Up for grabs?

Raja Simhan T.E.

OFFSHORE development and outsourcing -- Today, CEOs of Indian software companies love to talk of these measures and everyone knows why. In the wake of the bursting of the dotcom bubble and the hiccups in the IT industry, these two services have emerged as the most promising business propositions.

Earlier, Indian companies were providing software solutions to Fortune 500 companies, including Citibank, General Electric, General Motors, Sony, Boeing, Coca-Cola, Pepsi, SwissAir, Philips and General Motors. But the IT slowdown has compelled overseas players to get off on-site development, and into offshore software development. This outsourcing is estimated to bring down costs anywhere from 25 to 60 per cent. Indian software services companies, too, are now looking for small and medium enterprise clients rather than looking at just the Fortune 500 companies.

Sensing this trend as early as last year, many Indian software firms quickly put in place the required infrastructure and manpower, besides a strong marketing team abroad to bring offshore business to India.

Doing a fast forward, have the Indian firms been successful in snagging offshore projects or have they missed the bus?

eWorld quizzed Indian players and their response to eWorld's questionnaire seems to suggest, by and large, that offshore projects have been coming in consistently since January this year.

`India on a strong wicket'

According to Phiroz Vandrevala, Chairman, Nasscom, the first quarter of 2001 witnessed an interesting trend in terms of large global corporations outsourcing mission-critical projects to India.

``What we are witnessing now is the end of the first generation of the outsourcing model and the emergence of a new model. Traditionally, global corporations used to outsource 70-80 man year projects, but the trend that we are witnessing now is outsourcing to the scale of 300-400 manyear projects.''

India's advantages are -- the availability of quality people to handle high-volume projects, a low cost structure (US companies outsourcing to India gain a cost advantage of anywhere between 50 and 60 per cent), high quality processes (of the 35 companies assessed at SEI-CMM Level 5, 27 are from India) good government support and patronage in the form of tax concessions, and provision of STPI.

Further, there is good infrastructure in the form of bandwidth, network availability and connectivity. Above all, the availability of English-speaking professionals with a compatible culture is a mature advantage for India, he says.

What the figures say

Here's what some of the software companies have to say about how much offshore business they have won since January 2001.

From January to July, Cognizant Technology Solutions (CTS), headquartered in the US and with ODCs in India, added 28 new clients for project outsourcing. The year-to-date (YTD) revenue from the above (January to July 2001) was $4.3 million.

The Rs 700-crore company, in the offshore development business for the last seven years, provides technology solutions to over 95 customers in the US and Europe, says the company's Senior Vice-President, R. Chandra Sekaran.

Its clients outsourcing include Financial Services, First Data Corporation, iNautix (the technology arm of CSFB), The Pacific Stock Exchange, MetLife Insurance, Royal and Sun Alliance, CCC Information Services, Healthcare IMS Health and Sierra Health Retail Ace Hardware.

The company handles projects in application management and e-business. Application management includes application development, application maintenance and re-engineering and e-business includes e-commerce, business intelligence and CRM solutions.

Pentasoft Technologies, a Rs 583-crore Chennai-based company, has bagged 34 new clients since January. This includes an initial order worth over $1 million from Electronic Banking Services, Government of Sudan, for computerisation of 200 branches during the first phase.

The company also bagged an order from Etisalat, the telecom giant in the UAE, for mobile computing of its Fixed Asset Management System, says the company CEO, D. Kannan.

Pentasoft also signed an MoU with Macau University of Science and Technology (MUST), China, with the two-pronged objective of providing IT training to mainstream students in and around Taiwan, Hong Kong, Korea and Mainland China, and undertaking projects related to R&D in IT, he says.

The company expects 45 per cent of its business to come from offshore development centres (ODCs) in the next couple of years.

HCL Technologies, during the quarter ended June, continued its strategy of forging long-term alliances with its customers and announced five new off-shore development centres for strategic customers.

These are Matsushita Electric Company Denso Corporation, Nomura Research Institute, Deloitte Touche Tohmatsu, Honda Motor Company, Thomson Financial and Fuji Film. Incidentally, all are Japanese companies.

NIIT added 23 new customers in April-June. These include SATS, Sony Hong Kong, CoKinetic, Hitachi Data Systems and Midas Kapiti. The fresh order intake during the quarter was $11 million. The total revenues from global software business in the quarter was up by six per cent at Rs 129.8 crore.

Polaris Software Lab (Rs 265 crore) has been marketing its ENTITY model, (the Extended Technology Facility) to prospective clients.

In the last two quarters, Polaris acquired 14 new clients, for major projects being executed offshore. The company focuses on large global relationships. With regard to long-term relationships, it makes perfect business sense when the cost savings range from $10-$100 million.

However, the cost-saving potential is not realised right from the first year of outsourcing. Trends reveal that large outsourcing relationships mature to $3-10 million accounts in around 18-36 months.

The trend of new business maturing to be major revenue contributors happens over time, and such a trend is anticipated in the new relationships signed in the last two quarters also. At Polaris, the business model will lay emphasis on relationships signed rather than the reflection of the same on the profit and loss of the quarter.

At present the offshore onsite associate mix is in the ratio of 82:18 and the organisation expects this ratio to be maintained in the immediate future, says a company official.

DSQ Software (Rs 520 crore), another Chennai-based company, has bagged 10 new clients for offshore development projects since January, bringing around $10 million in revenue.

Incidentally, the company inaugurated its 30,000 sq. ft offshore development centre at Tidel Park in Chennai with its US-based client, Liberty Mutual Group. The ODC undertakes offshore project work in insurance, banking and finance for US-based clients.

DSQ deployed around 200 of its employees for the US company to undertake projects on old legacy system, new development requirement and migration of data.

A couple of months before the opening of the centre, DSQ issued a press release stating that it had signed a $100-million contract with an East Coast-based insurance group in the US for setting up an ODC in Chennai. However, when asked, an official of Liberty Mutual then said that the size of the business for the ODC would depend on the quality and the cost-effectiveness the facility brings for the company.

For Liberty Mutual, the $13.5-billion company, with globally around 37,000 employees, DSQ was the first major vendor in India. The company in the past had used some of the small Indian vendors for Y2K-readiness.

DSQ expects a business of $40 million from ODC in the fiscal year 2000-01.

Outsourcing is set to continue for many years to come. The model would vary for different groups based on their stand in the market place, says Kannan of Pentasoft Technologies.

According to him, in future the Fortune 100 companies may set up their own offices within India and do the outsourcing. These subsidiaries may have local contractors who can become business partners or can provide resources.

The second rung of Fortune 200-500 companies would like to associate with companies in India which have a good infrastructure in place and with project delivery capabilities with SEI CMM Level 4-5 compliance.

The third type would be companies in the range Fortune 500-1000 companies, which are in the business of re-engineering processes and handle their IT requirements, including maintenance and migration projects out of India.

The fourth type would be companies which require customer services support (typically call centre management) who look for companies with good infrastructure and the experience to handle such services. Thereby the companies may become business partners associated with this company for IT-enabled services in the areas of call centre management.

Says Chandra Sekaran, CTS, that currently, much of the work done out of India is still not mission-critical. The more critical ones are done in-house by the customers themselves. Through long and deep relationships with customers, a good number of Indian software companies are moving up the value chain and getting into more critical assignments, he says.

To meet the increasing demand of offshore projects, some of the above companies now have a strong infrastructure in place.

For instance, Pentasoft has one full floor in TIDEL Park of around 100,000 sq.ft., which can accommodate a minimum 1,000 people per shift and up to 3,000 people in three shifts if the demand warrants. In addition, the company has ODCs in Bangalore, Hyderabad, Mumbai and Delhi.

Polaris currently operates out of six development centres in Chennai and New Delhi, having a total of around 2,50,000 sq.ft in built-up area. There are two more centres that are coming up, Polaris Towers in New Delhi and Track I in Chennai, providing a capacity of half-a-million sq.ft of infrastructure space.

Polaris anticipates recruiting around 600 associates for fiscal 2002. It added around 109 associates in the first quarter of this fiscal. Polaris' recruitment will be based on business needs and not on planning needs.

The Indian software services industry is now moving on to a new era, where growth is not automatic, but has to be earned. More companies are moving towards building long-term relationships with clients, and therefore, their entire planning paradigm is changing.

What precisely is changing? Recruitment and retention planning and plans are changing, and this is one area where companies were quite lax. And more importantly, business development and marketing focus is shifting towards stable and long-term relationships.

With inputs from Vipin Kumar

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