For a couple of years now, the Indian software industry has been talking about jumping on to the consulting bandwagon and moving up the value chain. Yet, revenues still mainly come from low-end services. Srikanth R P finds out just how far up the value chain Indian Software Inc. has climbed, and whether there is cause for celebration or concern

The new strategy is to approach a client as an end-to-end solution provider, rather than as a provider offering different technology solutions for different domains

After the conclusion of Nasscom 2001, when the slowdown had still not hit Indian IT on its collective jaw, Jason Pontin, editor of Red Herring, wrote an editorial titled, ‘Dear India: You are in trouble’. In his piece, Pontin argued that India in its quest to become the preferred destination in the software services space was becoming nothing but a middleman and a sweatshop for the global software industry.

A little more than a year later, the same situation prevails. Of course, the slowdown has taken the high growth winds out of the Indian software industry’s sails, but the industry still flies the low-cost flag high. While Indian organisations crow about how the slowdown has in fact established India’s position as the most preferred country for outsourcing, it is also a sad fact that growth has come on the basis of massive cuts in billing rates. And when every Indian organisation starts cutting rates, there is very little differentiation left between them.

Boxed into this corner, the top five Indian software companies TCS, Wipro, Infosys, Satyam and HCL Technologies have been attempting for some time to make a mark in the IT consulting space. This strategy will not only help them steer away from the crowd, made up of pure-play software services companies, but also enhance margins. The reasoning is clear by following a top-to-bottom approach, these firms can interact directly with the top management of the client company. In other words, where they interacted with the CIO earlier, now they want to interact with the CEO.

This ‘consulting brand image’ also brings in development work at the lower end of the chain application development for instance. In short, the consulting business will be a sort of door opener for the Indian company in a highly competitive global market.

Jan desmet says Infosys’ fully integrated value added solutions will be its differentiating factor

The scenario is best summed up by P Rajshekharan, general manager, Organisation Processing Group, Mastek, when he says, “The First Wave established that Indian software professionals were good, largely through onsite engagements. The Second Wave, capitalising on the Y2K boom, established offshore development as an efficient way of delivering software from a cost and quality perspective. This also led to mainstream players scaling up to provide required capacity to execute these engagements. The Third Wave, as we see it, is when customers turn to Indian companies for strategic, mission-critical assignments. The Third Wave will see Indian companies leverage their ability to acquire technology and domain knowledge faster than their Western counterparts, to deliver significant value additions to customers across the globe. IT consulting would be part of the value-added services provided by the Third Wave companies.”

But an attempt to move into the high-end of the value chain is a clear shift from the volume-based game that the Indian software industry has been playing for a long time, and is also very comfortable with. And though Indian firms have been in the consulting space for a couple of years now, looking at the financial statements of the software companies, it is apparent that revenues from the consulting space still run into single digits. One question that comes up is whether there are any adverse risks that Indian firms run in their quest to move up the value chain.

Says an analyst with a leading brokerage house, “Though it is extremely difficult for Indian companies to merge the culture of an investment banker with a commodity business, it is essential to note that Indian companies have very little choice left. While revenues from consulting run into single digits, it must be noted that they are growing steadily. For instance, take a look at Infosys’ revenues from consulting, which have grown from 1.6 percent of total revenues in 2000 to 4.2 percent in 2002. One must also not forget that though the contribution to the topline is low, the contribution to the bottomline is much higher. In addition, the intangible benefits, wherein a company gets low-end application development work due to the consulting foray, is not reflected in the balance sheet as revenues from consulting.”

L C Singh made strategic consulting a core part of his company right from inception

The positioning of the brand image is clear too. The new strategy is to approach a client as an end-to-end solution provider, rather than as a provider offering different technology solutions for different domains. Though competition is stiff and involves competing with best-of-breed consultants such as Accenture and IBM Global Services, Indian software houses are confident of pulling it off. Says Jan Desmet, vice president, Infosys Business Consulting services, “We believe that our ability to offer fully integrated, value-added solutions based on our execution model will act as a differentiating factor. Unlike other companies, it is around these strengths that we are building our front-end consulting services, rather than the other way around.” While the strategy of most global consultants has been to offer best-of-breed practices and then tie them up together, Indian companies first offer a framework and then the solutions to go along with them.

Key drivers
Indian companies have learnt the hard way that cost arbitrage and skilled manpower can never be sustainable competitive advantages. And in the face of growing challenges from countries like China and Philippines, it is important for India to play at a level where these challengers cannot reach.

Explains Sudip Banerjee, president, Enterprise Solutions, Wipro Technologies, “Services such as IT consulting will enable Indian companies to enter a client engagement at an earlier stage as compared to implementation services. This not only allows us to provide a higher value-add to clients, resulting in a higher margin revenue stream, but also stronger client relationships.” The ‘client relationships’ part is specifically important since Indian companies have been losing clients regularly, mostly on the basis of cost. Indian vendors have now realised that IT consulting assignments lead to recommendations regarding IT expenditure. For instance, in large end-to-end system integration projects, Indian vendors will not only get a chance to architect a solution and define the hardware/software and integration requirements, but also to develop and execute customised applications.

And unlike the common perception that Indian companies have not really struck gold with IT consulting, Indian companies are making gradual but determined progress in the consulting space. For example, Infosys is helping a large telco plan how it will reduce its IT delivery costs by over 30 percent and improve IT quality and cycle times by implementing an IT delivery framework of processes, metrics and governance structures. Desmet says more and more companies prefer Indian partners in the areas of strategy, process and change management because of Indian strengths in execution.

The other Indian major, Wipro is not far behind in the consulting space. Wipro is providing services in the area of process consulting, PCMM consulting and Six Sigma consulting. Says Banerjee, “We are targeting the consulting space by building on our domain expertise. For example, we are leveraging our knowledge in Six Sigma to help clients improve their processes. We feel we are better equipped to do this since we have been using these processes ourselves for many years. Last year itself we saved $19 million through Six Sigma.”

And being the first company in the world to be assessed at Level 5 of PCMM, Wipro is also looking at tapping clients for improving their people processes with PCMM. Wipro is already providing consulting expertise for a leading insurance company in the US for process consulting on the PCMM framework. In another instance, Infosys is working with an ocean transportation services company to accelerate the process of designing a division-level balanced scorecard for its human resources and customer services department.

But the biggest of the lot is Tata Consultancy Services (TCS), which employs a massive 19,000 consultants. TCS has now set sights on becoming a $6 billion global giant by 2010, with high-end consulting playing a big role. While revenues from the consulting business may be insignificant, it gives TCS an opportunity to enhance the company’s image as a high-end consulting company, on par with an EDS or an Accenture.

Says an official spokesperson of the company, “Ultimately, an organisation gets selected by a client because of its ability to handle big projects and implement them successfully. Our credibility is further reinforced by the domain expertise that we bring to the table, as well as our execution capabilities.” Sources at TCS say that the ‘credibility’ factor is the main reason why clients prefer TCS over the others.

Mid-sized companies
Analysts say the foray into IT consulting is even more critical for mid-sized companies, simply because the top five can cut costs on the basis of huge volumes. Mid-sized companies, because of their inability to bag huge contracts, will simply be swept away in the low-cost tide. It is this realisation that prompted L C Singh, founder and CEO of Nihilent Technologies, to make strategic consulting a core part of his company when he set it up in the year 2000.

Says L C Singh, “Before forming this company, I had two options. The first option was to go in for a volume-based kind of service offering and compete aggressively with the big five in the Indian industry. The next option was to create a company that could directly go to the next level and spearhead the Indian IT industry’s logical ascendance from delivering technology to delivering business value.” Having chosen the latter option, the benefits are flowing in for Nihilent. As a result of the focus on consulting, Nihilent has bagged big accounts like the South African Revenue Service and South African Authorised Securities Depository.

The company uses methodologies like Strategic Responsibility Management (SRM), which offers end-to-end solutions like strategic consulting, solution integration, software development, idea incubation, product development and business-critical support. In line with the consulting vision, the company has developed its own intellectual property like Technology Level 5 (TL5), an e-business architectural framework. The firm has also developed Program Hub, a product for strategic planning for IT companies, with a proactive collaboration model to manage change through people as key competitive differentiators.

Partnership model
While an Infosys or a Wipro can target clients in the consulting space on their own because of their brand image, smaller mid-sized Tier 2 companies are opting for the partnership route to tap the consulting space. A case in point is Mastek, which has a joint venture in place with Deloitte and looks at offering high-end consulting services for Deloitte’s customers. Says Rajshekharan of Mastek, “We will be successful because of a simple reason. Large consulting firms offer high-level management consulting and ‘vision creation’. We would like to see ourselves in a ‘vision fulfilment’ role where we focus on timely delivery and measurable benefits. Hence a model where we work in partnership with such companies vision creation supported by vision fulfilment, works extremely well. For instance, our experience in the JV has been extremely positive and we are targeting a headcount of 600 employees in two years. We have already crossed 100 people in the first eight months.”

Another example of a mid-sized company looking to make a mark in the consulting space through the partnership model is Blue Star Infotech. Says Pramod K Bhalla, managing director, Blue Star Infotech, “Our strategy to tap the global consulting space is to adopt a model of partnership with Tier 2 and Tier 3 consulting firms. The IT consulting market is extremely fragmented and even Fortune 500 clients employ multiple consulting firms that have proven track records in niche areas. Indian consulting companies that are able to project a niche offering stand a strong chance of working with large multinational customers. Given the Indian firm’s strengths in applications, Fortune 500 clients can certainly leverage this expertise to get a more detailed roadmap.” Though revenues from consulting currently contribute a mere 5 percent to Blue Star’s topline, Bhalla is extremely confident about this space and hopes to grow it by 200 percent in a three-year timeframe.

However, the flip side for mid-sized companies is the challenging task of convincing clients to give them higher billing rates than the rates they charge for software services.

Future signs
While the move into consulting is not without its share of challenges and will involve considerable change in mindset and culture, if Indian companies play their cards right, they can herald a new era where merit will be decided on the basis of competence rather than cost. And while critics point to single digit revenues from consulting, the case of majors like Infosys and Wipro formulating IT strategies for Fortune 500 companies clearly shows that Indian companies backed by execution capabilities and technical expertise can give the global Big Five a run for their money.