The Changing Rules of Global Competition

Steve Hamm

I delivered a provocative little speech (If I say so myself) and chaired a panel today at the NASSCOM conference on The Changing Rules of Global Competition. My goal going in was to shake things up and have a lively debate and it happened. I said that when you look at a handful of capabilities that will separate out the good companies from the best, the top Western firms have the lead in most of them.

After I gave my presentation, one of the panelists, Vineet Nayar, president of HCL Technologies, got up to give his 7-minute bit and said he disagreed with some of what I had said. Then he amended that. On second thought, he said, he disagreed with a lot of what I had said.

The core issue of debate for the whole panel was: Who has the advantage when it comes to the higher-order capabilities that IT services firms will need to differentiate themselves and win in the future--the Indians or the Western incumbents? There was a lively debate involving me, Nayar, TPI Chairman Dennis McGuire, and Genpact CEO Pramod Bhasin. Bhasin said he hears a lot of marketing hype from the big Western outfits about how they "transform" their clients' businesses, but sees very little evidence that they're actually doing it. He pointed out that some 40% of outsourcing engagements are counted as failures in surveys of IT purchasers.

There was nobody on the panel from Accenture or IBM to give their side of the story, but at one point I spotted Accenture PR man Allen Valahu in the audience and planned on calling on him to get an Accenture exec to the microphone to make their case, but he slipped out before I had a chance.

I'm appending the text of my opening remarks on the next page:

Slide 1: Changing Rules of Global Competition in the Global Technology MarketPlace: Forecast for 2008.

It’s my pleasure to lead this panel discussion at a time when the Indian tech services industry is clearly emerging not just as a disruptor of the global tech industry, but, indeed, a major power center. At this point, it can be said of any sizable global IT services company in the world, that if they don’t have a significant presence in India, they’re not going to be able to be competitive. It also became clear last year that the top Indian IT services companies are now capable of competing head to head with the largest global services outfits and winning. In this panel, we’ll talk about the state of play in the industry and look ahead to how things will be shifting. The title for this panel was handed to me by NASSCOM, together with the subtitle, Outlook for 2008. Most prognosticators have trouble predicting what will happen next month much less next year. But I’m sure I and the other panelists will do our best.

Slide 2: Panelists

We have a panel that provides a cross section of the industry players. Alistair Cox is CEO of Xansa, which has located 5,000 of its 9,000 employees in India. He established his global business bona fides while at Schlumberger and Blue Circle Industries, and as a consultant for McKinsey & Co. Next, Rajendra Pawar of NIIT. It doesn’t get the press of the largest of the Indian tech services companies, but its focus on a handful of verticals has it growing even faster than they are. Vineet Nayar is president of HCL Technologies, which is one of the leaders in engineering R&D outsourcing, a new hotspot for Indian tech outfits. Pramod Bhasin, CEO of Genpact, pioneered business process outsourcing in in India with GE and now leads the largest Indian BPO firm. And Dennis McGuire is co-founder and chairman of TPI, the Texas firm that is a power broker in the world of outsourcing. His company’s advice to corporate clients about selecting outsourcing providers carries a tremendous amount of weight.

Slide 3: The emergence of Indian services

The growth rate of the Indian IT and relates services industry is phenomenal. NASSCOM estimates that it will land between $35 and $40 billion this fiscal year. What makes the growth rate even ore remarkable is that fact that the industry is now confronting the law of large numbers, where each additional increment of growth is harder. Another factor is the slowdown in demand for outsourcing services worldwide. TPI’s quarterly index, which was released Jan 11, showed that the last quarter was the worst quarter in five years in terms of the value of outsourcing contracts awarded. And, still the Indian industry continues to grow at an impressive clip. Part of the explanation is that the industry keeps adding new services. Another element: The growth in the industry is in offshoring and in smaller contracts, at which, of course, the top Indian players excel.

Slide 4: Keys to success.

A year and a half ago, when I began working on Bangalore Tiger, my book about the rise of the Indian tech services industry, I was like a lot of other people. I thought labor arbitrage pretty much accounted for the success of the industry. But as I dug deeper into the topic it became clear that the recipe was a lot more complicated than that--and, therefore--the Indian industry’s success wasn’t as vulnerable to cheap labor in other countries. These are the essential ingredients: focus on quality and constant improvement, a true commitment to customer satisfaction (A lot of companies mouth platitudes about this but not a lot really mean it), adoption of the best global management practices, and HR skills.

Slide 5: The Empire Strikes Back

Unlike the US auto industry when confronted with imports from Japan, the Western IT services incumbents have taken the emergence of competition from India seriously. After some initial confusion and disfunction, they’re adapting to a changed competitive environment. Several of the big companies are getting their acts together. I’m thinking of Accenture, IBM, and CapGemini. They’re restructuring their operations and moving jobs offshore. IBM has more than 45,000 employees in India, and Accenture has about 25,000 here.

Slide 6: An industry at a turning point.

So now the industry is at a crossroads. Low cost labor is no longer the great differentiator for the Indian industry because the Western outfits have a low cost workforce, too. Reputation is no longer the great differentiator for the incumbents because the top Indian firms have developed sterling reputations for quality and efficiency, and they have forged C-level relationships with large corporations in the US and Europe. The landscape has changed. While low cost and efficiency and relationships will remain vitally important, a set of higher-order capabilities will separate the good companies in this industry from the best companies.

Slide 7: Key capabilities.

Here are the higher-order capabilities I believe will be the differentiators. The Indians have shown that they can establish and manage their workforces in India. But now, as they and the Western leaders continue to expand in other low-cost countries the challenge will be to replicate their successes here. It’s not enough to distribute labor among low-cost countries. These people have to be assembled into teams and those teams have to learn how to collaborate and hand off jobs smoothly. Software coding is a terrific skill, but even better is when you can automate the process to code faster or to reuse code--lessening the labor component of an engagement. Research can bring a tremendous amount of value to corporate customers who need to innovate to differentiate their products or services from those of their competitors. And IT or BPO services companies need to be able to understand their clients businesses so they can best leverage technology to streamline or transform them.

Slide 8: Who has the upper hand?

Don’t jump all over me now. I believe the best of the incumbents still have substantial advantages over the best of the Indian firms in most of these key capabilities. In managing a large, low-cost workforce, the Indian’s are out ahead. But when it comes to managing a globally distributed workforce, with that good collaboration, I give the lead to Accenture. In automation--including service oriented architectures--studies from Forrester Research and other outfits show IBM and Accenture in the lead. Though, it’s interesting to note that TCS, Infosys, and Wipro aren’t that far behind. They’re obviously not counting on brute force in programming to win the day. In Research, again, IBM and Accenture are the leaders. IBM is able to tap a global basic research operation with 3,000 scientists. In some cases, these people work directly on solving problems for individual clients. It’s the incumbents who have armies of business consultants and IT consultants. When I interviewed Kris Gopalakrishnan, Infosys’ president, last November, he said only about 20% of the company’s engagements with clients are truly consultative at this point. So Infosys still has a long way to go, and, of course, other Indian companies have much further to go.

Slide 9: Conclusion

So, to sum up, I see a relatively healthy and stabilizing IT services industry--in spite of a bit of a slowdown in demand for traditional IT outsourcing. Because of their low prices and aggressiveness at winning smaller contracts, the Indian outfits are well positioned to thrive even in a tepid overall market. And, as they continue to gain capabilities and land some of the mega-projects, they’re playing at all levels. Controlling costs in an Indian that’s overheating in some spots will be a challenge. That’s true for both the Indian players and their foreign competitors. But, over the coming years, it’s the ability to deliver higher-order capabilities to clients that will separate the merely good from the excellent.

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