Another growth curve
India-based IT services firms bidding for share of the U.S. consulting market
By Scott Bury, contributing editor -- Manufacturing Business Technology, 8/1/2006 6:00:00 AM
It's no secret India is emerging as a global center for IT outsourcing, but the actual numbers surrounding this phenomenon are still somewhat staggering.
According to recent figures published by The Economist, 60 percent of the $20 billion that North American companies spend each year to send IT functions—such as developing and maintaining applications, and providing customer support—offshore goes to firms based in India. The report also indicates Indian firms own $5 billion of the $11-billion business process outsourcing market.
These numbers fueled the growth of companies like Tata Consultancy Services—India's largest IT company, with more than 60,000 employees and $2.9 billion in annual revenues. In second place is Wipro, boasting 42,000 employees and $2.4 billion in revenue. Then there's InfoSys, which went from $10 million in 1994 revenues to $2.1 billion in 2005.
While these firms have clear success stories, they aren't content with simply handling what many in the industry view as rote, nonvalue-add IT functions such as cranking out software code or staffing help desks. In other words, they're looking to take on the heavyweights—e.g, Accenture, EDS, and IBM Global Services—for a share of the IT consulting market.
But taking on the giants won't be easy. Again, consider some numbers. Rediff.com, a Web site that tracks business issues in India, says India-based IT firms earned just $120 million in consulting fees in 2004, while the $2.5 billion in revenue that New York-based Accenture reported for Q3 fiscal 2006 exceeds InfoSys's total billings for the previous year.
Despite these disparities, the India-based firms are charging ahead with strategies for capturing more consulting business. These efforts began as far back as 2002, when Wipro began acquiring consulting businesses with North American roots. It started by purchasing the energy consulting practice of American Management Systems, and then bought NerveWire, which provides IT and business consulting services to companies across multiple industries, including manufacturing.
In 2004, InfoSys established a North American subsidiary, InfoSys Consulting, in Fremont, Calif. Tata, which has a stated goal of growing its consulting business from 3 percent of revenue to more than 10 percent by 2008, hired 400 consultants in 2005, and continues to hire more in North America and Europe.
Cementing relationships
Apart from being an additional revenue stream, a consulting practice can solidify relationships with customers, making it easier for the India-based firms to retain contracts for systems maintenance and other services.
"Consulting is a value-added service for the client," says Brian Rogan, a senior VP with Sierra Atlantic, which specializes in managing enterprise applications at offshore locations. Sierra Atlantic was founded by Raju Reddy, a graduate of India's Birla Institute of Technology and Science.
Narendra Patni, CEO of Patni Computer Systems, an IT outsourcer with headquarters in Mumbai, says India-based firms offer customers more value through their global business models. Patni and other industry experts contend these global models are even more important than the educated, English-speaking, low-cost workforces to which India-based firms have easy access.
Project managers in India-based firms typically can call on skills in low-cost centers from Vietnam to China to Eastern Europe. "Indian firms apply the discipline of physical supply chains [including concepts such as Six Sigma and lean] to the human supply chain," says Navi Radjou, a VP with Cambridge, Mass.-based Forrester Research.
This line of thought has caused India-based firms to address what have been identified as weaknesses in the offshoring model, such as the oft-cited problem of poor communication—which sometimes is viewed as bad service—between U.S. customers and operators in offshore call centers.
"Indian call centers have tried very hard over the years to improve the quality of the support and answers they give," Radjou says. "If an operator finds they're not giving good answers, a manager will get involved to identify the problem, and solve it within a matter of hours." Similarly, Indian firms apply the same concepts to application development and maintenance, and business process outsourcing.
Indian firms are working to replicate this global delivery model in consulting, but the large U.S.-based firms are not simply going to concede market share. Instead, they are fighting back by co-opting some of India's IT resources to their own advantage.
Over the past couple of years, for instance, U.S.-based consultancies have become some of the largest employers in India's IT sector. To wit: IBM moved 5,000 professional jobs from the U.S. to India in 2004 and 2005; Accenture increased its India workforce from 4,300 to 10,000 in 2004 and opened a New Technology Delivery Center in Pune, India; and 12 percent of Accenture's worldwide workforce is now based in India.
Best shore strategy
In May, Fujitsu Consulting, the U.S.-based consulting and services division of the Fujitsu Group, acquired Rapidigm, an IT outsourcing and consulting firm with 1,000 consultants and three development centers in India. EDS increased its workforce in India from 8,700 in 2004 to 18,000 by the end of 2005. Additionally, this past June, it acquired majority stake in Bangalore-based MphasiS BFL Ltd.
EDS also is implementing a "best-shore" strategy across all its service offerings, where it allocates personnel at the most cost-effective locations not just in India, but also Eastern Europe, China, Malaysia or wherever the best services can be found at the best cost. "India remains a key location in our Best Shore strategy," says Travis Jacobsen, an EDS spokesperson, "but it's not the only location."
Even as they work to raise their profiles in India, U.S.-based firms say they have some inherent advantages when it comes to winning and retaining the consulting business of North American companies. "Consulting requires significant amounts of 'client facing,'" notes Jacobsen, arguing that the U.S.-based companies are better equipped to do the required handholding for customers in their own backyard.
William Mougayar, VP of corporate marketing with Cognizant Technology Solutions, agrees that significant face time with customers is crucial to a successful consulting practice, particularly in North America. He also believes Cognizant has developed a model that can work across two continents.
While Cognizant, a subsidiary of Dunn & Bradstreet, is based in Teaneck, N.J., 70 percent of its employees are in India. Cognizant President Lakshmi Narayanan, a former Tata executive, also is from India. Even with such deep Indian roots, Mougayar claims Cognizant has a higher proportion of consultants based in the U.S. than any India-based firm, even those with U.S. offices.
Unlike other IT firms, Cognizant doesn't separate consulting from other services. "Consulting makes up 10 percent to 15 percent of every engagement we have," says Mougayar. The reason Cognizant integrates consulting with other work, he explains, is "there are no problems in the hand-off process" between consulting and implementation.
It's possible that rapid growth of India-based consultants could start to work against them. As Forrester's Radjou point out, all the hiring in India is causing a 10-percent to 15-percent annual spike in salaries for IT professionals. Those wages are still far below U.S. levels, but combined with the need for more expensive on-site personnel to coddle North American clients, the cost advantage for India-based firms may not be a significant factor for much longer.
Currency exchange rates also could work to close that gap, with the India's rupee current rising on international market and the U.S. dollar falling.
India's economy also is starting to bump against some important limitations: its schools cannot keep up with the demand for more IT professionals, its infrastructure is in dire need of upgrading, and even 15 years after the economic reforms of then-finance minister, now Prime Minister Manmohan Singh, government regulations are still considered a hindrance to business innovation.
Some industry observers wonder if conjecture as to whether India or the U.S. will dominate the consulting business is a meaningless exercise, because there ultimately will be enough business for companies in both countries to thrive.
"Seventy percent of all IT work currently is done in-house," says Kris Wadia, a senior executive in Accenture's global delivery network. "Because of more sophisticated methodologies, it's becoming easier to outsource more IT projects. So the potential pie remains quite large."
Wadia and others suggest the IT consulting market eventually could mirror the auto industry, in which companies like Toyota and Honda, headquartered in Japan, build a significant percentage of their products in North America, and essentially have become integrated with the North American economy.
Hard to hold back India
12/01/2004
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