IT OUTSOURCING: A Quiver Full of Arrows

The stage is set for second-generation outsourcing deals. This
time, deals are smaller in size, users prefer best-of-breed solutions than
end-to-end solution providers, and what's more, new players have come to the
negotiating table. The $2.2 bn ABN Amro outsourcing deal handed to multiple
vendors-including Indian players TCS, Infosys, and Patni-typifies this
trend. The arrival of Indian players is perhaps the most significant outcome in
the second-generation outsourcing deals.

If user maturity is demonstrated in the way deals are being
structured, vendor strategies have not remained static. Outsourcing has become a
global affair as American and European vendors ramp their offshore strategy,
namely India, and Indian vendors, who pioneered the offshore model, now focus on
building new competencies to take them to the next level of growth.

At the same time, Indian vendors have been successfully pulling
down the psychological barriers that separated them from big players. They have
won sufficient customer confidence to be invited as primary vendors. These
factors have marked an inflection point in the strategic road map of Indian
players.

Nandan Nilekani CEO, president and MD, Infosys Technologies

Now the challenge for Indian players is to maintain that
momentum of growth. They need differentiated strategies that would not only win
them big-ticket deals, but also maintain their competitive edge. In this
backdrop, it is interesting to examine the strategies of two Indian vendors,
namely Infosys and TCS, as they prepare for their next phase of growth.

Wipro, another front-running Indian outsourcing vendor, is at
the moment busy grappling with the sudden exit of several top management
members, notably Vivel Paul, vice chairman and CEO; Raman Roy, chairman and MD,
Wipro BPO; and Richard Garnik, CEO, Wipro America, in the last couple of months.
Wipro is traditionally a technology focused company with a large part of its
revenue coming from its telecom R&D business, with much longer sales cycle.
Also, the revenue realization is more stable but slower.

DNAs Reflect Contrasting Strategies

Two of India's most visible names in the global outsourcing industry,
Infosys and TCS have fired the investor community's imagination with their
unique growth stories and inherent strengths. Both are destiny's children
leveraging on global opportunities in a flat world, upstarts that have changed
ground realities, catching incumbents napping. Now as they aspire to break into
the charmed circle of top-league players, both are forced to redefine their
strategies.

Though their growth stories are similar, their DNAs are very
different, and this is reflected in their growth strategies. Infosys is a
typical new age company started by entrepreneurs when the country's economy
was unshakled. It rose meteorically, riding the power of the Internet and
leveraging India's powerhouse of software engineers. It is used to the
fast-paced growth of the new economy, and its vision reflects that. Its bet on
consulting services and BPO, both very high growth areas, will help the company
maintain its momentum.

TCS on the other hand has bet on its ability to leverage its
global service-delivery (GSD) model, perhaps a more robust system, but which
takes time to build up. It is part of India's oldest industrial house, the
Tata Group, which has a huge empire spanning steel, automobiles, and heavy
industries. The Group has a legacy of working closely with global corporations
around the world. TCS, which started off as a solutions provider, has a long
history of working with customers at onsite locations. As its focus moved to
software services, the company proved adept at building its onsite presence. And
it is this strategic advantage that TCS seeks to leverage in its next phase of
growth.

TCS: Flexing GSD Muscle

Whether it was legacy or a deliberate strategy, TCS' huge onsite presence
is paying dividends, winning deals in the US and Europe. Its revenue model was
always skewed towards onsite revenue. During FY 05, TCS had 61% onsite revenue,
while Infosys' onsite revenue stood at 51%. In fact, in FY '02 its onsite
revenue was as high as 71 percent, which it has steadily brought down to 66% and
64% over FY '03 and FY '04 respectively.

Its higher onsite revenues may not be great for its bottom line
but TCS has cleverly positioned it as an asset in an industry where distributed
delivery commands a premium.

For instance, in the US, TCS had been able to flex its global
delivery muscle to win a deal with the state of Indiana to upgrade the systems
processing its unemployment claims. TCS outbid its nearest rival Deloitte
Consulting, and Accenture by nearly $8 mn to win the deal at $15.2 mn.

S Ramadorai, CEO, TCS

TCS' growing strength has not gone unnoticed. Analysts are
upbeat about its global delivery capabilities. Michael Gilbault, an analyst who
tracks TCS with Boston-based Technology Business Research, says, "TCS's
long-term presence in developed markets, its professional image, and low-cost
delivery structure is highly competitive. As the US-centric IT firms rapidly
grow their offshore delivery capabilities, TCS' cost advantage will grow in
importance."

Indeed, as the GSD structures of major companies begin to
resemble each other, the offshoring argument will lose its edge, and cost and
capabilities become key in winning contracts. TCS has mastered delivery and
execution capabilities, a fact that is increasingly getting acknowledged. A
recent Morgan Stanley survey on offshoring amongst CIOs ranks TCS as the number
one on execution among offshore IT services companies.

Explaining its pitch for a global delivery network, N
Chandrasekaran, executive VP and head of global operations, TCS says, "We
work for many multinational clients present across geographies, and want a
system integrator to provide seamless service across the board. Second, some
customers have very regional character like those in Latin America: a Banco
Penta, Telefonica, Telemax, or Brazil Telecom-whom we cannot serve unless we
have local presence."

Over the last two years, TCS has been hiring local people and
training them. But the number has to go up significantly higher for optimum
utilization levels.

In fact, its global delivery capability was a key factor in
winning the ABN Amro deal. Why else would a company hand over such a large
application development maintenance contract to a vendor which does not have
operations in those places, as everything cannot be offshored. This deal will
see more than 500 TCS consultants work from its GSD centers in Brazil and
Hungary to service ABN Amro's operations in Brazil and the Netherlands, in
addition to the offshore support by consultants in India. TCS has also announced
plans to ramp up presence in Brazil. The Latin American portion of this deal is
estimated to generate revenues of more than $100 mn.

Infosys: Marrying GSD With Consulting

In reality, GSD is a strategic capability that all vendors have to build up.
It may be a different matter that Infosys does not want to play that card just
now, but it has always been leveraging on this model.

Infosys has two types of development centers: proximity
development centers and offshore software development centers. Proximity centers
are located regionally for projects that require close proximity to clients. It
has nine such centers, six of them in the US, and one each in Melbourne, London,
and Tokyo. It has 17 offshore development centers, 16 of them in India, and one
in Toronto.

In a typical offshore development project, Infosys assigns a
team to visit a client site and determine the scope and requirement of the
project. Once the initial specifications are over, the team returns to the
global development center to supervise a larger team. A small team remains on
the client site to co-ordinate the execution, and after implementation, a
dedicated team ensures the maintenance of the project.

Now, Infosys wants to leverage this model as a springboard for
its consulting services. It is a 1:1:3 formula, wherein for every single
consulting specialists on the job, the company would like to place at least one
person onsite, and another three offshore. The attempt is to create a potent
force in the IT industry by marrying consulting with its GSD.

The thrust of the vision is not merely the service offering, but
the business that will roll in from consulting. The Infosys board thinks its
strategy will generate enough downstream work to keep the organization on its
high growth path.

This will enable Infosys to provide consultancy services at 35%
lower cost than traditional consultants like Booz Allen Hamilton. Stephen Pratt,
CEO, Infosys Consulting, has already indicated that the company has beaten
several traditional consultancy majors to win some of its current engagements.

During FY '05 Infosys' revenue from consulting stood at $7.5
mn contributing 3.6% of the total revenue in the first year of operations.
Infosys has done several high profile hires to lend credibility to the project.
Pratt, its CEO, was the global leader of CRM practice of Deloitte Consulting. It
has also hired Romil Bahl, the former VP of consulting services, EDS; Raj Joshi,
the former CEO of Deloitte Consulting Offshore Technology Group; and Paul Cole,
the former head of global operations of Capgemini-Ernst & Young's CRM
practice.

Going by the ramp-up numbers, Infosys is not wasting time to get
a head start. During the second quarter of 2005, its headcount rose to 120
consultants, and it is expected to grow to 500 consultants by the first quarter
of 2007. It has a committed investment of $20 mn, and expects to break-even in
the first quarter of 2006.

Guilbault of TBR who also tracks Infosys says, "The
combined offering of IT services and consultancy has helped Infosys move up the
value chain by increasing its involvement in high-level projects, associated
with Sarbanes Oxley compliance, the Anti-Money Laundering Act, and the Patriot
Act."

With its consulting foray, Infosys has not only built brand
differentiation, but has effectively raised the barrier against Chinese IT
services firms that can offer rock-bottom prices.

Stephanie Moore, a Forrester analyst, wrote in a report titled,
Infosys Takes a More Strategic Approach: "The vendor is not chasing low-end
body shop deals, and putting controls in place to effectively manage accounts.
Infosys is focused on moving upmarket in accounts, and capturing a larger share
of the wallet within these strategic accounts."

Advantage TCS

One can't help addressing an inevitable question ragging everybody's
minds. So which model is going to win? The answer is, none of the players can
afford to ignore each other's capabilities. And honestly, they have been
building those capabilities quietly.

TCS has always been bundling its consulting services with IT,
although it now wants to position it as a separate offering. It has hired Per
Bragee, former Managing Partner and CEO, Ernst & Young's Management
Consulting, Sweden, to head its consulting business.

N Chandrasekaran, executive VP and head of Global Operations
says, "We see a lot of traction in consulting, and have consolidated all
our consulting efforts. We expect to engage our existing customers, and then use
this as a tool to engage new customers."

As Infosys is upbeat about building its global delivery
capabilities, it has recently announced setting up of development centers in
China, and ramping up presence in East Europe.

Although, as things stand, TCS looks more favorably placed to
bag the big deals, because of its expanse of offering and sheer spread across
geographies. This single fact will put TCS far ahead of the pack.

While Infosys is known in the US because of the value it is
creating in the stock market, TCS has been able to do that by building its
physical presence, both workforce and assets.

Another fact that speaks loudly in favor of TCS is its higher
onsite revenue, a clear indication that it is doing a higher amount of package
implementation, wihch requires higher onsite presence. But it also commands
greater margins, and more understanding of the IT environment than ADM.

For the time being, Indian players will continue to outbid the
US and European IT services companies as they have mastered efficiencies in
shifting processes offshore, while most companies who have started the
offshoring process have a long way to go in the learning curve. The only
limiting factor for Indian companies is the invisible glass ceiling, which is
increasingly being pulled down.

The dynamics of the globalized world have raised the curtains
for Act II in the outsourcing industry. The playing field is increasingly being
leveled and no longer will an American or European vendor get an undue
advantage, simply because they have been there and done that. The new age
players will all be wearing uniform outfits, and the differentiation will lie in
execution, and positioning of specific skill-sets, which will be key factors in
swinging deals.

Balaka Baruah
Aggarwal