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How India's IT biggies can grow
Subir Roy | May 24, 2006
The next step forward for Indian software leaders is to acquire consulting capabilities. They have made a beginning but it's a long journey, which, if successful, will raise the stakes and pit them directly against the global leaders.
Indian software companies are going through a paradigm shift in the way they are doing business. They began by maintaining legacy systems, then went into development (writing codes), then to putting IT systems in place (constructing, according to the architecture prepared by someone else), and are now seeking to shape solutions, both functionally and physically.
The last one has meant stepping into the new world of consulting, talking to clients to find out what they need, and designing a solution by addressing the client's business and technology needs.
Today, consulting is seen as a must-do for the country's leading software firms in moving up the value chain and keep growing. The Indian software effort still remains largely confined to the maintenance and development space, where it is globally the most competitive.
Most agree that this end of the business is commoditised, and as you grow, you have to get more into value-added work.
"It is a greasy pole, and not being in consulting will kill you," bluntly states V Ravichandar, CEO of Feedback Business Consulting Services, a B2B research-based consulting firm. He says, "Globally, for bright youngsters, being in consulting is the aspirational goal and you need a consulting play to attract the best talent."
The name of the game is to shift your touch-points in a client firm from just the IT executives to the business heads. The rationale: the CIO with whom Indian IT firms have traditionally interacted is more often that not, out of the loop. "How many CIOs end up as CEOs?" asks Ravichandar.
Says S Gopalakrishnan, chief operating officer, Infosys Technologies, "We want to define the solution and also implement it. The way to bag larger deals is to get in very early in the project lifecycle. This enables us to be of more strategic value to the customer. Traditional IT work means implementing a solution defined by others. Imagine the downside of meticulously implementing a solution that was flawed in the first place!"
Right now the amount of consulting done by leading Indian IT firms is quite small. What's worse, it is difficult to get a precise measure of whatever there is on the ground.
For instance, the amount of consulting work that IT companies do, cannot be directly equated with the consulting revenue they declare. Leading software companies claim that there is a lot of consulting inputs that are now going into the traditional IT work they do. However, that cannot be accounted as "pure" consulting revenue.
The problem of measurement is made worse by the fact that, as Siddhartha Pai, partner in the global outsourcing consultancy TPI, says, the idea of consulting itself is quite "fungible" - its scope and content can change according to what you want it to be.
At one end of the domain of consultancy are the strategy consultants such as McKinsey, Bain & Co and Booz Allen Hamilton who are considered the intellectual elite of the discipline.
At the other end, even a routine bit of customising that takes place while installing an ERP solution can pass off as a consultancy input.
A global software services leader such as Accenture, because of its origins in consulting, tends to adopt a broad definition. Accenture was born when the consulting practice of accounting firm Arthur Andersen broke away and its technical implementation capabilities were acquired later.
On the other hand, Indian software services firms tend to be more "puritanical" in their idea of what is consulting work, affirms Lakshmi Narayanan, CEO of Cognizant, adding, "by consulting we mean defining a business solution and executing it."
Explains Gopalakrishnan, "Accenture will flag an entire SAP implementation work as consulting, whereas comparable work, package implementation, accounts for 16 per cent of Infosys' revenue."
In recent times, Indian software firms have acquired consulting practices or groups of consultants to beef up their hard-core consulting capability. While Wipro has Wipro Consultancy as a business group within the firm, Infosys has the Dallas-based Infosys Consultancy as a subsidiary.
The manpower in these divisions is made up of senior consultants from leading global strategy consulting firms. But where is this getting them in terms of numbers? The pure consulting revenue is 2 per cent or less of overall 2005-06 revenue.
For TCS, it is indicated (not officially announced) at $65 million out of a total topline of $2.7 billion. For Infosys, it is $32 million, out of a topline of $2.15 billion. For Wipro Technologies, it is $25 million out of a topline of $1.8 billion.
Another way of measuring the amount of consulting work done by a firm is the number of consultants it has. Sudip Banerjee, president, Enterprise Solutions, Wipro Technologies says Wipro has 75 people in its core programme and change management team led by Tim Matlach, 140 in process consulting, 150-200 domain specialists, and 500 in functional areas.
Infosys, says Gopalakrishnan, has 200 in hard-core consulting, 300 domain specialists, and 2,500 in package implementation whose work is "similar to consulting".
The consulting face of TCS, its Global Consulting Practice, has just under 500 consultants, with 300 based in India. TCS plans to raise this count to 1,000 in a year's time, says Firoze Vandrevala, executive vice president, TCS.
Indian players, which have a degree of consulting capabilities are Infosys, Wipro, TCS, Satyam and Cognizant. As with their overall capabilities, the big three (Infosys, Wipro and TCS) have similar consulting capabilities, though they are not in the league of IBM and Accenture.
Within this, Infosys is strong in financial services and retail, Wipro in telecommunications, retail and technology services, and TCS in financial services, manufacturing, product engineering and infrastructure.
Forrester Research, the technology research and advisory firm, notes in its late 2005 report on "Indian Vendor Consulting Capabilities", that among Indian vendors, Infosys is most able to compete with global consulting leaders in process consulting and its Indian competitors in technical consulting.
By making Infosys Consulting, led by Stephen Pratt, a separate subsidiary, it shows it wants to be taken seriously as a global consulting and IT services firm.
Wipro has made investments in acquiring NerveWire and the utility practice of American Management Systems. And the consulting talent that it has thereby gained is considered strong. But Wipro is still conservative in the sense that the team at Wipro Consulting led by Tim Matlack and Sanjay Joshi remains within Wipro Technologies.
Satyam is on the same path and has acquired a high-end investment management consulting firm, Citisoft, but is even more conservative than Wipro in keeping its consulting work within its overall business structure.
TCS has been doing consulting work for a long time but formed TCS Global Consulting only in 2004. Nobody underestimates its ability to give the other Indian leaders a good run for their money.
Cognizant currently provides consulting inputs to its clients by way of incremental value for what it is already doing but clients value this highly. Its Business Technology Consulting setup is not yet a full blown consulting division.
Where does this leave the Indian leaders? They have an enviable margin and cost structure whereas firms such as Accenture are engaged in rescuing their margins by offshoring to countries like India.
The global leaders are in an intensive cost-reduction mode and are not likely to or need to make further investment in acquiring consulting capabilities, having done so already. On the other hand, the Indian leaders have all the cash in the world to acquire niche firms, practices or groups of consultants.
So, how long will it take for Indian firms to arrive in consulting? Lakshmi Narayanan has a vision. The firms have to first acquire the capability, which can take three to five years. Then they will need another five to build a brand. Leading Indian firms, now globally known for their IT capabilities, have to become known by their consulting capabilities also.
He adds, "This is the tougher part and will take around five years as we are not known for our high-end consulting capabilities. The effective way to do this is to have one or two case studies, of how a firm has been turned around. Once value is demonstrated, you will get value."
To build its business-focused consulting capability, Cognizant is hiring MBAs who, it feels will be a "potent force". As business analysts, they partner clients to bring business and technical expertise to architecting solutions.
Avinash Vashistha, head of Tholons and till lately the offshoring consultancy neoIT, sees the global software leaders and the Indian challengers facing two different challenges.
The likes of IBM and Accenture are certainly under pressure on cost and margins and as they get better on costs and see their offshoring act stabilise, their blended rates (combined onshore and off shore rates) will drop.
The Indian firms, on the other hand, are trying to access larger deals and ramping up their business consulting and global delivery capabilities. They are seeking to build global delivery through local acquisitions, but globalisation of delivery has to go beyond that.
What Vashistha adds is more significant, "Indians have a long way to go in acquiring business consulting capabilities. Cost optimisation by multinationals will happen sooner than global delivery and acquisition of business consulting capability by Indian leaders."
Sudip Banerjee of Wipro Technologies disagrees. "It is easier for us to move up the value chain than for them (global leaders) to move down the cost ladder. We have superior execution skills but don't have that many domain consultants. Over time, we will gain in experience and will be able to charge a premium. We are currently unable to do so because there is no shortage of global IT services delivery.
"But our improving value proposition is implicit in our rapid growth. We are chipping away at their dominant position. The gap between their and our blended rates is narrowing. But their backend costs remain high and some of them are having to face huge attrition after their initial rounds of offshoring."
Among Indian firms, Vashistha sees TCS getting larger deals and Infosys become more customer-facing. But the focus is more on application development than systems integration. The same can be said about Wipro. He says, "It is systems integration which can be the stepping stone to acquiring consulting capabilities." Leaving aside the top three, he feels, "Cognizant has a better chance in ramping up quicker on business consulting than global delivery. On the latter, it is TCS which is ahead of the others."
In this play, do the brighter firms among the smaller players have any kind of stake? They do, feels N Krishnakumar of MindTree Consulting. Even if you are small but have a niche technical and consulting capability, then customers will have an interest in you.
He says, "We track solutions in the mobile space. In this space, we work on assessing supplier capability, understand procurement and are thus able to offer a business value proposition."
One customer MindTree can talk about is Avis, the car rental firm. When MindTree came in, Avis was the second-largest car rental company in the world, but number six in terms of online reservation by customers.
The cost per reservation for Avis comes down to 50 cents from $3 when a customer reserves a car online. MindTree's online reservation solution has raised the share of online reservation made by Avis' customers from 5 to 17 per cent in less than a year.
Experts are strongly divided on what Indian IT firms can do and what they should not try to do in consulting. There is a general consensus that they should not try to get into strategy consulting. There is also some doubts as to whether they should try to ape Accenture and acquire consulting practices in order to put a western face in customer-facing situations. One expert is categorical.
"Indian companies have made a name for themselves by creating a unique value proposition by reducing costs through process innovation and attention to quality. They should keep doing that. If your costs and blended rates start creeping up because of the acquisition of costly consultants, then it will not pay. Keep your costs low and your value proposition intact," he says. Agrees Pai of TPI, "Indian firms are better off providing what they are good at - offshored delivery from multiple locations. Why try to create a new capability?"
On the other hand, the whole India game has been to offshore work that was not earlier offshored. Says Wipro's Banerjee, "We are bringing down the onsite content in consulting and creating a consulting bench in India."
Krishnakumar of MindTree tends to go along with the need to learn new tricks to keep growing, "Once you have delivered cost efficiency to a customer, what more can you offer? Once a customer feels you know him, he says, 'how can you help us do better?'"
He adds, "Even in commoditised areas, using domain expertise to suggest productivity improvements will be critical. Customers are constantly looking for new value-adds and raising the bar."
To draw a distinction between strategy consultants and the rest, experts delineate two kinds of consulting - that which works on the revenue side and that which works on the cost side. Pai says, "Indian IT consulting so far has been mainly confined to advice on cost reduction."
The traditional consulting majors, on the other hand, offer advice on revenue maximisation, how to grow business prospects, get into new lines of business and so on. A consulting assignment from the cost side can go up to a point and no further. If you do not have a grasp of the entire industry to offer full spectrum consulting, the "consulting capability that you are offering is like table stakes that you bring in Las Vegas, the minimum you need to be present at the table."
Krishnakumar thinks along similar lines. "Till now, large Indian software companies have built their business on the cost proposition, on how a client must spend in order to remain in business. But for vendors to remain in business, to ensure their bread and butter, they will have to advise clients on the discretionary spending for revenue enhancement. Once a strategic direction is understood, IBM or Accenture can advise on how to get there, architect or even execute the solution. Matching this capability is the challenge before Indian IT."
Only Infosys has sought to go into strategy consulting by creating a separate subsidiary for the job. It recognises this is a different kind of business requiring a different orientation.
TCS, always the scale leader, also has its sights trained high, set itself a high target in keeping with its vision to become a $10-billion company by 2010, says Vandrevala. It targets consulting revenue, both strategic and domain based, to be in the $500-million to $1-billion by then (2010).As for Wipro, Azim Premji's eldest son, Rishad, widely slated to take over from his father who controls 82 per cent stake in the company, is working at Bain and Co, one of the global strategy consulting firms. If he were to be preparing for the battle royal that lies ahead, he is in the right sort of place.
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