INDIAN IT INDUSTRY THE LEAP FROM SERVICING TO CONSULTING

Priya T.S. R. Viswanathan (This paper was featured in the January 2005 edition of Spandan , IIMKs Management Journal)
The IT services industry is shaped like a pyramid. At the bottom of the value chain are the Talent donators who are primarily body shops and staff augmentation companies. Above them are the system integrators, which is where the Indian firms compete- primarily in the area of application development and maintenance and more recently, business process outsourcing.

Thereupon, sit the IT consultants who not only offer strategy advice but also provide end-to-end application development capabilities. This space consists of both established

players like Accenture, IBM Global Services as well as small to mid-sized firms like Sapient and Keane Consulting. The slump in the consulting services business has seen the companies in this space step down the value chain to compete in the area of application management as well as setup offshore capabilities to compete with the Indian firms on a level playing ground. Right on top, are the business and strategy consulting companies. As one moves up the pyramid, the value-add increases; as does the per person productivity. The billing rates at this level vary from 6 to 10 times that of Indian pure plays. The Indian companies which have already reached a dominant position in the offshoring and application management space have now made the logical move up the value chain. They have a very well refined global delivery engine which can be leveraged to obtain downstream work from high value consulting engagements. Figure 1.1 Relative positioning of Tier I Indian Companies against global majors
IBMGS Deloitte EDS Accenture

KPMG

Domain/Consulting Expertise

CSC

Sapient

Keane

TCS

Infosys Wipro

Global Delivery Capability An attempt to move into the high-end of the value chain is a clear shift from the volume-based game that the Indian software industry has been targeting for a long time. Though revenues from consulting runs into single digits, they have been growing steadily in the past few years. For instance, Infosys revenues from consulting have grown from 2

1.6% of total revenues in 2000 to 4.2 percent in 2002. Though the contribution to the topline is low, the contribution to the bottom-line is much higher. In addition, the intangible benefit, wherein a company gets low-end application development work due to the consulting foray, is not reflected in the balance sheet as revenues from consulting. This move also includes a clear positioning of the brand image. The new strategy is to approach a client as an end-to-end solution provider, rather than as a provider offering different technology solutions for different domains. While the strategy of most global consultants has been to offer best-of-breed practices and then tie them up together, Indian companies first offer a framework and then the solutions to go along with them. Figure A.1: Criteria for selecting a Consultant

Indian companies have learnt the hard way that cost arbitrage and skilled manpower can never be sustainable competitive advantages. And in the face of growing challenges from countries like China and Philippines, it is important for India to play at a level where these challengers cannot reach. This move is specifically important since Indian companies have been losing clients regularly, mostly on the basis of cost.

OFFSHORING IN REVERSE
One of the major steps in this direction was the setting up of a strategic consulting firm, Infosys Consulting, Inc. by Infosys in April 2004. Infosys Consulting Inc. is a whollyowned, U.S.-based subsidiary of Infosys managed by ex-senior partners from CGE&Y, Deloitte, and EDS. The new firm uses Infosys India resources onsite and offshore to deliver higher value but lower-cost consulting, delivery, and operations services. Business consulting linked to Infosys existing low-cost, process-centric delivery expertise offers companies a new, high-value type of strategic consulting partner. The other Indian major, Wipro, is providing services in the area of Processconsulting, PCMM-Consulting and Six Sigma Consulting. It is also looking at tapping clients for improving their people processes with PCMM. Another strong move by Wipro has been the acquisition of the IT consulting firm NerveWire Inc. last year. Another interesting move is the internal re-orientation efforts undertaken up by Wipro to enable all its employees to talk the language of business within 2006.

SWOT ANALYSIS
In this section, we put things in perspective with a SWOT analysis of the Indian pure-plays as they stand today. Strengths Lower overall cost structure - both in billable labor SG&A overhead, relative to US/European MNCs. Focus on quality boosts credibility. The Tier 1 vendors all possess or are close to possessing certification for all of the major industry benchmarks/rankings SEICMM level 4-5, ISO900X certifications, and Six-Sigma initiatives. The Tier-1 vendors all possess strong (US-level) processes, methodologies, and management tools. Strong financials enable making the right investments for organic as well as the inorganic growth. 4

Consulting, tightly aligned with a Global Delivery Model engine, provides far higher returns on every business consulting dollar spent. Absence of expensive infrastructure and partner/management overhead.

Weaknesses Absence of strong vertical/industry expertise. Kal Patel, vice-president, BestBuy says about Wipro "I have seen significant improvement in their knowledge over the last four years, but if you are asking me if they have become retail experts, the answer would be no." Lack of CXO-level mind-space and credibility for complex consulting assignments in the absence of proven track record for such projects. Absence of Strong Project Management Skills required in executing complex assignments. Strength remains in less complex application development and staff augmentation projects Difficult to make headway in U.S. federal and state government markets. Change of employee mindset from a focus on technology to business outcomesmassive task given the high employee numbers. Ability to attract and retain consulting talent and their integration with the Globally Distributed Delivery model and culture of Indian companies. Margins will come under pressure as investments are made in hiring higher value, more expensive consultants and sales and marketing infrastructure; increased costs due to more onsite-bodies required by consulting projects. Supply-Demand mismatch of good quality management students to take up consulting roles in the country. Indias infrastructure, in particular the mass transportation system, remains poor.

Opportunities Established global delivery model and client base provide strong fundamentals which could be leveraged to win higher value consulting engagements.

Established players like Deloitte and EDS possess antiquated models with high overheads due to hierarchies built up over time and setting up of offshore capabilities would lead to significant revenue cannibalization for these firms.

Huge IT Services and consulting market of nearly 48.06 Billion $s expected to grow at 6% year-on-year. Since consulting infrastructure is being built from ground up, Indian companies start from a position of advantage and are unlikely to repeat the mistakes of traditional consulting companies with huge overheads.

Threats The biggest threat is from established players like Accenture and IBMGS with established consulting practices and who are ramping up their offshore delivery capabilities aggressively. Middle-sized system integrators like Sapient, Keane Consulting who have completed their offshore transition while continuing to posses consultants with strong vertical/domain expertise and proven track record of successful consulting engagements with offshore components. Consulting market is in a slump presently and does not need another high-end consulting company. Threat from other nations such as China and Philippines with large qualified labor pool who are making efforts to overcome the English language barrier. At this point, however, it appears that India has at least a 3-5 year window advantage over China due to its experience and credibility, competent IT labour-pool, predominantly English speaking individuals, and superior quality, methodologies and delivery capabilities. Offshore backlash and changed political climate in key client geographies could hurt toplines. Regulatory environment with acts like Sarbanes-Oxley, the Patriot-Act will affect the way US companies conduct their business.

Ways to crack the IT consulting jigsaw Building expertise in multiple areas in consulting (strategy, operations, change management) as well as expertise in all key technologies, and deep vertical/industry expertise. Promising specific business outcomes e.g., cost savings, efficiency improvements, increased market share, as CEOs become concerned with ROI from consulting engagements. More frequent use of Fixed-pricing. However, such a strategy would increase execution and financial risk. Building differentiation among Tier I Players by developing expertise in niche areas which are seeing increased demand. Developing credible multi-country development operations. Helps the services firms to keep labor costs in check and to optimize efficiency across a broader network of development centers. Investment in training to transform the armies of coders to speak the language of business and provide the client, consistent experience across geographies. Focus on the long term as margins come under pressure due to investments in developing onshore consultant pool as well as the required sales and marketing staff. While the above are some of the broad requirements to make a mark in the high-end consulting space, Indian companies today have three broad choices to support their move.

BROAD STRATEGIC ROADMAPS

First, opportunistically acquire a management consulting firm or vertical specialist, as Wipro has done. While this provides the company with an immediate revenue stream and client base, it is also more expensive in the short term and there are no integration guarantees. Integration complexity increases exponentially when companies from totally divergent cultures, backgrounds, and industries are merging. The other approach is to grow organically, as Infosys has done. In growing its own, Infosys has a better chance of gradually integrating the new consulting group into its fold. 7

To be sure, it will take time for Infosys to develop the necessary infrastructure, client base, and revenue stream. However, Infosys can build an infrastructure that integrates into its existing infrastructure; it can mine its blue-chip Fortune 100 client base; and it hasnt had to make a massive upfront investment, so the lack of revenue stream in the early days is not an issue. While an Infosys or a Wipro can target clients in the consulting space on their own because of their brand image, smaller mid-sized Tier 2 companies can opt for the partnership route to tap the consulting space. A case in point is Mastek, which has a joint venture in place with Deloitte and looks at offering high-end consulting services for Deloittes customers. While the move into consulting is not without its share of challenges and will involve considerable change in mindset and culture, if Indian companies play their cards right, they can herald a new era where merit will be decided on the basis of competence rather than cost. And while critics point to single digit revenues from consulting, the case of majors like Infosys and Wipro formulating IT strategies for Fortune 500 companies clearly shows that Indian companies backed by execution capabilities and technical expertise can give the global Big Five a run for their money. (The authors, Priya T. S. and R. Viswanathan, are First year PGDM participants at IIMK and can be reached at priyats08@iimk.ac.in and rviswanathan08@iimk.ac.in respectively.)