The Hindu Business Line : IT industry — Indian firm clicks as well as MNC

Indian IT companies such as Infosys appear poised to harvest the now accessible gains in the products business, even while strengthening their service business.

A FEW years ago, Indian and multinational consulting firms all but ignored each other capitalising on exclusive profit sanctuaries. As the onsite-offshore model assumed gradually began to dominate, the two beasts eyeballed each other warily, though from their exclusive territories. Now the territories are no longer exclusive and the beasts hurt in the territory, often fighting each other. Keen observers of the IT industry realise that competition in future will primarily be between two business models — of the Indian IT firm versus the MNC.

The MNC has a huge head (excellent customer relationships, heavy onsite presence and large volumes of work at the high end of the value chain) but a tiny tail (negligible work executed through the onsite-offshore model, poor annuity revenue streams). The Indian IT firm represents the antithesis of the MNC firm — large tail and small head. The key question is will the head grow a tail faster than the tail would a head? The answer would determine the future winners.

The two business models have intrinsic advantages and disadvantages.

Developing the offshore workforce

Advantage: Indian IT firm

The most important motive for offshoring of work by the MNC is improved profitability. Many MNC firms have workforces of around 100,000. We can argue that until these firms offshore some 30 per cent of their work, the improved profitability is not going to show up significantly on their P&L accounts.

This means the MNC firm has to quickly build a workforce of 30,000 professionals. The more successful Indian IT firms have taken 10-15 years to build such workforces. Assuming that the MNC firm is twice as smart as the smart Indian firms, it would take 5-8 years for it to build such a workforce.

And in these years, Indian IT companies having achieved $1 billion plus in revenues will not be twiddling their thumbs. Also, considering the overall sedate growth of the global IT industry, the MNC firm will have to retire almost an equivalent capacity onsite as it builds the offshore workforce.

This would entail the gut-wrenching exercise of trimming the workforce onsite even as the offshore workforce is being built. For the MNC firm, it would be a costly exercise in every sense — and one that Indian IT firms do not have to go through.

Delivery processes

Advantage: Indian IT firm

Over nearly two decades, Indian IT firms have carefully layered the basic onsite-offshore delivery model with methods that allow them to perform sophisticated work for their customers.

There is nothing the equivalent of it in the MNC armoury and there is no short-circuiting the learning process. At this stage, the MNC firms are battling with the task of mastering the basic onsite-offshore model. It will be a while before they reach today's level of maturity of the Indian IT firm's delivery processes. This time window gives Indian IT firms a lead they can profitably use to hone their delivery and grow their heads.

Leadership

Advantage: Indian IT firm

Forrest Gump's mother would have taught the IT industry that passion is as passion does. While the industry structure and the cost arbitrage helped the rise of the Indian IT firm, they were not the only reasons. Had it been so, a number of yesteryear Indian IT firms would not have fallen by the wayside.

The passion and insight of the founders of the leading Indian IT firms continue to guide them. For these leaders, taking their institutions to greater heights is no longer a question of making money. They have already made tonnes of it.

To them, it is their life's calling. Such passion, accompanied by sharp business acumen, produces results that is rarely generated by clinical and efficient management alone.

The stakes in their institutions are very high for the current IT leaders. MNC firms, particularly of American origin, will be significantly hampered in this respect.

Many of them lack the passion and the commitment that an Indian IT company leader feels for his company.

Leadership, again

Advantage: MNC firm

No, I am not contradicting myself. While the Indian IT firms are equipped with great leadership today, we must recognise that the leaders are almost all first-generation and founders (with the exception of TCS).

Companies like IBM are sustainable institutions because they have a hoary history of passing down the leadership responsibility. These are untested waters for Indian IT firms.

While many of their processes may have devolved responsibility to a large number of managers, the prime movers in these companies are a small number, often founders.

Until Indian IT firms demonstrate the ability to pass the baton, it is unlikely that they will retain today's glory.

Management of client relationships

Advantage: MNC firm

Over several years of doing business, the multinational firms have endeared themselves to their clients as trusted brands. This trust, though called into question today, is still a formidable asset. Indian IT firms, on the other hand, are just learning the ropes.

Very few experiences demonstrate the discovery and cultivation of a relationship by Indian IT firms as comprehensively as MNC firms have established.

Management of the multicultural workforce

Advantage: MNC firm

To effectively mine customer relationships and to deliver through superlative global processes, a multicultural workforce is indispensable. The Chinese, presumably, will be more comfortable doing business with the Chinese, as Germans with Germans, particularly at the high end of the value chain. While MNC firms have decades of experience in managing multicultural workforces, the Indian IT firm's experience is meagre.

In most instances, over 90 per cent of the workforce in the Indian IT firm is of Indian origin. The mandate for the Indian firm is to rapidly expand its cultural diversity and to develop better devices for multicultural management. An exercise that the MNC firm can almost completely avoid.

Secular trends

Regardless of which business model wins, some secular trends are emerging. They are, largely, a consequence of the global delivery model.

From technology delivery to knowledge-work delivery

The onsite-offshore model of delivery is not restricted to delivering pieces of technology. It is now used for complex work. The basic onsite-offshore model, over the last decade has become richly overlaid and is capable of delivering high-end consulting work such as business process design, complicated IT architecture for global corporations and integrated enterprise solutions. In many instances, such work does not involve writing or maintaining a single line of code. Instead, consultants working onsite collaborate with their offshore counterparts to deliver advice, workflows and measurement systems that design the entrails of the global corporation. At the lower end of the value chain also, newer possibilities are emerging. The stage is being set for a new method of engagement with the customer.

The new charter for the winning IT firms may well be improved business performance delivered as a service, not piecemeal contracts for consulting, design, maintenance and BPO.

Global processes

Another inevitability of the orderly march of the onsite-offshore model is the emergence of global processes. The state-of-the-art today is a single offshore location that carries out the entire project: from specifications, to design to delivery.

But national economies of scale and scope are emerging. For instance, Israel has the highest capability in the area of product development. But it falls short in being able to produce the requisite technical manpower to convert product specifications into reliable products.

Software products

Sooner, than later, India will be the birthplace of next generation software products. Who will be their procreators will depend on our preceding arguments on who will win the business model competition.

China provides an excellent parallel with its manufacturing economy. Over years of mastering complicated manufacturing outsourced to it by leading global corporations, China has now a number of emerging brands. Haier, Huwaei and TCL compete with the world-renowned brands in their respective industries: Whirlpool, Cisco and Sony. India has proven mastery in delivery of reliable software. It has acquired an unprecedented visibility in the global market.

The time is ripe for the launch of branded software products. This latent trend is abetted by product development companies such as Oracle and Microsoft moving non-trivial development work to India. An economic environment of product development is vital, if not indispensable, to fostering the product development business.

A few years ago, a recruitment advertisement in India for professionals with over five years' product development experience would have attracted half a dozen candidates. Today, such an advertisement attracts hordes. iflex has already established a name for itself as a product development company of repute.

Infosys, assisted by its steady triumphs with Finacle, seems poised to harvest the now accessible gains in the products business, even while strengthening its service business. `Made in India' may actually be a badge of honour for the next generation products, not an embarrassment.

(The author is Director, Consulting and Enterprise Solutions, Satyam Computer Services Limited. These are his personal views. He can be contacted at Prabhat_GB@satyam.com)

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