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Krishnan Thiagarajan

ARE global IT service providers or multinational (MNC) third-party vendors, such as IBM Global, Accenture, EDS and Computer Sciences Corporation, beginning to pose a credible challenge to Indian frontline companies in the field of offshore outsourcing?

Both Wipro and Infosys admit that they are competing with these global providers only in large deals, such as systems integration or SAP/Oracle implementation in which offshore has become de rigeur.

But in new project deals or deals which are predominantly offshore, the competition is confined to Indian frontline companies or Cognizant in most cases. If this is so, why is there such hue and cry over the recruitment plans of, say, Accenture and IBM Global, as a part of their India operations? These two companies pose the biggest threat to the Indian vendors and are the ones who are talking of recruitments in excess of 1,500 each for their offshore operations. Industry sources have admitted that Accenture is able to match the rates charged by Indian frontline companies in offshore project bids.

As these global service providers embark on this process, they are likely to face three key challenges:

Build critical mass

Given the strong balance-sheet, Accenture or IBM Global should be able to match the offshore prices of Indian companies for a reasonably long period.

But the key question, especially for companies such as Accenture, is how quickly can they build the critical mass for their offshore delivery centres and establish their presence here.

Project methodologies

Over the next one year, the offshore delivery capability of players such as Accenture will be put to the litmus test.

Almost all the Indian software players feel that the project methodologies that they have perfected, and the rich productivity payoffs as a consequence, may not be easily matched on an ongoing basis by these global service providers.

SG&A challenges

As players such as Accenture move work, which was predominantly onsite, to an offshore location such as India, the revenue per employee will drop substantially.

The biggest challenge for these companies is to bring down their sales, general and administrative (SG&A) expenses in line with the drop in revenues. So far, Indian companies have held that their lower SG&A has been one of the key differentiators between them and MNCs in the offshore business.

Despite a 5 percentage point reduction in SG&A in the first six months ended February 28, 2003, Accenture CFO, Mr Harry You, has claimed that it still has considerable scope for bringing its SG&A down. The outsourcing revenues currently account for 29 per cent of its global revenues.

This year is likely to be critical in reshaping the entire structure of the software industry. This is mainly because players such as Accenture and IBM Global are testing the Indian waters to strengthen their understanding of the offshore model.

Once they are convinced about the efficacy of the offshore business model and their ability to handle it from India, it may be reasonable to predict that at least one or a couple of mega-acquisitions, involving the top five Indian software majors, will be in the offing.

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