• Technology
  • CFO Magazine

The View from the East

India's upstart IT-services firms face their own challenges from their giant rivals in the West.

The Grass Is Greener

It is in response to all these challenges that India’s leading firms are desperately trying to move into the higher-value-added areas of IT services. For example, Infosys, Wipro, and TCS are starting to mix broad industry-consulting skills with IT in order to deliver “business outcomes” rather than just IT services.

The irony, of course, is that while Western firms rush to create a cheap offshore delivery capability, the Indian companies are racing to build a sophisticated front-end consultancy in the West.

Many industry watchers foresee tough times ahead for the Indian firms. The global majors have a worldwide presence capable of serving multinational clients, and plenty of resources. Revenues at IBM Global Services alone, for example, are $43 billion — almost three times the size of India’s entire IT sector.

Just as important is the question of “domain expertise.” In order to provide high-end consulting services, companies need a deep understanding of what makes particular industry sectors tick. Indian firms do not have this expertise — at least not yet. But gradually that’s changing. Thanks to a policy of hiring away “rainmaker” consultants from Western rivals, the Indian companies are starting to develop the knowledge and contacts they need.

Many Indian firms also are hotly pursuing acquisition opportunities. In March 2003, TCS bought Aviation Software Development Consultancy from Singapore Airlines to further its penetration in the transport sector. In June 2002, Wipro bought U.S.-based NerveWire, a consultancy serving banks and insurance companies.

Partnerships are another way of gaining much-needed knowledge, such as Infotech Enterprises’s five-year relationship with U.S. jet-engine maker Pratt & Whitney, which is helping the company develop skills for the aerospace sector.

Indian firms are also expanding geographically. In December, for example, Infosys bought Expert Information Systems, one of Australia’s leading IT-services providers. It also announced plans to set up a 200-seat software-development center in Shanghai.

Clearly, the Indian vendors are moving in the right direction, but Gupta suggests the pace may be too slow. “The progress on anticipated growth drivers — that is, domain expertise, services breadth, and geographical diversification — remains less than satisfactory for most,” he says.

Pooja Narayanan, an analyst at BK Securities in Mumbai, highlights another problem. “These companies will need to fight the perception that India and Indian firms are only good for low-end, low-value, low-risk jobs,” she warns. “Brand-building will be central to that effort.”

Chief Fighting Officer

Inevitably, the CFOs of the Indian firms will play a crucial role as their companies face increasing competition from Western multinationals. Of central importance will be the need to pay close attention to operating margins. Traditionally, many firms have enjoyed margins of as high as 35 percent, not to mention enviable return-on-capital figures — Infosys’s was more than 50 percent last year — but that looks set to change.

That’s partially because prices at the low-value end of the IT-services market are being squeezed tight, thanks to stiffening competition within India. But as such companies as Infosys, Wipro, and TCS move into higher-value services, they also will need to invest heavily in building new capabilities — a fact that will add further margin pressure.

Discuss

Your email address will not be published. Required fields are marked *