New Booster Shots
While the end-to-end position is the current selling proposition, there are a few areas that showed very strong growth rates as customers looked for a broader range of services to be delivered from offshore. Software testing, IMS and enterprise solutions are the new babies under great nurture. The result: these practices contributed to a much larger proportion of revenues. Cognizant ERP, CRM and BI practice for example, grew by about 100%. Package implementation, which has higher revenue productivity than other service lines, added up to about 25% of TCS' overall revenue and 16.2% of Infy's, a shift of 100 basis points from FY 2004-05. TCS won a number of end-to-end enterprise solution implementation opportunities in the areas of ERP, CRM and supply chain. These wins have been a growth driver in FY 2005-06. Wipro's revenue mix, comparatively, is less skewed towards package implementation (11%) at the moment, with R&D services and ADM contributing 61%.

Wipro and HCL, continued to lead the pack as far as R&D services or engineering services are concerned. The contribution of this service line for Infosys, unlike in Wipro's case, which grew by a phenomenal 172% (33% of revenue), has come down over the last three years, from 2.2% in FY 2003-04 to 2% in FY 2004-05 and 1.8% in FY 2005-06. It is 24% of HCL's revenue and for Satyam, outsourced product development constituted 6.6%, a healthy growth from 4.5% in FY 2004-05.

Infosys, however, showed a marginal improvement in Testing, which now is about 6% of its revenue, up from the previous year's 5.8%. Rival Wipro continued to strengthen its testing practice too, the service line's role to its overall revenue pie now touching 9%.  

The single most important service line for Satyam remains the enterprise business solutions space and consulting-a combination of what it does in enterprise applications, in providing business consulting solutions, in extended enterprise and functional solutions and what it does to enable each of these solutions. Last year, this grew 50% over the year before and contributed 39% of its revenues.

Consultants, Inc
Many Indian IT services players had some play in the IT consulting space. Higher value-chain business consulting, though, is new to many.

Infosys' overall consulting (includes technology consulting, architecture consulting and all consulting across the group) revenue have come down marginally, but its relatively new subsidiary grew well on a year-on-year basis-from Rs 29 crore in FY 2004-05 to Rs 143 crore last year. While consulting now constitutes 3.5% of Infy's overall revenues, Satyam seems to have done better at about 8%. Wipro's consulting fortune has declined over the last two years and now is about 1% of its revenue. It is not too worried though. There is a second agenda that can possibly-and is already happening in certain cases-be cited as a measure of India's success in consulting. 

For the first time, beyond the additions or acquisitions of Indian companies overseas from an organic and inorganic perspective in the consulting space, there seems to be an opportunity for them to drive value above and beyond IT in the enterprises they are serving. There are opportunities in change management, in business transformation, in providing strategic IT design solutions, in helping companies figure out how BPO, IMS and legacy transformation can be balanced across an organization over a period of time and improve productivity.

The traditional approach of consulting was to help the company from a legacy standpoint in the old ADM space and then climb up the value chain. As one started providing a lot of solutions, it went up the value chain because of its privy to a lot of client information. Now, pure consulting-led work is beginning to get won-this contributed 7% of Satyam's revenue in FY 2005-06-but given that Indian companies are leveraging cost arbitrage and IT services platform and skills, pure consulting revenue may not inch up to beyond 15% of the top seven-eight companies' revenue in the foreseeable future. The proposition in doing consulting then, will be to corner a larger share of IT services and BPO work that emanates from the small consulting assignments. Most of Wipro's big deals won last year have come because it was consulting lead-it played a part in positioning the company in the organization, doing an early engagement, or being part of the assignment team. TCS' Global Consulting Practice front ended and added 49 customer wins in FY 2005-06. iGate too has consulting offerings and most of its sales now are consulting-led.

Indian companies haven't ramped up their consulting practice significantly though-Satyam has just 250 people in pure consulting for instance and the mid-sized iGate about 35 people-so with fewer consultants, the objective has been to get in early in the customer's organization in terms of the cycle and then when the down stream work is awarded, be well positioned to participate.

On the infrastructure management side, HCL still is the clear leader among Indian players, with about 12% of its revenue coming from the service line in FY 2005-06, a growth of 62% y-o-y. Wipro is also relatively strong, with 8% contribution to its revenue from infrastructure outsourcing. In Q4, TCS alone added 16 new clients and 420 employees.

While this is a greenfield space for most companies, there is serious competition from MNCs such as IBM and EDS. But since 50% of the overall IMS pie may be delivered through a global delivery model, there is hope for Indian vendors. A key trend has been the ability to do much of infrastructure management work remotely; everything from data centers, networks, servers and storage to desktops of a number of world's top corporations are now being remotely managed from offshore locations such as India. TCS, for example, set up a global operations center for a leading US retailer to remotely manage its distributed operations, remote deployment of software, capacity planning and provisioning and another GOC for a consumer electronics company to provide support to its North American data center remotely.

BFSI Rules the Pie
The traditional heavy spender on IT, the BFSI sector, continued to be the cash cow in FY 2005-06, but hope also came from newer areas like health services and retail. It was the insurance sector particularly, that opened up to outsourcing and a higher growth was noticed in Europe as compared to the US. The latter still has tons of legacy and therefore is a cross situation “between manage by themselves and manage by outsourcers”.

i-flex had been working closely with Oracle on the technology side to take advantage of emerging standards, the fusion middleware components that will provide the infrastructure to enable running of applications even before Oracle acquired stake. In FY 2005-06, it began collaborating on the sales and marketing side. The two companies now have a reseller agreement wherein Oracle and can go and sell revenue on their paper (the company front ended its deal with Wells Fargo Bank). Similarly, a lot of collaboration is happening on the Flexcube side. Oracle, in fact, has helped i-flex also on the visibility aspect in North America where it has significant relationships with banks with its enterprise solutions. For Infosys, the BFSI vertical, which contributed to almost 37% of the over all pie in FY 2003-04, recovered after a minor dip in FY 2004-05. The insurance part though, has seen a slide since hitting 13% in FY 2003-04. It now contributed to 7.5% of the pie, down from 9.4% of FY 2004-05.

The insurance market, initially, had been driven less by application and a little more by BPO. Today, applications have started flowing in a large way. For this category, companies such as HCL are doing IT, some amount of BPO and infrastructure work-the BFSI sector now contributing close to 25% of its overall revenue.

Telecom companies, in FY 2005-06, looked at two types of solutions-one, to make out how they can leverage offshore better and therefore the cost arbitrage-second, on how they can start deploying solutions to essentially remove costs from the way they are managing networks. Adoption of VoIP technologies, increased usage of data and value-added services like free downloads, and the growing population of wireless, also fuelled growth. Tech Mahindra, solely into this vertical, grew at 31%. Growth was equally broad-based for the other top players, including Wipro, HCL, Satyam and Infosys.

Manufacturing, the other big adopter of IT, saw auto companies establishing a massive need to outsource whether it is the US, the European or even the Japanese players, as they wanted to get rid of their legacy systems. For the first time, the vertical is also seeing solutions that are overlaid by consulting in the IT space. India inc is therefore getting an opportunity to play a consultative role in manufacturing, in transportation. Also in retail, which is growing from a small base. 

The other important story of FY 2005-06 was the growth in the health vertical, which now contributes to between 1% and 10% of the top five players' revenue proportions. Outsourcing here is being driven by serious drug pressures because of the expiry of a lot of patents. The IP enterprises created, are also coming under pressure from generics, from low cost places out of India, China and Latin America.

Going Forward
Worldwide IT spend grew by about 7% in FY 2005-06 and the global delivery model continued to remain mainstream. With multi-billion dollar contracts all set for renewal this year, the supply side for Indian offshore players may be an issue in the short term-how many of the 550,000 engineers or the two and half million graduates coming out are business-ready-and that gap continues to be an issue. Not so much an availability problem; but cost for that availability problem is expected to remain in the short term, at least the next one to two years. But it will also not ebb the ability to service demand. The number of instances where companies have got involved with universities or have invested in training to make people business-ready, has increased.

The other aspect to worry about for most companies is profitability, given rising salary costs and India Inc's attrition rate. The top five companies can suck in bottomline hits, but for mid-sized companies, it will remain an uphill task. Not to forget, the IT industry will lose its tax-free status by 2009.

Goutam Das
goutamd@cybermedia.co.in

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