In late July, rumors swirled that Infosys Technologies might be readying a takeover offer for Cap Gemini or another major tech-services player in the Unites States or Europe.
So on Jul. 25, when the company alerted the press and the markets that it had a major announcement, there was a great deal of anticipation. Instead, Infosys unveiled a US$250 million outsourcing contract with Royal Philips Electronics of the Netherlands.
It was an acquisition of sorts, the company said, at least of the outsourcing centers that belonged to Philips. "We're taking the model to a newer level," said Chief Executive Kris Gopalakrishnan.
Landing a new contract certainly is not bad news, but the development was somewhat deflating for those who believe that Infosys needs to redefine and reposition itself in the multibillion-dollar arena for global outsourcing services. In fact, Infosys and other Indian outsourcers are facing a raft of competitive challenges that will require some dramatic new strategies.
Adversities add upTrue, India's biggest outsourcing firms continue to rake in the profits, at least judging by the latest earnings season. The top five players--Tata Consultancy Services, Infosys, Wipro, Cognizant and Satyam--reported robust profits in the quarter ended June, 2007. And executives generally forecast strong growth ahead.
"We're very happy with having beaten the forecast," said CEO and Managing Director S. Ramadorai of the US$3.1 billion Tata Consultancy Services in Bombay. "TCS, as the leader, is doing well." Ramadorai predicts US $60 billion in tech-services exports for the industry by 2010, nearly twice the current US$35 billion, plus US$20 billion in revenue from domestic business.
Yet behind this show of supreme confidence lurks deep unease. A confluence of adversities is at play. They include an appreciating rupee that is cutting into earnings, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats.
Diminishing returnsOn top of that, there is the end of preferential industry tax benefits at home and the growing success of multinational competitors such as Accenture and IBM on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term. For the first time, industry insiders are asking: Is the outsourcing game over for Bangalore? "The Indian IT companies have had an unusually long run in profits and growth," says Siddharth Pai, partner and managing director of global tech advisory TPI Advisory Services India. But that is "an anomaly", he adds. "As they mature, they cannot expect the same kinds of returns."
And mature they must. For the past decade, Indian software-services firms, which pioneered the business of delivering tech services to the developed world from India efficiently and at 40 percent of the cost of companies such as IBM, have grown exponentially. Revenues exploded from a mere US$1 billion in 1997 to US$35 billion in 2007.
Outsiders' edgeAt first, their multinational competitors such as IBM Global Services, Accenture, and Electronic Data Systems were taken by surprise. But then they joined in the new game, setting up shop in India and leapfrogging by making local acquisitions, hiring aggressively, and offering similar services to their clients. As of June, the three multinationals alone have 100,000 professionals on their rolls in India. That is about a third of the top three Indian players, and the multinationals only began hiring three years ago.
Now that the competition is evening out at the bottom of the business, the battleground will start to move up to the higher-end business consulting and the integration of the offshore and on-site services. Here, the multinationals clearly have an edge. Not only have they been providing consulting services for decades, but they have been doing it across geographic borders, using experienced talent and cultivating long-term and deep relationships with customers. More important, companies have been investing in research and product development for decades--in 2006, IBM spent US$6.2 billion on research and development, and its largest R&D center outside the United States is in Bangalore.
Indian companies, in contrast, have almost no research and development and spend very little on it. They began building their high-end consulting services only two years ago, and all of them have done so organically. Infosys began Infosys Consulting in Fremont, Calif. Wipro has been making small but strategic acquisitions in the United States and Europe. And TCS, which has the widest reach with 150 offices and 79 development centers worldwide, says that 3 percent of its revenue now comes from consulting. That is peanuts compared with foreign rivals.
Lagging the CompetitionNor have the Indians attempted to leapfrog into the big league through a major acquisition. "They have to, they should, to get a global footprint," says Avinash Vashistha of New York outsourcing consultancy Neo-IT. Do they lack confidence? Certainly, "the levers and supportive environment they have in India are not available to them overseas", says Kris Wadia, executive partner, global sourcing, at Accenture.
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