The Indian IT companies, most of them, including the likes of Infosys, TCS, Wipro, etc. have had a very good run so far. They have been reporting good results quarter on quarter, good profit margins, good growth & good outlook. Is this growth sustainable in the long run? Yes, if these companies are ready to move up the value chain instead of focusing mostly on the low-hanging fruit, as they have been doing till now.
In order to put things in perspective, some discussion about the way the Indian IT industry has grown so far is due. In the first round of out-sourcing / off-shoring that started in late 80s & ended during the dot-com burst, we saw most of the IT companies do well irrespective of their size. This was possible because the cost-differential was huge and even companies operating at the 3rd or 4th level in the out-sourcing chain could make a decent margin.
The dot-com burst of 2001 changed the rules of the game. Most of the corporations across the world had become aware of the benefits / pitfalls of out-sourcing, off-shoring and also the costs / risks associated with it. Hence they started demanding more. This reduced the number of layers in the out-sourcing chain leaving less room for the smaller players to make money, unless they could offer some special advantages like domain expertise, very good understanding of the client's business, etc.
Post 2004, lot of changes were happening in the emerging markets like India, which started seeing a lot of development. With double-digit growth year after year, the developed world started taking notice. Corporations across the world started focusing on India as a market for their products / services in a big way. This included companies like IBM, GE, DELL, HP, CISCO etc. While the world started focusing on India in a big way, the Indian IT majors still continued to focus only on overseas markets without making an attempt to understand the long term implications of that strategy.
Now, in 2010, most of the big Indian IT MNCs are still doing well, but their margins have reduced. They are going after billion dollar contracts, but the competitors like IBM, HP, Accenture are way ahead. With so much cash on their books, what is that our IT MNCs are not doing right to make the competition even? In order to understand that, we need to dig deeper into the competencies that Indian IT MNCs have managed to build so far.
Indian IT MNCs, including Infosys, TCS, Wipro started off as body-shoppers and that was their main business till late 90s. After the dot-com bust, most of them started focusing heavily on fixed price contracts as the margins were higher there and also they had mastered the global delivery model. At the same time, IBM, Accenture and other global MNCs realized that the Indian IT MNCs have an undue advantage in terms of their heavy off-shore presence. To off-set that they started investing heavily on building their off-shore presence here. In addition, they also started looking at India as market and started beefing up their sales/marketing organization here.
Another area where companies like IBM & Accenture score over their Indian counterparts is domain expertise. Over the years, consciously, the IBMs have built domain expertise in key business verticals as well as technology horizontals. The Indian IT MNCs have realized this but their approach to bridge this gap has been patchy at best. The Indian IT MNCs must first get their definition of domain expert right. They think that anyone who has worked on Insurance projects for 7-8 years is an expert on Insurance. Some of them even went to the extent of hiring retired bankers to beef up their banking domain expertise.
In my view, a domain expert in banking would have spent lot of time in not only understanding the banking domain, but also the kind of technologies being used in the industry. He/she would also be an authority on the direction the industry is taking in terms of application of technology for better ROI (Return On Investment). Unless an IT major has top-of-the-line domain experts, they cannot even bid for taking over entire IT function of large corporations like Citibank, Walmart, Airtel, Exxon Mobil etc. Even in case of well-established relationships, the IT majors need to work with their client businesses as partners. To be able to do that, they need to understand the client's business domain very well. Companies like IBM & Accenture, I hear have folks who can operate at that level.
After having discussed the state the Indian IT majors are with reference to their foreign counterparts, I would like to propose a long-term solution to the problem. Before I discuss the solution, a little context-setting is necessary, especially with regard to the growth of the Indian IT MNCs.
In the first era of out-sourcing, the Indian IT majors were well positioned to cash-in. During this era, the focus was mostly on body-shopping kind of contracts. In the next era which pretty much ended with the 2008 bust, the focus was on fixed price contracts, but the mindset did not change. The Indian IT majors still focused on $ per hour before they even decided to bid for contracts. That is why we did not have any Indian IT names even being heard when the high-profile Bharti contract was signed not too long ago. The current era, which, in my view, started after things stabilized (2009-10) and the focus totally turned on emerging economies, the focus is going-forward will be completely on value which I would like to refer as "Value-sourcing".
There are two reasons why I feel "Value-sourcing" is the way-to-go for Indian IT majors. Firstly, we Indians have always looked for value in anything we put our money on. It is in our DNA. Secondly, for organizations, it is not what they spend on IT which counts, but the ROI (nothing but value) is what counts in the end. For example, in the IBM-Bharti deal, I am sure nobody would have discussed in terms of rate per person-hour, but instead focused on SLA (service-level-agreement), penalties for not meeting SLA, how to tie payments to IBM to Bharti's revenue & customer-satisfaction etc. Our Indian IT majors have realized this and have started making amends, but they have lost a lot of time already.
Secondly, Indians have traditionally been very good at analysis, number-crunching, etc. This particular quality, coupled with a lot of domain expertise is what will prepare the Indian IT majors to succeed in this era of out-sourcing. For example, if Wipro goes to Reliance Industries with a proposed solution which will help Reliance increase their operating efficiency by 10%, won't Reliance sit back & listen? definitely yes. For a company of the size of Reliance, a 10% reduction could even mean a couple of billion dollars which is almost equal to Wipro's turnover for a quarter. The analytics business, if leveraged well, can give the Indian IT majors a good foothold not only in India, but also outside India.
The "Value" business of which the analytics business is a sub-set does require very strong domain expertise, good understanding of the market and attention to detail. But the most important is of-course the ability to find patterns / trends which need be identified for the clients much ahead of everyone else. This is where the Indian IT majors can leverage a fast-growing domestic market to try out their "value" offerings and take it to the world market at pretty much the same time.
In the first era, companies looked for software & services, both of which were expensive. In the second era, they started looking at solutions and not software & services separately. In the current era, the businesses are looking only for "value". Before they spend any money on IT, they want to understand what return they can expect from their investment. To cite an example, at the height of the financial bust in 2009, one sales person known to me was trying to convince a top-10 bank in the US to buy his high-end contact center solution which would enable them to handle all forms of media (voice, chat, e-mail, ...) together. An excellent proposition in the by-gone era. In this case, the customer refused to upgrade saying that the ROI is not convincing enough to make the investment ( just a few million dollars for a Fortune-50 company ).
In order to re-iterate the potential of value-sourcing, let us take a few illustrative examples. Every company operating in India will be launching new products / services as frequently as their industry segment requires them to. Each one of them will also be running lot of internal initiatives to improve efficiencies, increase customer satisfactions levels, look at new market segments, etc.
Let us take a FMCG conglomerate like Hindustan Lever. By now they must have already invested sufficiently in IT across different departments and also at the corporate level. They would already have an SAP solution (or similar) across different processes, a good call-center solution to handle customer calls & other software / solutions used in their domain. In all probability, they already would have out-sourced their entire IT function to a third-party like IBM or TCS. Most of Hindustan Lever's competitors would also be in a similar situation. Under such circumstances, if someone like Wipro wants to increase their market share in the FMCG vertical, where do they start? They will have to either wait till contracts come up for renewal or pray for the existing vendors to goof-up big-time.
The other option is to look at what kind of solutions would add value to Hindustan Lever's business either in terms of top-line growth or improvements in bottom-line. What could this be? If customer service at Hindustan Lever is really bad when compared to its competition, Wipro folks can try to figure out how that can be improved. It could be just that Hindustan Lever is using an outdated set of solutions for handling customer service or they may not be running it efficiently. In either of these cases, Wipro can really come up with a better solution and go to Lever with the clearly articulated ROI (like extra investment of $1 million which will improve customer satisfaction ratings to 90% or more and also saving $0.5 million every year due to increased efficiencies) Hindustan Lever will definitely be interested. This is a classic case of identifying the customer pain-point & proposing a solution to address it.
Let us take another case where a particular customer has everything going right and no visible pain-points. Even in such cases, they will be ready to listen if the IT vendor that they are dealing with comes up with a solution / offering which will make their business more profitable or enable them to grab more market-share or even better help them expand the market itself. As we all know, IBM is running Airtel's IT in India. Airtel's 2G business has almost reached saturation. How does IBM increase its revenue from Airtel under such circumstances? IBM has complete access to Airtel's data. They can do wonders with that. Lot of analytics can be done and patterns identified and solutions proposed to the customer. If one such solution can enable Airtel to reduce the tower-density by 50%, wouldn't they be ready to pay even a fortune to IBM to buy that kind of a solution?
In summary, value-sourcing is all about showing customer the value. Indian IT majors are well positioned to leverage the India advantage in order to move up the value chain. It does require good amount of up-front investment. Are the Indian IT majors ready to make that investment? I am not really sure about that, going by the past trends, but hopeful that I am proved wrong.
No comments:
Post a Comment