At Prayag, we had recently completed a report on non-linear models prevalent in the IT services industry. As you know, non-linear models involved any form of revenue contribution that is not linked to headcount. Typically, in the offshore (read Indian) market, revenue growth implied proportional headcount growth as well. This is not a sustainable model for the usual reasons – talent shortage, attrition, training costs, infrastructure costs and so on. So, companies especially the Indian ones have started looking at non-linear strategies where revenue growth is not directly proportional to headcount growth.

For our report, we conducted a detailed study and spoke to several contacts in the industry including senior folks in charge of non-linear initiatives, delivery, sales, marketing in IT services companies, industry analysts, equity analysts and other industry experts. These interviews combined with our own research was pretty insightful and helped us arrive at a big picture.

Overall, our findings showed that the offshore players are looking at non-linear initiatives in a similar way – delivery initiatives and outcome based models. Here again, more progress has been made on the delivery initiatives front in the form of solution accelerators, platforms, shared services and output based pricing. Among the main offshore players, TCS is ahead in terms of investing in platforms and solution accelerators. TCS’ platforms as part of its BPO offerings in particular have made a good start and gaining traction. It was interesting to note that companies are thinking similarly and we did not find anyone with a strikingly different approach. Our research shows that Wipro’s shared services model called Flex  also appears to be a successful initiative. On the revenue side, HCL seems to have made some strides in offering risk-reward partnerships to its clients especially in the hi-tech area. All these initiatives are not a new concept for a seasoned company like IBM – they are far ahead in this game and the whole process of developing accelerators and solutions is fairly mature.

However, we need to be cognizant of the fact that these non-linear initiatives form at the most 10% of overall revenues and more work needs to be done for it to scale and address some of the serious challenges . For now, our assessment is that non-linear initiatives need another  five years or so to scale and contribute meaningfully provided customers cooperate and companies continue to view it as an important part of their  strategy. With the tepid Q1 results  being announced by the large offshore players,  it appears that will necessarily have to focus – anyway, at Prayag we will continue to monitor this important trend and keep you posted.

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I was talking to the US based CEO of an emerging company focused on the ISV space recently to get a feel of the market. What he had to say made me reassess the general view that the economic recovery is well on its way. It appears not.

Venture funding is still low although it has picked up from earlier quarters. Consider this, in the first 3 months of 2011, 364 tech companies received a funding of $4.8 billion. Of this, Facebook itself accounted for $2 billion of the funding followed by Groupon with $377 M. Removing the Facebook deal, the value of funding has increased by a low 8% only. Of course, the other way of looking at it is that good ideas can still attract funding.

Overall, it appears that the US market is still limping along – both at the enterprise and ISV level. Cisco has already warned about its performance in the coming quarters. For companies targeting the US market, the progress would be difficult but opportunities do exist. Value has to be demonstrated convincingly and cost savings still remain the overall driver.

My take is that the US is still an attractive market for companies large and small. There is no equivalent market in terms of scale and opportunities yet. Of course, the going will be tougher but the returns may be well worth it. Do you agree?

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I visited the passport seva kendra in Bangalore last week to renew my passport. I had been postponing the inevitable as I was dreading the innumerable forms, processes and repeat visits to get this seemingly simple task done. However, I must say I was pleasantly surprised with the overall experience. The passport processing has been outsourced to TCS and I believe this is the key reason for the improvement in efficiencies.

The whole process starts with registering yourself on the passport office website and you are alloted an appointment on a certain day and you can even choose which location you want to visit- this straightaway eliminates long waits at the passport office. The website gives clear instructions on what documents are required and you could even upload scanned copies for quicker processing. On the appointment day, armed with all my documents I made my way to the passport office. The whole document verification process has been broken down into multiple levels and a workflow created to ensure faster processing. And there is no scope for jumping queues as everything is automated once you are issued a token number. There were several TV screens which continuously flashed whose turn it was next and this was accompanied by a person whose job was to announced the next token # over the mic (for those who are not tech savvy – neat!). The system also factors in cases when you may need to go to an earlier stage in the process to get something ratified – and recognizes that you have already been through some of the stages and prioritizes yours over others – the net result being you do not have to wait too long. The actual government officials are involved only at the last stage and yes that stage takes longer than the others as expected!

All through the various stages, there are helpful TCS staff who are willing to answer your queries and guide you with correct/precise instructions. I had to spend more than half a day on this and that was mainly owing to the volume of applications that had to be processed rather than due to inefficient processing – what a welcome change. The best thing that the government could have done was outsource the passport processing and TCS has done a good job of handling this mammoth task.

Popularity: 8% [?]

As I was reading the ET today, there were two news items that caught my attention – one was Accenture hiring Avinash Vashishta of NeoIT fame to take over their India operations and the other one was an article about Indian firms being shy about acquiring local companies (reference to the iGate-Patni deal). Now, if you think about it, both are connected.

We know that while Indian companies are trying to go up the value chain, the non-Indian counterparts are trying to establish a sound offshore presence – yes, this has been discussed before. While few Indian companies have made the right moves and are climbing the value chain gradually, similarly there are very few non-Indian companies that have been successful in setting up a scalable offshore organization. Looks like this is still continuing.

One name that immediately comes to mind when you think of companies adapting to the offshore concept is IBM which has done a great job surely. Accenture on the other hand has been really slow on this front – they have around 50000 people in India split almost equally between BPO and IT services. Part of this is due to the company culture itself – it is still partner led and we hear that the Indian operations have little access to the client. Clearly, Accenture is taking a long time to change from a consulting, partner-led approach to an outsourcing approach which requires a more decentralized approach. Obviously, setting up India operations is not sufficient – the organizational culture is key to making it work. It remains to be seen how a person like Avinash Vashishta, someone very familiar with outsourcing can make the change. Mr. Vashishta comes from a background where he has been on the other side – helping buyers identify the right vendor and working with both sides on the deal. Today, the IT services business and the offshoring scenario has evolved quite a bit and Mr. Vasishtha has a hard job ahead.

Moving on to the article which said that Indian IT companies should seriously consider acquiring local companies – it discussed the scenario where if Wipro had picked up Patni, it would have helped Wipro widen the gap with Cognizant which is close at its heels. Agree that in a sense, it will be easier to acquire local firms in terms of integration effort and compatibility and so on. However, we need to remember that Indian firms are looking to go up the value chain – the Tier 1 players at least have a scalable organization more or less. They need to be looking at growth that is not dependent on headcount – the much talked about non-linear initiatives. Acquiring a Patni or a Satyam (when it was up for sale) is a short term fix for growth and will not really address challenges such as attrition, HR issues, higher end services and so on. Many of the Tier 1 players are serious about non-linear growth and the recent TCS results was proof of that. A Patni or a Satyam purchase makes sense for a iGate or TechMahindra as this helped them scale quickly as opposed to a longer organic route. Our view is that Indian companies should look to acquire only those companies that will help them deliver higher value services or nudge then in the direction of non-linearity– they are more than equipped to handle the regular IT services business.

What do you think? Do you agree that the efforts from Indian IT services companies as well as MNC players are continuing in the same way?

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I am afraid this blogpost might have lost its currency. After all, Obama’s visit is almost a month old and the entire media hullabaloo has died down. But a couple of days ago I read this http://www.thehindu.com/opinion/lead/article903883.ece

I source courage from P.Sainath, whose candor and commitment to hard hitting facts usually have the ability to renew interest in old issues. Sainath’s criticism is limited to demolishing the rosy picture painted by the media about Obama’s visit and what it does to Indian business and international politics.

However, among the different voices of criticism/ protests against the Obama visit that were ignored by the media, there is one that stands out. And what’s more, it has significant implications for the deep engagement in corporate India that the USA has sought. As Obama landed in Mumbai, about a 100 survivors of the Bhopal Gas Tragedy protested outside the Union Carbide Factory in Bhopal. Their demand was that Obama should ensure that both Union Carbide and Dow Chemicals submit to Indian laws and abide by the decisions made in Indian courts.

In 1984, the pesticide plant of Union Carbide, India spewed poisonous methyl-iso-cyanate in a congested part of Bhopal, killing over 3,000 overnight. In addition, the contamination has taken a toll on Bhopal’s population over the last 20 odd years. As the environment in Bhopal continues to be contaminated, Union Carbide has not only reneged on the compensation to be paid to the victims but has also refused to clean up after itself. In June 2010, an Indian court verdict found Union Carbide India Ltd and seven of its top executives of that time guilty of criminal negligence. Meanwhile, in 2001, Dow Chemicals took over Union Carbide.  Dow has categorically refused to take responsibility for Union Carbide’s actions.

What are the larger questions of significance in this context for the future of Indian business with the USA? Most obvious is, ofcourse, when there is a merger, to whom does the legal liability belong? There is, however, another elephant in the room. The 20 year ordeal of seeking justice in the Bhopal Gas Tragedy case has obviously meant that certain systems need to be in place. Because of the involvement of two countries, the situation is even more complicated. There are two systems of laws and they each provide enough loop holes. What we have seen in the last 20 years is a systematic failure of both these systems to work in tandem to deliver justice.

This is where Obama comes in. In this atmosphere of great business bonhomie between the two countries, it would be worthwhile to think of a shared set of rules to safeguard both people and buisnesses. Should an accident take place, justice can be speedily delivered. It takes political will to engage in this manor, which, unfortunately, was lacking from both sides. Unfortunately, corporate India also doesn’t seem to have understood the significance of such engagement for further business. Would love to hear what you have to say.

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Sometime back, I had written a post on MNC companies in India and here is the next one on Indian companies. The Tier 1 Indian players are at crossroads and some of the issues facing them are – (1) while they have developed their business quite nicely – they are still address a small percentage of the total outsourcing market and there is plenty of opportunity to grow it further. (2) Indian players continue to be associated mostly with low-end services and have to work really hard to change that perception as well as prop up delivery capabilities (3). MNC players like an IBM, Accenture have established themselves firmly in India and are trying to emulate the Indian delivery model. Some such as IBM are doing this really well. (4) It is becoming increasingly clear that the revenue-headcount relationship will not sustain over the long-term and this has to be addressed sooner than later.

The good news is that Indian companies are addressing these issues and in a sense some of their strategies are similar. For example, most companies are looking at a combination approach of solutions/solution accelerators, shared services and outcome based pricing models. We need to keep in mind that these initiatives are driven by the service providers and not so much by the customer. For the customer, as long as their delivery and cost savings are maintained, they would prefer things to remain undisturbed. Hence, the service providers have to be careful about making some of these changes. While solution accelerators have been around for some time, not all requirements will lend itself to such an approach. Similarly, take the shared services model – service infrastructure management, application management could be considered for this model. Again this model requires a huge change in the customer mindset. We also need to be cognizant of the fact that Indian service providers are also new to such models and their approach may not be as mature as some of the MNC players. As can be seen, there is lot of work to be done by Indian companies if they need to move to the next level else there is the risk of plateau-ing – you can see that happening with some of the MNC players as well as tier 2 Indian players.

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