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August - 2008 - issue > Cover Feature
Domestic Market a Big Miss for Indian Vendors
Jaya Smitha Menon
Friday, August 1, 2008
In 2003, when Sunil Mittal, CEO of Bharti saw the increasing number of Indians signing up for mobile phone services, he knew he had a herculean task in front of him. Subscribers were doubling every year and to maintain his lead in the market with stiff competition, he had to build out a network fast enough to keep up with the pace. Mittal finally came up with the best way to build it – outsourcing. Though he signed outsourcing deals with Ericsson, Siemens, and Nokia, what caught attention was the $750 million dollar deal he signed with IBM. Mittal signed a ten year contract with the company, farming out the bulk of Bharati’s information technology services, including billing management of customer accounts and even operation of its Intranet. The deal turned many an eye to it for many reasons, one being that in the telecom world, turning your network over to another firm was unheard of.

However, the big question about the deal was why IBM? Why not the Indian technology firms who are widely acknowledged for their performance on global ground, being hailed as ‘outperformers’ and ‘formidable competition’? Not only the Bharati-IBM deal, but soon after came the FMCG major Dabur’s deal with Accenture and Bank of India’s and Britannia’s deal with HP which confirmed the fact that the global players are ruling the domestic market. Today these multinational players deal with prestigious Indian enterprises and institutions like the Idea Cellular, DLF, Apollo Group, Syndicate Bank, Ashok Leyland, Andhra Bank, and Vysya Bank amongst others. To cut the story short, as per the reports the total domestic IT software and services market in India increased from $6.7 billion in FY 2006 to $8.2 billion in FY 2007 and the Indian players seem to have missed the bus when it comes to deals at home. According to a research by Gartner, the domestic IT services market is pegged to grow to $10.73 billion by 2011 at a five-year compounded annual growth rate (CAGR) of 23.2 percent.

On the Indian scene, barring Wipro Infotech and TCS for that matter, not many realized the potential hidden in their own backyard in the race to win mega deals in the Western countries. For them India was never a focus area until a few years back. “The Indian IT services firms realized only a year or two back that the Indian domestic market is itself a huge market and the U.S. market might flatten out,” says Ranjit Tinaikar, Partner, McKinsey & Company. The Indian players were always focused on the Western market, especially the U.S. “The U.S. market was a matured market where the companies knew the advantages and the value IT could bring to their business. But Indian market was a relatively evolving market. Though the Indian companies knew about Information Technology they were reluctant to spend as their U.S. counterparts did, as they were not aware of the power of technology. Hence they chose to focus on the U.S. market,” explains Rajdeep Sherawat, Vice President, Nascomm.

As Nandan Nilekani, Co-chairman of Infosys, himself put it in an interview with Rediff a few years back “The U.S. GDP is about $10 trillion and it spends about 8.0-8.4 per cent of GDP on IT. That means that the annual spending of the U.S. GDP on technology is about $800 billion. The Indian economy is about half a trillion dollars. Domestic spending on technology in India may be 1 per cent of that, i.e., around $4-5 billion. It is a vastly different scale. For us, an entry into the Indian market is something that we can do fairly swiftly. When we think all the trigger points are there, we will move in. But those trigger points are not fully there yet.”

However, it was not as easy as he envisaged. By 2005, these marquee deals started making it obvious to the Indian players that the domestic market was at an inflexion point and they started to address it with a renewed focus. But barring TCS (thanks to the CMC acquisition) and Wipro Infotech, who already had a fairly good presence in the Indian market, none of the other Indian companies, including Infosys, could create a traction in the market. Infosys recently announced the launch of a separate business unit to address the market with a renewed focus. Wipro Infotech, which has a presence in the market from the early days of Wipro, signed multi year contracts with HDFC Bank, Dena Bank, Sanmar, ITC, and Aircel. “We have successfully won several transformational contracts in the last few years and have been constantly innovating in service delivery to make it more meaningful and cost effective for our customers. We have a remote delivery center at Mysore (GSMC), which is the center of several mission critical customer service deliveries”, says Anil Jain Vice-President, Corporate Business Unit. For TCS, the acquisition of CMC put them in a relatively good stead in the domestic market with contracts like Passport Agency, Chatrapati Shivaji International Airport, State Bank of India, and BSNL amongst others. But the truth still remains that the disadvantages of being a late entrant is hitting the Indian players hard in the domestic market.

Another factor that unfavorably hurts the Indian companies now is that the service model of Indian companies is focused on labor centric services like application development services and maintenance and in some cases process operations. Today most clients are looking beyond this. “For the users in the outsourcing services market in India, operational efficiency and business agility are the major factors they consider during IT services engagements, contrary to the popular notion that cost is the primary parameter to them,” says Arup Roy, Senior Analyst, Gartner.

The Indian domestic IT services market has been outpacing the overall Asia Pacific growth, as it grew by 18 per cent in 2007. “Due to the huge surge in the economic activity and relatively low legacy, the Indian market has its own challenges. Customers expect high speed and lower costs. The ROI question has to be answered right from the word ‘go’. The integrated project management is another big expectation of the customers in India, as customers want to depend less on vendors for their output,” explains Jain. But one main factor which worked against the Indian IT players except Wipro Infotech and probably HCL even after they started focusing on the market was that they lack the integrated approach taken by the global players like IBM and HP who set out to work on the entire IT business transformation for their clients by helping them design, build, maintain, and manage the complete system which includes both the hardware and the software. Another important aspect pointed out by Tinaikar is “Though the Indian players had fairly huge deals and strategic alliances in the banking sector, because of the scope of the deals, they never thought about going beyond implementing a core banking solution and reach the scope and size of the deal handled by the global players.” The global players looked for a larger pie and signed deals, which are transformational in nature. “They sell ‘buyer value propositions’, i.e., approach their client by telling them that spending on IT services and solutions can help them save money and be more productive, even in a profoundly uncertain economic climate,” explains Roy.

The Indian vendors also have to understand the difference between the Western and domestic clients and cultivate relationship with business executives. The Indian vendors are largely in touch with the Chief Information Officers only. But in India they have to shift their touch points to the chief executives who are more powerful in the organizations. “Most of the large Indian conglomerates are family owned businesses, which are oligarchic in nature and the CIO’s decision making powers are limited, compared to their U.S. counterparts”, observes Roy. The business executives of these companies would look for opportunity to bring value propositions, transformational ideas in which the global players are veterans.

The Indian economy is growing steadily with 8-9 percent GDP growth and the domestic market is expanding with sudden rise in investments in almost all sectors of the economy from telecom, retail, financial services, and manufacturing trying to leverage IT for business transformation through efficient operations and superior customer service. IBM realized this growth potential long time back in 1997 and set up the business unit for the domestic market along side developing their offshore capability and expanding the delivery center in India. Indian companies, except Wipro Infotech, seem to have missed the bus when it comes to deals at home and were trying to build the consulting practice in overseas markets from scratch. But what they did not realize was that the Indian domestic business offers Indian IT service providers the opportunity to test and develop their high-end service capabilities, and take what they have learned from it to their global clients. This would have opened up new avenues like that of consulting for those who have traditionally banked on offshore work.

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