also completed an important realignment exercise as a part of its efforts to offer verticalized solutions. An important aspect of the new structure is that client handling will be done by engagement managers, more in the style of consulting companies. The role of the sales organization will undergo a significant shift from what it was.

Wipro, which as been much more active in pursuing an inorganic growth strategy, completed the acquisition of Nervewire in 2003, close on the heels of the acquisition of the Energy and Utilities division of AMS last year.

Patni acquired US based Reference Inc to strengthen its presence in the financial services sector.

Another trend that is emerging is the hiring of non-Indian nationals by the IT companies. Infosys and Wipro are hiring locals in Europe and the US as part of their strategy to move into high-end consulting contracts.

Putting the offshore wave in perspective

While there has been a lot of attention and hype created over offshoring, a look at the hard facts puts things in perspective-
Contrary to the common perception, most Fortune 1000 companies are still not outsourcing work to low-cost countries such as India. According to a survey conducted by Forrester Research, a very small percentage of Fortune 1,000 companies are actually fully engaged in offshore outsourcing. The survey also points out that the move is not as simple as perceived.
The study found that more than 60 per cent of Fortune 1,000 companies are either doing nothing about offshore outsourcing, or they are doing very little.
Forrester has identified these companies as "bystanders." The "experimenters" comprise another 25 per cent to 30 per cent of the Fortune 1,000. This segment has experience and relationships with offshore vendors, but offshore is not a key element of their overall strategy, as just 1 per cent to 5 per cent of their IT services budget goes toward offshore. The "committeds" and "full exploiters" make up the remaining 10 per cent to 20 per cent of the Fortune 1,000. These firms commit anywhere from 10 per cent to 50 per cent of their services budget to offshore ventures.
Forrester data shows that 46 per cent of companies who are participating in offshore say that a lack of internal project management skills is one of the major reasons that these companies aren't doing more. Moving jobs offshore is a process that takes up to 48 months. Many companies don't understand the complexities (from cultural barriers to security measures) involved in offshore outsourcing. Companies that have committed to it so far are large, global companies that are highly aligned and have experience with developing nations.
More than half (54 per cent) of those who are not using offshore say they are facing resistance from IT staff or business executives. Forrester says that will change, at least from the business side.
So, all this means that we are just seeing the beginning of what has the potential to redefine economic equations at a global level. But, for this potential to be realized, IT service providers need to do a lot, while buyers need to organize themselves better internally to benefit from the economic gains.

2004 may provide answers for the following-

How will Indian companies, particularly the larger ones, handle the backlash issue?

How will Indian companies build competencies to handle large deals?

Who will win the battle for mind-share in the global outsourcing space- The Indian MNCs – Infosys and Wipro or the global giants – Accenture and the CGE&Ys?

Will Indian IT companies manage to get a reasonable share of the customer’s wallet as far as IT spends are concerned?

Will the BPO segment graduate to the next level on the value chain and truly transform India into a global knowledge hub?