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Saturday, April 08, 2006

Surging Confidence Of Indian Headquartered Players

I was in the US few days last week and could generally see positive sentiments being expressed all around about Indian headquartered service companies and some voices with genuine concern about the ability to scale up considering the widely talked about talent shortage issues were also heard. With impressive headcount increase being made by western majors in Indian facilities, some foresee that the Indian services growth rate moving forward may even be flattened. Some were concerned that rates being offered by offshore majors may be high and the competence depth may not be there. While, I may disagree with such views fact remains that these views came from seasoned veterans and deserves definite attention and consideration. There may be some hidden truths therein as well. I can only point to a well analysed report from Ed Caso and his team published last month. (Note : All views in this blog are my private views). As I wrote while covering the report here, the data of all leading India headquartered service firms are available therein the report.

"Confirming the widely held belief, the report notes, Accenture as the best positioned amongst the commercial firms to benefit from an overall market improvement. I am not too sure why the average offshore billing rates for Accenture’s consulting and BPO operations can’t be acquired – may be they do not report this separately as needed for comparison ( so much for disclosure). However,in fairness the report suggests that data on this for most of the firms across categories are not available. Billing rates and utilization for enterprises across categories make interesting reading - however I am aware that there is scope for enterprises to tend to marginally play around these two figures for balance. On all conventional financial metrics – growth, margins, offshore firms have established new records. Average attrition levels at offshore firms are far less than that reported by the likes of Accenture – across quarters – an important trend to watch. Talk of some having mastered the global delivery model gets decimated by the fact the average billing rates for firms in the commercial firms stand approximately three- four times more than that of the indian headquartered firms. The upside potential for expanding GDM capabilities and for the offshore firms to increase marketshare is apparent based on this. Three things in a way summarized the scene better:

1. Accenture’s sale is more than the combined sales of all the ten offshore firms listed therein – the list includes the top five offshore players.
2. Surprisingly I found that in the four quarters preceding Dec 2005, Accenture recruited more people than the likes of Infosys ( however adjusting for attrition, offshore firms may be seen as doing marginally better)
3. Infosys marketcap stands higher than that of Accenture ( as seen from public data)
These financial data are indeed very real and truly reflect the strength of the players therein – the report is also helping with a trend analysis by presenting in a nice – comparable format
. Stakeholders may like to read this report alongside some qualitative metrics like comparison of maturity of service offerings, vertical and geographical strengths and penetration productivity levels, relationship management indices, average experience of employees within the enterprises etc to get a better understanding of the concerned enterprises

On a related note came across this nice interview by Knowledge@wharton with Mr.Azim Premji. Some excerpts with edits and comments:
Wipro has recently announced a reorganization and Mr.Premji hopes the reorganization will make Wipro more agile and believes that the new structure will help the company execute its strategy well. While conceding some misaligned productivity numbers in its BPO operations, he shares his vision of targeting Wipro to compete against the Accentures &IBM. He claims that in the products engineering services business his company is 10,000 people strong and the largest products engineering services company in the world on a third-party basis( Just a sample for depth of competence being acquired by offshore headquartered firms). Claiming that the businesses being done therein are evolving towards models for taking turnkey responsibility for deliverables such as the design of end products - next generation products(Its not making subsystems for customers or work as part of a project team). Saying that his organization is also trying to build similar skills in other businesses, he adds that learnings from technology infrastructure rollouts as well as in enterprise platform implementation are used for differentiation purposes. Many critics just see the mundane type of business being used by offshore companies, Mr Premji explains that the mundane business is also extremely profitable & generally it has a tremendous annuity value. With strong efficiencies into execution, they make very good margins. Among the cutting edge products being designed he singles out designing the next generation of mobile hand sets, including certain embedded technology for an OEM player & , designing a fairly sophisticated telematics system. [Telematics is an emerging auto communications technology which integrates wireless voice and data to provide services such as emergency roadside assistance.]
Now comes the growth part - "is it about to flatten?" On growth Mr.Premji says it would be reasonable to assume that Indian services exports in IT and in BPO will grow cumulatively for the next five years at about 35%. He predicts that well run Tier 1 Companies can grow faster than this and adds that growing to 150,000 to 200,000 people is not an insurmountable challenge. He believes that post that size growth can come through business model innovations. I thought that some vey tough questions were put at Mr.Premji - I would like to see in action western service firm CEO's being asked such tough questions.The Tier 1 indian headquartered firms continue to make huge strides and despite some attendant difficulties in scaling up(which they are addressing quite well) they are seen to be executing very well, restrategising and as needed realigning their approach - seen from an operational, financial, competitive value add, efficiency perspectives. Next time when someone talks to global majors on their competitiveness, value add potential & GDM, I would like to help with queries that need clarification. One does not need to go any further- just listen to the top 5 Indian IT headquartered companies conference calls and quarterly earning/investor reports and listen to global majors quarterly earning calls - the lack of detail in latter would indeed be revealing.

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