Big fight for the long haul
PRACTICALLY all frontline software companies have projected flat-to-negative sequential (quarter-on-quarter) growth numbers for the three months ended March 31. This is attributed to the continued uncertainty in the US and Europe. Since early February, the US Federal Reserve has been signalling a recovery. But that this is yet to change the ground realities for the Indian software services industry is well-captured in analyst conference calls, press releases issued by companies and the break-up of some software metrics (such as the onsite-offshore ratio, the employee utilisation rate or the billing rate) for the third quarter ended December 31, 2001:
Probable revenue lag: Although the Fed has indicated that the US economy is firmly on the road to recovery, this is not likely to immediately translate into revenue growth opportunities for India's frontline software majors. This is because of the twin pressures of the slack demand and the high pressure on billing rates. Until the pricing environment improves and demand recovers, it will be reasonable to presume that revenue recovery will follow the US rebound by at least a few quarters.
Long decision cycles: As long as the pricing pressure persists and the surplus capacity remains unabsorbed, the decision/sales cycle (the time taken to progress from the Request for Proposal, or RFP, stage to the closing of a contract) will continue to remain long.
Slow client ramp-up: The frontline companies have managed to widen their addressable market space from Fortune 500 companies to Global 2000 companies. Though this has helped add clients in the first nine months, the prominent names (for most frontline companies) were few. Second, in the absence of big names, the ramp-up and its scale have also been slow because the deteriorating economic conditions forced most of these companies to put many of their research and development initiatives and new projects on the backburner. This may continue to affect the fortunes of frontline companies.
Resurgence in IT spending: Finally, the biggest trigger for recovery will be the resurgence of information technology spending which has dried up for almost a year-and-a-half. Until the spectre of technology over-investment fades completely and IT spending revives, the possibility of near-term recovery appears tough. The key indicators that may signal a revival are a steady flow of proposals for consulting involving new projects (from the definition stage) or newer R&D initiatives in different vertical segments.
Focus on the long term
In such a turbulent and uncertain atmosphere (fleeting signs of recovery notwithstanding), the near-term financial projections for the industry continue to remain weak. The short-term financials too appear to be the last thing on the minds of frontline companies. Instead, the focus of frontline companies, such as Infosys, Wipro, HCL Technologies or Satyam Computers, has shifted to maintaining and enhancing their long-term competitiveness. With no opportunities such as Y2K or e-commerce, for the first time, these companies are gearing up to face the long-term challenge of enhancing volume growth even while maintaining the current margins without a dominant peg. And to meet these challenges, the companies are reorienting their "business models" to operate in an entirely new environment:
Scalability: Faced with the brutal pressures on billing rates and harsh competition during the downturn, it was obvious to most frontline companies that "offshore outsourcing" from India had already become a commoditised play. Though the essence of offshore outsourcing continues to remain relevant, it has to be reoriented to cater to the strategic interests of the clients competing in the global arena. To emerge as long-term player, frontline companies will have to broadbase their ability to compete by growing in scale, enhancing the breadth/width of service offerings (across different verticals) and striking long-term client relationships.
Preferred vendor status: Among the existing line-up of frontline companies, perhaps only two-three have the potential to make the transition from the $350-500 million club to billion dollar status of global IT majors. This giant leap forward will be possible only if these players can carve an offshore outsourcing niche for themselves among Fortune 500 / Global 1000 majors. And for that to happen, these companies will have to display the combined attributes of quality in deliverables, expertise across verticals and an attractive value proposition in every deal to direct offshore engagement to India. Only by doing this consistently and over time, do frontline companies stand a chance of becoming the preferred vendors for these Fortune 500 majors. Though the evaluation process is bound to be stringent, Infosys Technologies and Wipro's Global IT Services division have the attributes to graduate to the billion dollar club.
Proactive rather than reactive: Increasingly, in the foreseeable future, software companies will have to employ a proactive approach to sell the client new strategic initiatives resulting in improvements in RoI (return on investment), enhanced productivity gains, frameworks for cost reduction, or quality-led/customer-focussed initiatives such as SCM, CRM or SRM. This will essentially mean that the outsourcing company will approach the client through new outsourcing initiatives instead of the other way round.
As a long-term strategy, if the frontline companies have to compete with the Big Five (such as PricewaterhouseCoopers, Accenture or KPMG Consulting) or outsourcing majors such as IBM Global, CSC or EDS, employing a proactive approach to software selling will be a key strategy. An examination of the strategies of the Big Five or outsourcing majors reveals that by virtue of their long-term relationships with clients, these players completely bypass the RFP route in winning contracts, thereby effectively shutting out a good part of the market for Indian players. To overcome these lacunae, the frontline companies will have to actively explore markets beyond the RFP in the days to come.
Cross-selling strategy: In the past, the Indian software industry failed to work adequately on cross-selling as a growth strategy within its existing client base. This was partly because of two reasons: First, it had not developed adequate domain expertise (across verticals) to be able to make cross-selling feasible. Second, most frontline companies had only a limited basket of offerings and have managed to widen and deepen their array of service offerings only over the past year or so. In the future, cross-selling will be one of the actively managed strategies of the frontline companies.
This process will also be helped by players such as Infosys or Wipro working towards global branding and visibility for offshore outsourcing in the US market.
From CIOs/CTOs to CEOs: As outsourcing becomes more strategic, the decision-making on these deals is shifting from the realm of the CIO/CTOs (chief information/technology officer) to the CEO/CFOs (chief executive/financial officers) and thereafter to the boards. The need to network and strengthen the relationships with the CEOs is likely to become the key imperative of the top management of frontline software companies.
Maintaining margins: Going forward, the biggest challenge for the frontline companies will be their ability to maintain operating profit margins (at current levels). Unless the players can well and truly move up the value chain by undertaking IT consulting, systems integration and other high-end services, the scope of maintaining the operating profit margin will be rather slim. And almost all the frontline companies are gearing up for the task.
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