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Global giants watch out, here comes India!
Surajeet Das Gupta | September 08, 2005
For years, it's been a cosy little club. A club whose select members hobnobbed with Fortune 500 companies and supped on the rich pickings from technological transformation and greater globalisation.
It was a club whose gilt-edged portals were firmly shut to outsiders.
Until now. For, having already got their foot in the door, several IT majors are resolutely elbowing their way deeper into the rarefied world of technology consulting, hoping for a larger slice of the lucrative $21 billion pie.
Says an optimistic N Chandrashekhar, executive vice-president and head of global operations at Tata Consultancy Services: "Consultancy has been identified as a key business growth area as our customers are demanding a full-service offering. We are looking at 100 per cent growth in this area."
Mumbai-based TCS hopes to earn more than 10 per cent of its revenues (FY05: $2.4 billion) from consulting in the next three years, up from 3 per cent currently. It has already roped in over 400 consultants across the globe to make its dream a reality.
TCS isn't the only one with such ambitions. Consulting income for Bangalore-based Wipro Technologies already constitutes 6 per cent of revenues (FY05: $1.87 billion). The target is to hit 10 per cent in less than three years.
"While our consulting business is growing at 40 per cent, overall company revenues are growing at only 28-30 per cent. We are looking both at organic as well as inorganic growth to scale up our business," says Kapil Khandelwal, head of the India delivery centre of excellence at Wipro Consulting Services.
There's certainly ample room for growth. Last year, Indian technology companies earned barely $ 120 million from consulting, just a tiny fraction of the $17 billion raked in from IT exports. What's even more promising is that consulting isn't a greenfield area any longer:
Wipro, for instance, bought out the global energy practice of American Management Systems in 2002 and acquired consulting firm NerveWire a year later . Today, it has 225 professionals servicing clients in the areas of strategy consulting, e-governance , strategic cost reduction, business transformation and security governance.
How to go about it?
Of course, the easiest way to prise open the door to consultancy is by tapping existing clients who have been hollering for end-to-end capability from their IT services partners. Almost two-thirds of Infy's consulting clients are companies with whom it already has a business relationship.
Similarly, 50 per cent of Wipro's consulting business comes from referrals from existing clients. Says Tim Matalack, practice head of consulting at Wipro: "Consulting is a matter of reputation and connection. Our reputation comes from the work we have done for our existing clients."
Now that they've scampered up the steep end of the learning curve, Indian IT majors are hoping to spring into the big league. Take Infosys. Last year, the Bangalore-based technology services giant set up a fully owned consulting subsidiary in Texas.
In the intervening period, the company has built and fine-tuned its consulting model and is planning to spend $20 million to expand operations, possibly through acquisitions.
By 2007, for instance, Infosys Consulting hopes to ramp up the number of consultants from 120 now to more than 500. That should multiply consulting's current 4 per cent contribution to turnover (FY05: $1.59 billion) manifold. By offering a full range of services, Infosys COO Kris Gopalakrishnan hopes to bag at least "a few clients who bill more than $100 million each," in the next few years.
Clients like that have hitherto been the exclusive preserve of big boys like the $96.29 billion IBM Corp, $20.67 billion Electronic Data Systems Corp, and $13.67 billion Accenture Ltd, who straddle the entire value chain from business consulting to software outsourcing to IT implementation, thereby offering comprehensive, end-to-end solutions.
Flexing their muscles
Taking them head-on now are Indian companies that are using their strengths in offshore IT services to paddle rapidly upstream to consultancy creek.
The reason? "Our entry into consulting is essentially a business strategy. It is only the cherry: the real revenue is from the downstream application work that it brings," explains Mumbai-based Patni Computer Systems vice-president Deepak Khosla.
Unlike some of its peers, Patni doesn't even have a separate consulting practice, preferring instead to build its teams on top of key industry verticals.
However, that didn't stop the company from acquiring Massachusettes-based The Reference Inc., a technology consulting and advisory firm specialising in investment management, in 2003 for $7.5 million, and following that up last year with a $68 million buy-out of Cymbal Corp, a consulting, systems integration and outsourcing solutions provider specialising in telecommunications. The objective: to build domain knowledge in key sectors.
That domain knowledge is crucial when it comes to consultancy. That's because IT companies can leverage a domain-knowledge won consultancy agreement to bag a veritable windfall in application and maintenance contracts. Satyam, for instance, expects 80 per cent of its consulting work to generate downstream implementation and maintenance work. Industry experts reckon that every dollar earned from consultancy can generate between $7 and $10 in downstream deals. "Consulting is a wedge to open doors," adds Khosla.
Consulting is a pretty profitable business on its own as well. Billing rates can be five to ten times that of pure application work (with 20-30 per cent higher margins). Not surprising, therefore, that companies like Satyam are hurriedly reworking contracts that bundle consulting with services for existing clients. "Forty per cent of our contracts have already been restructured so that consultancy is billed separately," says Satyam senior vice-president Sailesh Shah.
But perhaps most importantly, a consulting practice is essential for survival. With competitors worldwide nipping at their heels, Indian IT majors are looking for clients who undertake 'strategic offshoring'. In simple terms, that means clients who offer long-term contracts, where the board rather than the CTO is involved in taking a decision on what areas to outsource.
Says Goplakrishnan: "If we're looking for a deeper involvement with clients, there is a clear need to build relationships with business managers and board members rather than just the technology chiefs. If we want to add more value, we must get into the lifecycle of the project much earlier. That is were consulting comes in."
That view is echoed by industry analysts. Points out Avinash Vashishta, managing partner at San Ramon (Calif.)-based offshore advisory fiirm neoIT: "None of their clients will come to them only for consulting. That might happen ten years down the line. But as (Indian) IT companies try to move up the value chain, clients are asking whether you have a wider knowledge of their businesses like the Accentures of the world. You need a consulting arm to convince them."
One of the biggest advantages that Indian companies have, of course, is cost. By replicating its offshoring model in IT services, TCS plans to hire 60 per cent of its consultants in the US and Europe, with the balance based in India. Chandrashekar says that some work which is research-based or requires elements of training, can be easily offshored.
Similarly, Infosys works on a simple rule of thumb: three India-based consultants for every consultant overseas. But the real cost advantage kicks in when companies undertake both consulting as well as implementation and maintenance work as a package because then, most of the work can be offshored.
Gopalakrishnan says that by leveraging the global delivery model, Infosys can undertake consulting and implementation at a 35 per cent mark-down in price over its global competitors.
"We have 40 delivery centres in 30 countries and cover of 30 industries. It will take them years to replicate this model. After all, where do Indian IT companies have a global delivery model? Their operations are dominated by India," says Kevin Campbell, global managing director of Business Process Outsourcing at Accenture.
That's not Indian IT companies' only drawback. Reconciling consulting and software services businesses poses a serious challenge.
Argues Arun Maira, chairman of Boston Consulting Group in India: "They have different cultures, skill-sets and pay packets. The way they think is different. So, there are serious issues of integration." Maira adds another word of caution: "Indian IT companies are not involved in strategic consulting at all. Their consulting is geared to selling solutions and getting downstream revenues."
Hoping to pull the rug from under the feet of domestic upstarts, the big boys are also replicating the offshoring model for consultancy much faster than Indian IT companies are are building global delivery models.
As much as 12 per cent of Accenture's employees, for instance, are now based in India and more than half of technology consultant Sapient Corp's work is outsourced to this country. "Indian IT companies have still not built a truly global delivery model, but the Accentures have, after some years in India, perfected the offshoring model," reminds Vashishta.
So are the Indian challengers destined to fall by the wayside? Perish the thought. They contend that it isn't easy for the multinationals to shift hundreds of jobs to India without disrupting operations in other countries.
Our homegrown consultants may not have the geographical spread of the global big boys, but their ability to build domain knowledge in specific verticals as well as offer far cheaper end-to-end solutions could signal the arrival of an Indian contingent at the consultancy club.