With multinational software and consulting firms establishing offshore bases in India, the cost-effective positioning adopted by the Indian software industry has boomeranged. Pankaj Mishra compares MNCs against the Indian players and discovers that the real test for the industry lies not only in beating the US slowdown, but also in competing effectively with MNCs on home turf

Check this out: In 2000, MNC software houses operating out of India accounted for 8 percent of the total software exports worth over $550 million. The MNC share of the export pie is expected to double to 16 percent in 2002, with MNCs exporting $1.2 billion worth of software. What is even more alarming is that the ‘win rates’ of MNCs having a base in the country against the Tier One Indian players is hovering around 65 percent.

According to a McKinsey survey, 80 percent of the top 40 global IT services firms have a presence in India. With the likes of Accenture, EDS, CSC and Cap Gemini Ernst & Young enhancing their offshore capacity in India, the offshore success story of Indian software companies no longer seems a marketable value proposition as MNCs can now offer the same cost advantages. In consulting, while Indian companies are still talking big but struggling to identify a target, IBM has recently closed the acquisition of PwC’s consulting arm. Adding to the woes of India’s software titans, there are MNC companies like Cognizant, that have become domain experts in various niche areas.

Says Lakshmi Narayan, president and COO, Cognizant Technology Solutions, “For the first quarter ended June 2002, Cognizant’s revenue grew 17 percent sequentially, the highest in the industry among the Top 10 software exporters from India.”

However, Vivek Paul, CEO of Wipro Technologies, seems unperturbed by this development. “It will take at least two to three years for these MNCs to mature in the global delivery model. It is not an easy task to open shop in India and start executing projects through global delivery,” he says. Wipro is looking at acquiring a firm with consulting expertise and is also building its consulting strength by recruiting professionals from the big guns of consulting.

Analysts believe that most MNCs are growing their Indian operations by at least 40-50 percent every year, and in some cases even faster than that. This includes software services companies such as IBM Global Services and Cognizant and captive software development centres set up by companies such as HSBC, Standard Chartered, and P&O Ned Lloyd. Global players like Accenture, Logica, EDS and Keane, besides others, are all rapidly adopting this model.

Major players

MNCs like IBM Global Services India, CSC and others have adopted different ways to exploit the cost advantage of undertaking development work in India. Most of them are taking up global projects while some have started taking up independent projects, bidding against big Indian companies such as TCS, Infy, Wipro and Satyam. “Around three years ago, we did not have the capacity to bid effectively against the Indian biggies, but we are now in the same league as any large India-centric offshore player. Our current win rate against the pure Indian players is 60 percent and we expect it to hover around the same mark,” says Narayan. “Based on Nasscom’s ranking, we are the second largest multinational exporter of software from India and the top pure-play onsite/offshore company in this list. All our clients use the onsite/offshore model, and 70 percent of our programming staff are located offshore, reflecting the high offshore ratios we are able to achieve for our clients,” he adds.

Though Cognizant was one of the earliest entrants to set up an offshore base in the country, others like Accenture, CSC and EDS might take a few years to replicate the global delivery model. “Infosys has been delivering services using the Global Delivery Model (GDM) from India for the past 12 years at least. MNC companies will have to learn the ropes, make investments and make the required changes in sales, delivery and marketing in order to deliver these services. Many customers would like to go with established players in India rather than take a risk with a new player, even though they have existing relationships with these companies,” feels S Gopalakrishnan, deputy managing director and COO, Infosys Technologies.

How do these MNCs fare in terms of their cost structures and are they able to maintain margins? “If you look at the cost structure of Infosys versus these companies, if they start offshore services, the benefit will go to the customer rather than themselves. It will add very little to their margins since the rates for these services are lower, even if delivered by the MNCs,” Gopalakrishnan adds. Realising this, around 51 percent of MNCs having a base in India have established fully-owned subsidiaries, and are ramping up fast to justify the cost structure and improve their margins.

For instance, IBM Global Services India (IBM GSI) has over 3,000 professionals across six development centres in this country. It is aiming at adding 7,000 professionals over the next three years. The development centres in India execute all global application development projects as well as independent projects. While bidding for a large project, Indian players often come across IBM GSI.

And for the year ended March 2002 a year that did not see much employee ramp-up in the software industry Cognizant had a gross addition of 993 professionals. In the first quarter of 2002, ending June 2002, Cognizant added 660 professionals. The company expects to cross the 5,000-mark by end-2002.

Other MNCs have adopted different strategies for exploiting the offshore advantage. While some of them, such as Accenture, CSC, Sapient and Cap Gemini Ernst & Young have invested in building their own resources in the country, a few others such as Perot Systems, Deloitte & Touche and Groupe Bull are either sub-contracting work to Indian companies or have formed joint ventures with local players. Valtech is subcontracting to Hexaware. Deloitte & Touche has a joint venture with Mastek, while Groupe Bull has one with PSI Data Systems and Perot with HCL.

Scouting for differentiators
Cognizant’s Narayanan says that the dilemma faced by many clients who are looking at India-centric players is the lack of differentiators amongst the Indian companies. “One of the biggest challenges for Indian companies is how to position themselves differently. The ‘quality’ tags like CMM and Six Sigma can work for a while, but there is no sustainability in this differentiation,” he says. There was a time when SEI-CMM certifications were looked upon as the ultimate differentiator, but with so many companies already assessed at Level 5 of the SEI-CMM model, that’s no longer a USP.

Analysts fear that the cost-effective offshore proposition has now been commoditised and the only differentiation left is the ‘India-centric player’ tag. However, companies like Infosys and Wipro have also started investing heavily in marketing activities to ensure that the ‘brand message’ is conveyed effectively. Wipro for example, has branded its offshore delivery mechanism as ‘ShoreGain’. Even Accenture has adopted the same strategy to increase brand recall amongst its target customers.

Taking on the MNCs
There are many innovative measures adopted by MNCs which Indian software houses might need to emulate in order to compete effectively. Here’s what some of the MNC firms did right:

Accenture: It started providing system integration within the communication and hi-tech areas. By standardising methodologies (Method One) and launching a network of alliances (SAP), it was able to expand into other verticals like utilities and energy. Deals on the lines of Accenture’s acquisition of ITT’s two divisions helped the company expand the scope of its service lines.

Accenture also formed Avande with Microsoft to offer solutions on Microsoft’s Enterprise Platform and Windows 2000. Microsoft contributes $385 million in cash to Avande. Under its programme called Network Alliances, Accenture has an ongoing relationship with Ariba (e-marketplace solution), HP (imaging solutions) and Siebel (CRM). The company has made over 70 venture investments amounting to $200 million in firms like Blue Martini and SeeBeyond.

EDS: This giant invented outsourcing using IBM mainframes for Frito Lay. Initially EDS worked with government clients (US Navy, US Federal Government) and automotive companies (General Motors). Then it acquired A T Kearny and others to move up the value chain and offer consulting services. The acquisitions also gave the company an entry into the private sector. It has made 10 acquisitions in the last three years.

CSC: This company has conducted over 20 acquisitions in last three years. In 2001, acquisition revenues were $2.8 billion (IT Services, Combitech and Mynd). It has also expanded geographically BHP IT in Australia and KPMG in France.

Global consortia:
EDS, IBM Global Services and PWC are working together on a 10-year $3 billion deal for UK’s social security system. This joint strategy can be adopted by leading Indian vendors to collectively bid for a large project. However, Indian players do not seem to be ready for such an arrangement.

Emulating the MNCs
There are two ways of looking at the presence of MNCs in the country they can either be perceived as a serious threat to the local players, or more rationally, Indian vendors can benchmark the best practices adopted by these MNCs and even seek joint venture/sub-contracting opportunities. Some MNCs like CSC, who prefer to sub-contract projects may look at giving more projects to Indian players. CSC is sub-contracting work to around five Indian players at present. Even Tier One companies like TCS, Wipro and Infosys can explore joint venture or sub-contracting arrangements with the global Big Five.

Interestingly, analysts believe that TCS may soon join the league of the global Big Five owing to the depth of services offered by the company. Wipro and Infosys have already started moving to a more comprehensive spectrum of service offerings. Both of them have recently forayed into the BPO space too.

In conclusion, the Indian software industry is undergoing a decisive phase in its evolution today, and it would be a wise step for the industry to take lessons from the Big Five. Almost all of them have used acquisitions to outgrow others and enhance their service lines as well as scope of offerings. Are our CEOs and managing directors taking notes?