No time to rest on our laurels: Infy CEO

A top infotech official has warned the Indian IT industry, already facing trouble spots such as wage inflation, high attrition rates and a strong rupee, cannot afford to sit on its laurels as global competition is on the rise.

"We (Indian IT industry) cannot rest on our success to date," newly-appointed Chief Executive Officer and Managing Director of Infosys Technologies Ltd S Gopalakrishnan told PTI in Bangalore.

"It's all about what we are doing today, how we are going to compete tomorrow, which is going to decide your future. So, it's being relevant, continuously evolving and changing to meet the market requirements."

Asked which are the countries he thought have the ability to beat India in its own game, Gopalakrishnan said: "Certainly China has the potential because it has a large number of engineering graduates and it's also a growing economy".

But he would not say how many years before Beijing catches up with the 'desi' industry. However, the CEO also said India will continue to be the number one preferred location (for offshore outsourcing).

"I think we will continue to be competitive. The other positive thing which is happening is that there is an ecosystem which is being built in India for technology. And that clusters...that's being created is also going to fuel more growth and create more opportunities".

Gopalakrishnan does not buy the argument that Indian IT sector may witness slowdown after growing in a scorching pace in the recent years.
"The market opportunity is there for companies to grow....business is there for companies to grow. Nasscom continues to project that the sector would grow at 25-30 per cent in foreseeable future. So, I think the opportunity to grow continues to be there."

Given the size of the Indian IT industry today, it is in a much better position to meet the expectations, he said.

"Top tier (Indian IT) companies are much larger today. They have a global brand, global exposure, they have strong leadership, large employee pool....they are in a much better position."

To stay ahead of the race, the newly-appointed CEO said Indian IT industry needs to further enhance its value proposition, service offerings and its portfolio to meet market demand and what the customers are looking for as well as respond to changes which are happening in (market) environment and technology.

"We have to make sure that we address the talent needs of the IT industry. Definitely, we need to address the issue of an appreciating rupee", he said.

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IT firms move closer to clients

With the strong rupee eating away profits, Indian IT companies are increasing their manpower count closer to client locations in order to grab projects that offer higher margins.

Recently, Infosys co-chairman Nandan Nilekani, after stepping down as CEO, said he would now be based in the USA and spend more time working out new business models, negotiating for projects with higher rates and more high-margin deals around Infosys Consulting. TCS, Wipro and Satyam Computer Services are all increasing their on-site efforts through deployment of additional manpower.

In the recently announced results, TCS global head of human resources S. Padmanabhan said the company added about 1,000 employees across all its global subsidiaries, which number about 150, and a majority of them would be groomed to be the “face of the company”.

Infosys, through its global internship programme, has trained a couple of batches of 200 workers from different countries who will be groomed to undertake different roles in their respective locales.

"Deploying manpower on on-site locations is not something new, but projects with good margins are increasingly a mix of onsite and offshore," says Ram Mynampati, board member and president, commercial and healthcare business of Satyam.

Industry experts believe that as Indian IT majors have aspirations to be global consulting companies, then it is crucial to have a diversified workforce and a lot of times with nationals who are familiar with market conditions. "Earlier, if a company outsourced work to Indian companies, it was not basic run-of-the-mill stuff. Now, as Indian companies are looking to move up the value chain, with higher billing, companies want to have a touch-point in their respective locations," says William McArter, president of Mastek's US operations.

Recently, all IT majors have offered wage hikes for employees who are deployed on-site and are asking them to service more than a single client. "Earlier, if an employee was servicing a single client, now two employees are being asked to service three clients," says Pradeep Mukerjee of Tholons, an offshore advisory firm. Analysts also see this increase in employee productivity as a move to counter international software companies such as IBM, EDS and Accenture who score higher on this front.

Infosys: Flat World, Flat Investment?

Nobody at Infosys came up with the phrase "flat world." Thomas Friedman invented the phrase and wrote a best-seller, weighing more than two pounds, called "The World Is Flat." Infosys adopted the phrase as a corporate mantra, and the stock has been exploding ever since. Fool contributor John Finneran explores whether the flat world is also a flat investment.

In Thomas Friedman's ode to outsourcing, The World Is Flat, he credits Infosys CEO Nandan Nilekani with coming up with the "flat world" phrase. Although Nilekani actually said the "playing field is being leveled," Friedman's rare exercise in saving words has paid off handsomely. Infosys (Nasdaq: INFY) adopted "flat world" as its corporate mantra, and the stock has appreciated 61% in the last year. And Friedman's book, which weighs more than two pounds and nudges 600 pages, has become a best-seller.

Growth rates from another world
The world may be flat, but Infosys' growth rate is anything but. Revenue has grown at a cumulative annual rate of 38% over the last five years, and net income has similarly jumped 33%. Results announced earlier this week -- revenues up 42% -- confirm this otherworldly growth story. Behind the growth, huge hiring and talent factories hum along. Infosys hired just 2% of the 1.4 million people who applied last year, and is reputed to have the largest training facility -- two words that frighten this Fool -- in the world. 

Flat-worlders come to India
Friedman forgot that the flat world works both ways -- India can come to America, but America can go there, too. 

Infosys is, like all its Indian IT peers, built on a fundamental labor arbitrage -- hire Indian IT staff at approximately one-sixth of their U.S. cost, and charge them to clients at the highest U.S. rate achievable. Chipping away at this advantage are the 20% wage inflation and high attrition rates in the Indian IT sector.

However, there is a faster way to level the playing field -- just hire more people in India and dilute the cost advantages of the native firms. Infosys has 66,000 total employees. In contrast, IBM (NYSE: IBM) has 43,000 employees in India, and plans to invest another $6 billion there over the next three years. Meanwhile, Accenture (NYSE: ACN) has 23,000 staff in India.  

The New World of old work
India may be the New World for IT services, but the work outsourced there is distinctly Old World. There are few signs of New World revenue, such as the transformational outsourcing services offered by IBM and Accenture. Here's the evidence.

First, reviewing Infosys' revenues by service reveals that maintaining software applications is the largest slice, at 29% of total revenue. Now, this revenue has the advantage of being delivered under long-term contracts, but it is typically for tired "legacy" systems, offering little upside to the client or outsourcer.

Second, though Infosys has invested in a dedicated consulting arm, total revenue from consulting is abysmally low at less than 4%. Consulting is critical to an IT services firm, because it helps shape client agendas and generate larger amounts of work downstream for the outsourcing and software factories. In contrast, Accenture earns 55% of its revenues from consulting, and 45% from outsourcing.

Third, the traditional pricing model of charging by the hour for every staff member dominates at Infosys. This model, called time and materials, accounted for 74% of Infosys' revenues in its last quarter.  

Finally, to sharpen the distinction, contrast the work Infosys and Accenture are doing in the airline industry. Infosys has announced it is implementing Oracle Financials for the finance function of a U.S. airline -- traditional implementation services for a well-established software package. In contrast, Accenture has set up Navitair, a separate, wholly owned subsidiary, providing technology and business processing services to 70 airline customers, including JetBlue and United. Navitair operates as an Application Service Provider (ASP), and provides services under multiyear agreements with a per-transaction or gain-sharing model.

"Flat world" investors, stay home
The good news is that investors in the flat world can stay home. It is much easier for Accenture and IBM to replicate the India-driven global delivery model than it is for Infosys and Wipro (NYSE: WIT) to make the round trip. You just take out your big checkbook and hire away -- no leadership institutes shaped like spaceships required. On the other hand, replicating the long-standing, consulting-driven client relationships enjoyed by the global brand names in IT services is much, much harder.

Valuations make the case for staying at home even stronger. Accenture has eight times the revenue and its return on equity is a third higher, but it trades at half the enterprise value of Infosys.

The world is still round
Infosys is a great company, but that does not make it a great investment. Buying its stock means a full subscription to the story of 30% to 40% growth in sales and earnings over five to 10 years. 

There are just too many pressures bringing Infosys' growth rate down. The frenzied hiring of staff by local and multinational firms will flatten the cost advantage in India, while the Indian firms will be slowed by the relationship and innovation assets held by firms like IBM and Accenture.

The world is still round!

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Innovation: Outsourcing's Second Wave

Companies want an edge through new business models, but in innovative strategic thinking for clients, Indian IT firms lag the global giants, says Forrester's Navi Radjou

Back in June, IBM's (IBM) Chief Executive Sam Palmisano lit a traditional Indian lamp to kick off the company's largest-ever town hall meeting in Bangalore. Then he announced to his 43,000 Indian employees—an eighth of his global workforce—that IBM would invest $6 billion in India over the next three years.

It was a significant event for IBM—but it was an even more significant moment in the history of the global IT service industry. Palmisano heralded a new chapter in outsourcing, one where the big global players like IBM and Accenture (ACN) will lord it over the upstart Indian offshore IT services companies.

For the last two decades, the Indians pioneered and dominated the outsourcing game. Companies like Infosys (INFY), Wipro (WIT), and Tata Consultancy Services (TACSF), with their low-cost global delivery of services model, were able to leverage their talent at a low cost and deliver competitively priced IT services.

They specialized in providing such things as application development, infrastructure support, and business process outsourcing (BPO) to cost-conscious, top-tier multinational clients. The Indians disrupted the existing business models of high-priced consultants like IBM and Accenture, which saw their IT service revenues dwindle in recent years.

But now these Western players are turning the tables on their Eastern rivals. Corporate leaders are seeking more than cost efficiency to help boost profits. They are looking for innovation from their IT consultants that will help them increase their revenues. Here, global players like IBM and Accenture are coming out tops.

COMPETING THROUGH OPERATIONS. First, they are starting to beat the Indians at their own game by expanding the size of their offshore workforce to keep up with the competition for talent. IBM has more than quadrupled its Indian technical staff in recent years and is catching up with Accenture, which has already drastically expanded its offshore services capabilities.

Secondly, while using their offshore locations like India to help customers save costs, these Western consulting firms are now using their industrywide expertise to create global innovation networks (GIN), which they can tap into to create competitive new products and business models for their customers.

According to a recent survey of top-level executives sponsored by SAP (SAP), 55% of corporate leaders worldwide report that new business models—organizational structures, competencies, processes, and partnerships that define how a company operates—will confer a greater strategic advantage than new products and services by 2010. And both IT and business execs tell us that consultants remain one of their top sources for such business innovations.

This is where the Indian and other offshore providers lag. Offshore vendors are currently telling clients: "We will free resources for you to innovate." To which chief executives at client firms are now responding: "No, we want you to help us innovate." When Satyam (SAY) and Infosys talk about "process innovation" or "service innovation," they mean applying Six-Sigma or agile development techniques to optimize their own internal IT service delivery processes, not to innovate their clients' industry-specific processes and services.

And while Wipro and Tata Consulting employ research and development teams that can help firms innovate their products, they are not trained to deliver what chief executives care about most: new business models. So, offshore outsourcers need to align their interpretation of innovation with their clients'.

TEAMS OF INNOVATORS. Here, smart Western consultants have sensed and seized the opportunity. Here's how they work. These players are upgrading their own global delivery infrastructure to deliver not just technical services like applications development, but also business innovation services. That's where the global innovation networks come in. These are global ecosystems of internal and external partners that collaboratively design and deliver business innovations that clients want.

For instance, the software activities of IBM's Center for Business Optimization, whose consultants help reengineer and optimize clients' business models, are done in Bangalore by PhDs trained in operations research. In one current project, these Bangalore-based PhDs are working with IBM's logistics experts in Zurich and Japanese software engineers in IBM's Yamato Software Lab to jointly develop and deliver a scalable supply-chain optimization model to European and Asian clients.

Ditto for Accenture, whose Institute for High Performance relies on India-based MBAs to devise industry-transforming business models. And Deloitte's Intellectual Asset Management practice relies on a 100%-virtual innovation network, tapping a global expert network of 300-plus respected scientists, engineers, and physicians to help clients worldwide maximize their intellectual property (IP) portfolio value.

MORE THAN ENGINEERS. For now, the Western players are galloping away with the prizes. Offshore players in India and elsewhere can catch up—but only if they change their mindset and move fast. They need to acquire a new client-focused innovation mindset by recasting their operationally focused mission statement to help clients innovate by transforming their business processes, market offerings, or business models to boost value for their enterprise.

To effectively carry out this client-focused business innovator mission, offshore providers need a fresh, new talent pool and expertise. They need business designers who can invent new business models, industry specialists who can tailor business innovations to suit the client's context, and they need to extend their reach to global players who can broker and orchestrate the GINs for them.

So, in addition to the famous IIT-minted software engineers and mechanical engineering PhDs who can create massive programs and design jumbo jets, offshore providers also need MBAs and PhDs in economics who can design clients' new business models. These business designers must operate not out of India, but on European and U.S. soil where their clients are based. That way, while its software programmers in Bangalore are coding customer Food Lion's multichannel commerce platform, for instance, Infosys' U.S.-based microeconomists can invent the cross-channel pricing models.

STRATEGIC ADVISERS. Business execs in multinationals tell us that they are impressed by offshore providers' technical talent and project management skills, but underwhelmed by their vertical-specific process knowledge and domain expertise. To deliver business innovation to non-IT execs, offshore providers must retrain their consultants to act less as client order-takers or peddlers of cookie-cutter tech frameworks, and more as strategic advisers who can anticipate clients' business needs and engage them in collaborative innovation scenarios.

For example, before responding to a proposal from General Motors' (GM) IT department to upgrade its OnStar telematics software, Wipro's management consultants should proactively propose to the carmaker's chief financial officer a value-based pricing scheme, with risk-reward sharing, to co-develop and co-market an energy-efficient new car in emerging markets.

Finally, what is needed are some savvy global brokers. Offshore providers today promote their human assets, i.e., "we can rapidly assemble a team of our 5,000 engineers just for you." But users don't want to rely on a single provider's expertise alone to address their multifaceted innovation needs: Most users tell Forrester they prefer best-of-breed IT services from all over instead.

EMPHASIS ON ACUMEN. Offshore providers must form business development teams capable of seeding and orchestrating the external ecosystems of innovation specialists. With such Innovation Networks in place, Tata Consulting can quickly tap a Shanghai-based logistics expert to co-develop an innovative global transportation solution for GE's (GE) manufacturing unit in China.

Offshore players are behind in this second wave of outsourcing, but they needn't be if they can quickly build upon their existing strengths—trust-based, transparent client relationships and mature, automated global delivery processes—to shape these global innovation networks. Some already have pockets of expertise to drive industry-specific business innovation—Infosys has an expertise in financial services and Wipro in IP portfolio management, for instance. But their technical skills typically overshadow their business acumen.

Now is the time for Indian and other offshore players to emphasize the latter and transform themselves from low-margin IT vendors into strategic GIN services providers. As these global networks take off, companies will be able to access innovation twice over: from within their organizations and from outside, through their vendors or partners. That's when the true benefits of globalization will start to accrue, and make customers the real winners.

Navi Radjou is a vice-president with Forrester Research. He advises senior executives including chief information officers worldwide, on new organizational designs and business processes their firms must adopt to sustain global competitiveness through technology-enabled innovation
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Offshore fuss 'rubbish' says Infosys

THE Australia head of India's largest technology company has lashed out at media coverage of offshoring at St George Bank and Westpac, calling St George's decision to move 70 jobs to Bangalore a "great move".

Infosys Australia managing director Gary Ebeyan said claims of a customer backlash provoked by the The Daily Telegraph urging its NSW readers to "send a message of disgust" to St George, were "rubbish".

St George announced it would outsource jobs to IBM's Indian operations, while Westpac has postponed until November a decision on whether to take almost 500 back-office jobs to India.

"It is unpleasant publicity, but we have never seen that sort of an impact on any of our customers," Mr Ebeyan said.

"For shareholders this is a very positive move. The media is taking the patriotic line, which is unfortunate," he said.

"Some parts of the company are going to be affected and will react negatively, but it's short-sighted criticism that ignores the wellbeing of the company and the majority of employees."

Infosys is India's largest offshorer, with almost 60,000 staff and revenue of $US2.1 billion ($2.8 billion). Its Australian revenue was $91 million for its most recently reported financial year. Its clients include Telstra, ANZ Bank, Esanda and Mayne Logistics.

Senior executives were starting to see that outsourcing IT and back-office services was essential for global competitiveness, Mr Ebeyan said.

Three years ago, such a view was largely confined to chief information officers and IT directors, he said.

"In three years the market share of Australian companies will be eroded dramatically if they don't match the costs of global players," he said.

"Now boards are seeing the necessity of offshoring."

Ultimately, banks were likely to take everything from mortgage processing to financial research overseas in an effort to cut costs, he said.

Banks such as St George were facing overwhelming competitive pressures from non-bank lenders in many of their traditional markets -- including mortgages and credit cards -- while simultaneously being challenged by newcomers such as ING, HSBC and CitiBank, all of which have low cost structures.

HSBC, for example, does much of its data entry in Kuala Lumpur. Executives say HSBC's high-income customer base is not concerned by offshoring.

Some senior managers were cautious about using Indian call centres, Mr Ebeyan said, but they should consider "carrying" local staff and reducing costs by using Indian call centres for their overflow work.

"That way you get a very local feel," he said.

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