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July - 2003 - issue > On The Cover
What is Your Vanilla Flavor?
Karthik Sundaram
Monday, June 30, 2003
In the 1850s, the booming railroad industry was facing severe shortage in manpower. The U.S. opened doors to Chinese immigrants, laborers who were glad to escape the stifling dragonland. The immigrants worked hard, accepted low wages and made no unionized demands. More than a century later, short-sighted coding was threatening to hold the world to ransom. To clean up the millions of code before the Y2K bug could hurt industry, the U.S. again welcomed immigrants. This time around, the Indians came. And the IT services industry was born.

As the Internet and software industry boomed, IT services industry grew many fold to become the largest export entity for India. Pure body shopping and staffing was an even bigger business, generating immediate revenues. A slew of Indian companies launched IPOs in India and ADRs in the U.S., and the golden era of IT enabled services (ITES) was at its height.

Even as the U.S. went into recession from the mid-2001, the ITES industry has posted some healthy growth. But the effects of the recession are seen in many forms—offshore development centers, reduction in cost-per-seat and overall IT budgets, and premature cancellation of projects. To compete with these downturns, the ITES industry had to reinvent itself. While in the beginning, the players simply rode the momentum and had no viable differentiation—often ridiculed as just another “vanilla flavored” services company—the need of the hour has been to become really a beneficial partner to the client.

IP Differentiates
“Point of view marketing is important when you want to play to win,” says Girish Gaitonde. In a market flooded with players of different hues, sizes and shapes, it is important to derive a point of view—how do you want to focus and how do you deliver this focus to the client, says the CEO of Xoriant. “We adopted a point of view that we will build our business based on the intellectual property that we own and build.” Secondly, says Gaitonde, Xoriant focuses on five core industries and develops in-depth horizontal and vertical process knowledge in these five. “I don’t want to be everything to everybody. We remain focused within the areas of financial services, high tech, telecom, healthcare and government. There is sufficient room for growth in just these five areas, as long as we deliver on our IP and widen our IP portfolio.”

Gaitonde speaks with over a decade of experience. Founded in 1990, Xoriant has built a successful business by focusing on IT staffing and delivering turnkey projects for Global 2000 companies. “From over thirteen years of experience, we have developed some key bridge technologies which close the gap between the packaged software and the free software,” says the CEO. “Many clients—and consequently their services partners—have refrained from experimenting with free software like Linux. While the potential of these free software is tempting, the lack of a support system is a frightening sequel.” The gaps existing at data level, intelligence level and business process levels are some of the areas Xoriant has been attempting to close, delivering actionable information to the decision making entities within the enterprise. “These services can be possible only if you have enough depth in your intellectual property,” cautions Gaitonde.

Another example that the Xoriant CEO proposes is the way the service itself evolves. “At one end, you can be a pure play ITES company, and then move forward to be integral in the client’s core business itself.” This has been very prevalent in the high tech industry, where chip design services are being taken on by capable service providers. Issues of IP protection and sharing are being resolved and the market can only grow, says Gaitonde. This kind of a service requires more than top layer level knowledge, and the market size is estimated to be around $1 billion by 2005.

Maintenance Markets
Tightening IT budgets has caused another inflection in the ITES industry evolution. The bigger players have till now focused on application development based on the business analysis. “The chunk of budget set out for this is shrinking, and rapidly,” comments Datta Nadkarni, the vice president of marketing at Xoriant. Industry analysts have predicted this slice of the budget to stabilize at 5 to 8 percent of the whole pie. “Not many clients need new applications everyday,” says an industry watch firm. The bigger chunk is directed towards maintenance and support. “The support market needs creativity, which a services firm can provide,” says Nadkarni. The maintenance process does not need the big five consulting firms’ support for new process analysis. “We are going after the large gaps that exist in the enterprise-wide packaged software, in which space we can leverage our knowledge of free and packaged software integration to deliver lower cost solutions,” says Gaitonde.

Typically, over 70 percent of the budgets are allocated for maintenance and support and Gaitonde observes that an IT services firm with sufficient domain expertise in a particular space can easily take a big share of this budget. “As the real time enterprise gains momentum, services companies that can apply middleware to integrate applications to deliver tangible ROI can really see growth,” adds Nadkarni. This again, says Gaitonde, is a good reason to develop IPs within the services company.

Companies can explore more innovative means to reduce fixed costs & deliver higher value. For example, says Jody Bhagat, VP of Outsourcing Financial Services at Xoriant, software intensive companies have non-core products or services that they continue to invest resources & capital to support customers. A more compelling model is to outsource the maintenance & support of these products to an outsourcing company for a fixed percentage of these revenues. This model eliminates continued investments in non-core products and provides a fixed profit margin for the client, while delivering continued support to the end-customer.

Maturity Awaited
“If you look at the automotive industry, only the Tatas learnt how to build a car,” says Gaitonde. “Most service providers have shied away from the learning that has to be done to survive in this business.” The importance has been lost in the easy lucre that was apparently available during the boom time. “You cannot approach a bank and propose an outsourcing exercise to them simply on the cost factor any more,” adds Nadkarni. “The learning comes with a cost—time, and this has to be spent in the process of building a successful service company.” The capital-intensive element of the business has been an advantage to the industry players so far, but the real survivors will be those who have spent effort in shoring up the knowledge bank.

The industry is yet to mature, says Gaitonde. There are ample opportunities for even startups to focus on understanding the core business processes of certain verticals, identify solutions that could bring down cost of operations for a client and deliver those solutions successfully. “In this, we have become particular about what we propose. If a client does not seek to add value to the business by leveraging our IPs and core strengths, we simply move on. If we cannot bring a differentiated value to the client business, there is no point in the relationship,” remarks Gaitonde. This is the first step to a mature relationship, as otherwise only cost could be a factor and the play becomes a cat-and-mouse exercise.

The maturity process has been given a big push by some of the American giants, who themselves are exploring dedicated offshore and outsource units. “While some may continue this exercise, I see them as no threat,” says Gaitonde. “A bank’s core business does not include implementing, upgrading or maintaining enterprise-wide Oracle applications. Even the Citibank exercise was spun off as a totally independent business now.” The knowledge base within IT services companies outscales that extant within corporates. “I would have seen a problem at some other industry vertical and can use knowledge from that experience to deliver workable solutions for another client. This cannot be said of a company that outsources to its own subsidary elsewhere,” observes Gaitonde. “Also, we can hire a 100 Oracle professionals at any time and spread them over projects across different verticals,” says Nadkarni. “The cost efficiencies cannot be matched.”

Now that the cost battle is over, CIOs are choosing experts who can deliver reliable results, says Gaitonder. “If you are able to approach a bank and outline a mortgage business analytics map, point out areas where your expertise can bring the bank results, you have a client,” says the CEO. The market, he says, hasn’t seen the real boom yet. “Business process analysis, and outsourcing based on realities is just around the corner. Insurance, healthcare, mortgage and so on, are key industries where technology is no more the differentiator, but technology that has delivered efficiency and lower TCO are decisive elements.”

BPO The Next Boom?
“An IT services company could play the BPO game if it is sure it will be investing in it,” warns Gaitonde. “IT services have not demanded the mundane task sequences that the current BPO businesses demand. These skill sets are very capital intensive. The competition could be anybody—even a giant like Reliance, who could easily sustain and outbid any traditional IT services company.” The key is to focus on the true business processes that could be outsourced and add value to the client’s business methods, and not to focus on just tasks that could be outsourced.

Institutionalized Learning
Xoriant has placed learning and skill sets honing as a priority within and for corporations. “With the plethora of tools and new products hitting the markets, it is mind boggling just to remain abreast of the names in the game,” observes the seasoned Xoriant head. Xoriant has created the Xoriant Institute, which offers industry-matching training and education. “You could learn in three ways—from a university, by working on the job, or by yourself,” says Nadkarni. “The Institute clubs all three benefits—the rigor of a university education, seasoned by experience and with sufficient scope for self-learning. It is an ideal program for the business.”

From the staffing firm in 1990, Xoriant has come a long way, racking up $60m this year in revenue. “There is enough business in the market. How we get it will rest on how agile we are in delivering the flavor of the day to our choice customers,” comments Gaitonde wryly.

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