Moving up the value chain has been an aspiration for Indian IT brands for quite sometime now. Now it may well be deemed an unavoidable necessity!
WHY IS COST A RELIC OF THE PAST?
The first point that comes to mind is emergence of low-cost destinations like Philippines, Vietnam, countries in Eastern Europe et al. It is well known that they are proving to be quite competitive with Indian companies on the cost front. Moreover, as Diptarup Chakraborti, Senior Research Analyst, Gartner India, states, “Earlier, difference between US and Indian salaries was close to 100%; now it is just around 20%.” Moreover, it is imperative for them to move beyond the per employee billing rate system; else they risk hitting a revenue ceiling. Chakraborti gives the example of IBM’s revenues, which are 10 times that of TCS, with only 2-2.5 times the number of employees. Improving realisation per employee is absolutely imperative as companies like TCS plan to increase their size and touch revenues of $10-12 billion. An Infosys spokesperson tells us that the company has already started working in this regard. He says, “Infosys offers its clients two business models. The first is the outcome-based or transaction-based model, that offers its clients a value proposition where the rates will be irrelevant and the client pays only for the result the firm provides. The second centres around new opportunities caused by the shift in consumer preferences, where Infosys offers solutions in new platforms such as the mobile network and social networking sites.”
The real risk, in fact, comes from home ground. Sudin Apte, Principal Analyst, Forrester Research, elaborates, “We have to stop comparing Indian companies with MNCs. IBM now has around 80,000 employees in India and Accenture has around 60,000. Who are we calling MNCs?” India is a resource destination and no longer the exclusive domain of Indian companies. Mayur Sahni, Senior Market Analyst, IDC Asia Pacific puts it thus, “Cost competitiveness cannot be sustained unless there is an economic and/or business barrier. The economic barrier has been removed to some extent with global IT and technology players setting up operations in India.” The business barrier, on the other hand, links to the margin a particular player is willing to accept while negotiating a deal. According to industry buzz, when TCS won the deal for Malaysian Airlines, another overseas vendor claimed that the price TCS had offered was below their cost! But then vendors like IBM also pay higher salaries, making them more attractive to top talent. So this age-old bastion may not last very long either.
Consider, in addition, the phenomenon of protectionism. Admittedly, that isn’t a real worry, since companies have begun to accept offshoring as an inevitability. As Chakraborti cites an example, “Let us say that Exxon Mobil suddenly decides that we will do all IT in-house, while they don’t have the capacity. It will take them 3-5 years. What will they do in the interim?” So, if outsourcing is stifled, it will hurt them more. But it is also true that these debates do weigh heavy on client perceptions, while going for deals. In a recent NASSCOM conference, Pramod Bhasin admitted that this was one of the key reasons why Indian IT companies were going for on-site hiring.
WHY IS COST A RELIC OF THE PAST?
The first point that comes to mind is emergence of low-cost destinations like Philippines, Vietnam, countries in Eastern Europe et al. It is well known that they are proving to be quite competitive with Indian companies on the cost front. Moreover, as Diptarup Chakraborti, Senior Research Analyst, Gartner India, states, “Earlier, difference between US and Indian salaries was close to 100%; now it is just around 20%.” Moreover, it is imperative for them to move beyond the per employee billing rate system; else they risk hitting a revenue ceiling. Chakraborti gives the example of IBM’s revenues, which are 10 times that of TCS, with only 2-2.5 times the number of employees. Improving realisation per employee is absolutely imperative as companies like TCS plan to increase their size and touch revenues of $10-12 billion. An Infosys spokesperson tells us that the company has already started working in this regard. He says, “Infosys offers its clients two business models. The first is the outcome-based or transaction-based model, that offers its clients a value proposition where the rates will be irrelevant and the client pays only for the result the firm provides. The second centres around new opportunities caused by the shift in consumer preferences, where Infosys offers solutions in new platforms such as the mobile network and social networking sites.”
The real risk, in fact, comes from home ground. Sudin Apte, Principal Analyst, Forrester Research, elaborates, “We have to stop comparing Indian companies with MNCs. IBM now has around 80,000 employees in India and Accenture has around 60,000. Who are we calling MNCs?” India is a resource destination and no longer the exclusive domain of Indian companies. Mayur Sahni, Senior Market Analyst, IDC Asia Pacific puts it thus, “Cost competitiveness cannot be sustained unless there is an economic and/or business barrier. The economic barrier has been removed to some extent with global IT and technology players setting up operations in India.” The business barrier, on the other hand, links to the margin a particular player is willing to accept while negotiating a deal. According to industry buzz, when TCS won the deal for Malaysian Airlines, another overseas vendor claimed that the price TCS had offered was below their cost! But then vendors like IBM also pay higher salaries, making them more attractive to top talent. So this age-old bastion may not last very long either.
Consider, in addition, the phenomenon of protectionism. Admittedly, that isn’t a real worry, since companies have begun to accept offshoring as an inevitability. As Chakraborti cites an example, “Let us say that Exxon Mobil suddenly decides that we will do all IT in-house, while they don’t have the capacity. It will take them 3-5 years. What will they do in the interim?” So, if outsourcing is stifled, it will hurt them more. But it is also true that these debates do weigh heavy on client perceptions, while going for deals. In a recent NASSCOM conference, Pramod Bhasin admitted that this was one of the key reasons why Indian IT companies were going for on-site hiring.
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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