IT Matters

Flat Tyre in the Flat world?

January 1st, 2008

Rahul Dravid, Sourav Ganguly, and Sachin Tendulkar:  the revered trinity of the Indian cricket pantheon. They lorded over Indian cricket for many years and their exploits have enthralled fans. They seemed unstoppable and invincible.  However, of late, a few not-so-spectacular performances and more importantly the changing demands of the game, new players, and newer formats have raised questions about their continued dominance.

The other Indian big three - Infosys, TCS and Wipro too find themselves in a similar predicament. Till recently, these poster companies for Indian IT were the darlings of the bourses, delivering impressive returns year after year on the back of high growth and profitability.  But of late, they have fallen out of favor with the markets – their market caps have fallen by about a third in 2007 and they trade at/near 52 week lows. The general consensus is that their returns are likely to be subdued for the near future, and won’t definitely be like anything in the past.

What has brought about such a drastic change in the prospects of these once high flyers?  

The rupee appreciation against the dollar (12.3% in 2007) eroded the profit margins of the big three given their mostly “dollar revenues and rupee costs” model.  No respite is in sight as pundits predict that the rupee will continue to appreciate against the dollar in the near future

The offshore model which they have perfected is no longer their exclusive preserve - MNC competitors have scaled their offshore operations significantly and are able to offer similar value proposition to clients. This constrains the ability of the big three to get price increases from their clients.

The big three business model is very people-centric and based on attracting quality talent but now with other sectors of the Indian economy booming, they have to compete not only with other IT companies but also with manufacturing, retail, telecom, and financial services sector companies. This means that they have to try harder than before to attract and retain talent and consequently the wage costs continue to rise.

Of course, these factors did not materialize out of the blue but were gradually at work for the last few years. But the big three have (successfully) relied on optimizing productivity and used operating levers like greater proportion of fresher employees, and onsite-offshore mix instead of making any radical changes. Now that operations have been more or less optimized there may not much scope left for further optimization.

In cricket the current flavor of the season may be the flashy and trendy Twenty20, in which success is possible through some inspired short-burst performances. But its clear that the IT big three need to muster all their skills and resources and be able to play the more artful and longer test match version and wait for their second innings in the sun.

After scoring a century, a batsman usually take a fresh guard to refocus and dig in for an even bigger knock. As the IT Big three cross (or approach) the 100,000 employee mark, they too need to refocus and reinvent their business models.  No doubt, the Indian IT majors have transformed outsourcing by demonstrating the viability of the global delivery model - what they have done is indeed remarkable and worth celebrating. However, as the current situation suggests they may have reached the profitability peak of what’s possible with their existing “linearly linked to head count growth” business models.  

The cricketing big three have silenced the critics with their recent test match performances, (at least for now) – it remains to be seen if the IT big three too can reinvent themselves and continue to cruise on the information highway or if they will be stuck with a flat tyre in the flat world.

 The Big 3 IT firms are used only as illustrations. The situation described here is applicable to the Indian offshore services sector in general.

(The views expressed on this website are the author’s personal views and do not represent those of his past/current employers)

Entry Filed under: Offshore IT Services