Europe beckons Indian software companies

With the US economy still not showing complete revival, Indian companies are now eyeing Europe as the new shining star to guide them to growth in the years to come. Srikanth R P has the details

India’s rise as a software services player has been largely dependent on the US, with the greenback contributing more than 65 percent to Indian software exports. Other big markets like Europe have not really been tapped as compared to their potential. For instance, Western Europe, with an IT services spending capacity of $109.6 billion for 2002-03 translated to just a 21.3 percent market share of software services exports. Compare this to North America with an IT services spending capacity of $171.1 billion, which accounts for 67.7 percent of Indian software services exports.

The key drivers for IT investments by the financial services sector are likely to be regulatory changes, e-business initiatives and enterprise security, says Sunil Mehta

Clearly, Indian software companies have a lot to gain in the European market if they play their cards right. With the US economy going downhill, it does make sense for Indian companies to look at alternatives. The European market has also gained significance because the US dollar is steadily going downhill and losing out to the Euro.

Market opportunities
Europe accounts for around 30 percent of the global IT services market. According to IDC estimates, IT services spending in Western Europe is expected to grow at a CAGR of 11 percent in the medium term. Naturally, Indian players are looking at Europe to offset the slowdown in the US. Financial services and telecom are the main sectors that represent huge opportunities for Indian companies in Europe.

Says Sunil Mehta, vice president of research at Nasscom, “The financial services sector, including securities, banking and insurance services is the largest consumer of IT services. The key drivers for IT investments by the financial services sector are likely to be regulatory changes, e-business initiatives and enterprise security. In Europe, stock exchanges are required to implement the International Securities Identification Number (ISIN), for all securities trading. This is likely to offer a significant opportunity to Indian software companies with expertise in the European financial services industry.For instance, the six digit numeric Wertpapierkennnummer (WKN) currently used in Germany to uniquely identify securities, will be replaced by the new International Securities Identification Number (ISIN), a 12-digit alphanumeric code. Hence German banks will need to transition all relevant IT systems to the new standards. Also, expenditure by the telecom sector on IT services, as a percentage of revenues, is one of the highest at around 12–15 percent. This is mainly due to the rapid changes in telecommunications technology, as a result of mobile communications, and intense competition in the global telecom service and equipment markets. Some of the areas which can be tapped by Indian companies are software solutions, telecom software, mobile and wireless applications, e-business and IT-enabled services ”

Within Europe, UK is the largest IT market, estimated to be close to $39 billion and growing at a CAGR of 7.4 percent. Hence, Indian software companies look at UK as a springboard into the European market. In the UK, financial services, public sector, utility services and manufacturing are some of the traditional big spenders on IT.

But Europe is not just about the UK. Says Mehta, “There are large non-English speaking markets in Western Europe (Germany/ France/Italy) which remain under-penetrated by Indian IT companies. These three alone have the potential to offer the Indian industry over $2-$3 billion in export revenues by the year 2008. Germany for instance has the potential to emerge as a high-growth geography for Indian companies in the next two-three years followed by France and Italy. The IT services market in Germany is expected to be $40 billion by 2005. Likewise in France, the IT services market is expected to be close to $30 billion in size by 2005.”

The key players
While Indian software exports to Europe still lag behind the US by a huge number, there have been some companies that have taken the lead in tapping the European market and effectively decreasing dependence on the US. One of the first companies to make a foray into the European market was TCS. Unlike other Indian software companies, which have now started to look at the European market, TCS set up operations in UK way back in 1975, a time when the concept of software outsourcing itself was unknown.

Incidentally, the office in UK was the first overseas office of TCS. Today, the company has close to 2,000 professionals working for UK-based clients. TCS relentlessly went on to tap markets by setting up operations in various countries in Europe. The year 1985 saw TCS setting up operations in Switzerland; Germany and Denmark followed in 1990, Belgium in 1993, France in 1997, Sweden in 1998, Finland in 1999 and Hungary in 2001. And the key to success in all these markets are alliances TCS has with different local players in these countries.

Says Atul Takle, vice president for Corporate Communications at TCS, “In line with our quest to become a global company, we had started scouting markets in Europe for opportunities. But this was at a time when the concept of offshore outsourcing was relatively unknown. As we had built up considerable expertise in various industries, the company felt that the best approach to tap foreign markets would be to build alliances with local partners. Accordingly, we built an alliance with TKS Technosoft, a Swiss company well versed with the working of the Swiss banking industry. This helped TCS in understanding the local market and customise solutions or products accordingly. For example, Quartz, which is an important part of TCS’ product portfolio, was first developed for a Swiss bank. The alliance which started in 1985 continues till date.”

Similarly, Infosys has seen its revenues from Europe growing at a steady clip. For instance, the contribution of Europe to the company’s revenues have increased from 9.4 percent (1999) to 19.5 percent (2002). Infosys is also looking forward to the mandatory requirement for stock exchanges in Europe to implement the International Securities Identification Number (ISIN) for all securities trading. To capture this emerging market, Infosys has introduced its security number conversion services to ensure total ISIN and WKN compliance.

The other Indian biggie, Wipro Technologies has also seen its revenues from Europe grow by a significant number. For instance, the proportion of revenues from Europe has increased from 29 percent for the financial year 2001 to 36 percent for the year 2002. Besides, in traditional areas like finance and banking, Wipro has been doing a lot of work in the telecom sector in Scandinavian countries. While Wipro has been doing business with UK-based customers for the past 10 years, the emerging areas of opportunity for the company are countries like Germany, which has traditionally been a big manufacturing base for auto makers. Similarly, Switzerland has huge potential in the areas of banking, finance, travel and tourism and manufacturing.

Besides big names in the industry, mid-sized companies like Mastek too have benefited in a huge way from a European focus. Says Ashank Desai, CMD, Mastek, “Europe is a key market for us and contributes more than 60 percent to our revenues. Even in the current economic scenario, our revenues from the European market have been growing at 60 percent. We have been very successful in this region and have done some interesting projects. The latest one is the London traffic project where we have provided the solution for traffic congestion in London.” Desai believes that telecommunications, manufacturing, logistics and hospitality are some sectors that are still relatively untapped and represent a significant opportunity to Indian companies.

Adds Sukumar Namjoshi, managing director, Patni Computer Systems (UK), “Europe offers promising opportunities in the areas of Internet, e-commerce, mobile and wireless communications. Verticals like banking and finance, utilities, retail and manufacturing industries also offer opportunities. Patni has increased its focus on the European market since late 2000 and the opportunities emerging have been very promising.”

Polaris has also been focusing on the BFSI vertical and in emerging verticals like ERP implementations and business re-engineering solutions. Says Vijay R Narasimhan, senior vice president and sales director for the European region at Polaris Software Labs, “The European market is emerging as the second strongest outsourcing market after the US and we believe the continent offers the potential wherein it will adopt contemporary technologies in future by replacing existing technology systems. Outsourcing business re-engineering projects hold a huge potential in UK as most companies in the continent are still working with older systems and outsource only maintenance contracts. Within the UK, our focus is on providing customised solutions for business re-engineering. We have taken a product /customised software solution approach in multiple regions within the continent, especially central Europe. In certain geographies in Western Europe, we have been successful in winning contracts for customised business software and for our emerging verticals division that focuses on implementing SAP and BaaN solutions.” Besides the market for software services, Polaris is also looking to tap the European market for its banking products. In the product segment, the company recently established a strong footprint through product-related order wins from ABN Amro and the Deutsche Leasing group.

In line with the needs of the market, Polaris is looking at positioning its product portfolio to cater to different market segments. Explains Narasimhan, “We see a big opportunity in the SME space for our product portfolio. Most SME companies in the continent are active in the product shopping segment. They typically look for products that are robust, scalable, future-proof and require low maintenance. We will be going all out with our Orbipack framework of products to meet this need from component-based solutions to large integrated solution frameworks.” Polaris, which set up operations in Europe in 1998, has seen its revenues from Europe grow to 27 percent of total revenues.

Blue Star Infotech is another company that derives a big portion of its revenues from Europe. Currently around 35 percent of Blue Star Infotech’s revenues come from Europe and the company expects an annual growth rate of 25 percent for the next two years. Says Parmod Bhalla, managing director of Blue Star Infotech, “The banking sector in Europe has good potential as most of the players in this segment have experienced the benefits of outsourcing to India. The retail and energy sectors are also attractive. Further, due to a strong industrial base, European markets also have a lot of potential for embedded software work. Our focus is on the retail sector in the end-user space and telecom software providers in the technology sector. In the recent past we have strengthened our position in the telecom software market as well as application portfolio management space.” While Blue Star started its UK office in 1999 to address HP’s client base, the company has aggressively moved to form alliances to tap the European market in a big way. The company has a branch office in Finland and business associates in Austria, Sweden, Denmark and Germany. The European shift is evident from the fact that most alliances have been formed in the last 12-18 months.

Key Challenges
One of the key reasons why the European market still continues to be out of reach for Indian companies is the fact that there is a huge difference between the market in the US and Europe in terms of culture and acceptance of concepts in outsourcing.

Sukumar Namjoshi says that outsourcing is the accepted norm in the US as a means of saving costs, whereas Europe with its strong trade union culture is more resistant to outsourcing as it could mean job losses

Says Namjoshi of Patni, “Outsourcing is a tried and tested process in the US. In comparison, Europe is not an aggressive outsourcer. However, there are some exceptions, notably the UK. Big US companies have a different approach to dealing with third parties on a project basis. While in the US they are willing to outsource to new companies, European companies are more reluctant to tread on a similar path. The Europeans are more comfortable doing work with companies that they are already working with. Moreover outsourcing is the accepted norm in the US as a means for cost saving, whereas Europe with its strong trade union culture is more resistant to outsourcing as that could mean job losses.” Another significant factor unique to Europe is their conservative style of doing business. Companies are very particular about spending on specific projects and are risk-averse, unlike the American way of conducting business that encourages the spirit of entrepreneurship and is more adventurous in risk-taking. As European customers prefer dealing with vendors whom they know very well, Indian companies have to invest substantial efforts in building relationships with their European counterparts.

The European market also represents different countries with their own languages and culture and is hence a big challenge for Indian companies trying to acquire clients outside of UK. Indian software companies face lesser issues in tapping UK-based clients as English is the medium of communication. Agrees Namjoshi, “Most Europeans prefer to speak in their own languages, which can be quite uncomfortable for Indian IT professionals. Within Europe, the language issue partly explains why the UK alone accounts for 60 percent of Indian IT exports to the region. Also, work permits take longer to process times in most European countries. This is one of the biggest challenges faced by us in countries like Germany and France.”

European clients also lay significant emphasis on long-term relationships with their vendors. Says Bhalla, “European clients are comfortable only in dealing with vendors who have a local presence. The business culture involves much more face-to-face contact as compared to the US where a lot of business deals get done over electronic means or tele-commuting. Our experience has been moderately good as most of our clients have a long-term orientation.”

Taking up challenges
Some pointers on how to crack the European market can be seen from strategy adopted by TCS, the first Indian company to set up operations in Europe. In addition to building local alliances, TCS tries to get the views of the local Indian diplomats when it comes to understanding the varied cultures in different countries. And in cases where a client is not comfortable with an offshore model, TCS has tried to set up a model demonstration centre that showcases what TCS is capable of. For instance, the company has set up a demonstration centre in places like Amsterdam and Hungary. The positioning of the centres have also been carefully chosen. For example, Hungarian mathematicians are considered to be the best in the world and the cost of living in Hungary is significantly cheaper than in say, UK. In addition to having access to good talent, TCS can cost effectively service European markets like Germany. TCS also invests a significant amount of its resources in training its people in language skills. For instance, the training centre at Trivandrum imparts language skills in Japanese, French and German.

To overcome the European conservative view towards outsourcing, Nasscom has taken a host of initiatives to help Indian software companies tap the European market. Says Mehta, “To start with, we have initiated a public affairs and PR campaign to strengthen India’s global brand equity and inform key influential people, business decision makers, industry analysts, policy makers, academicians, senior government officials, media and the IT community about India’s strong value proposition as an IT oursourcing destination. We are also working with the Indian government and European countries to streamline visa and work permits and other policy issues facing the two countries. Nasscom is also working towards signing MoUs with its counterpart associations in European countries to encourage co-operation and enhance IT trade. Having successfully conducted seminars in various parts of Europe, including UK, Germany, Belgium, France, Italy and Austria, Nasscom will host more such seminars and conferences in Europe. We are also working at increasing interaction with European embassies through various initiatives like regular newsletters to increase flow of communication with different countries.”

While Europe with its varied culture and different languages represents a huge challenge for Indian companies, the path to growth is becoming clearer. The ominous signs of the US economy receding with events like the 9/11 terrorist attack and the ongoing war on Iraq makes it imperative for Indian companies not to keep all eggs in one basket. As one optimistic software industry analyst says, “So what if the egg does not hatch in a day’s time?” It is time Indian software companies thought along these lines and laid a foundation to reap a bountiful harvest in times to come.

Challenges in Europe for Indian software companies
Different countries with their own languages and culture European clients prefer to work with vendors they already know. New players, therefore, have to be extremely patient before they can even think of signing a contract Europeans lay greater emphasis on long-term relationships with their clients. This results in longer decision cycles as compared to those in the US. This is likely to result in higher client acquisition costs for Indian companies Europe with its strong trade union culture is resistant to outsourcing as it would mean loss of jobs
IT services spending regional shares, 2002-03
Country	IT services spending US$bn	India’s exports US$m	India’s market share(%)	Relative dependence ratio	Share in India’s exports
North America	171.1	6,685	3.92	1.4	67.7
Western Europe	109.6	2,103	1.92	0.7	21.3
Japan	34.9	193	0.55	0.2	2
Latin America & rest of the world	17.5	583	3.33	1.2	5.9
Asia Pacific	16	311	1.94	0.7	3.2
TOTAL	349.1	9,875	2.82		100