IT Services is in vogue today. Hardware companies are trying to re-invent their business models. IBM is clearly the most shining example of this strategy. HP, Dell and Xerox are latest imitators of this strategy. Today, IBM has built a services business through organic growth and strengthened it through alliances with partners like Cisco, SAP and with acquisition of Price WaterHouse (Business Consulting) and Daksh(BPO). At the same time, IBM has also shed its hardware business gradually by selling desktop hardware business to Lenevo and hard drive business to Hitachi.
Before the emergence of Indian software service companies, large-scale outsourcing deals were dominated by IBM and EDS. These deals typically have whole IT departments being hived and sold off worldwide and often the vendors absorb 1000s of employees from the customer’s IT department. Some of the strengths of IBM are – its presence across 100+ countries, it boasts of some of the best HR practices (making it easier for employees from organizations to get absorbed) and its experience in handling the most complex and intricate systems. However, huge cost arbitrage between Indian service companies and US based vendors has caused a major shift over the last 6-8 years. At the same time, Indian software companies have acquired companies in US and Europe for specialized domain knowledge (Wipro is a case in point), spread their offerings to span almost all areas of IT services and also invested in geographical breadth and depth. TCS clearly has emerged the torch bearer for global delivery with geographically spread delivery centers.
By 2003, it was clear that US based vendors needed to accept or embrace India as a key delivery center, else they risked losing their key clients. The challenge was enormous, because client facing organizations were reluctant to position the Indian centers. They will often quote based on US/Europe based delivery centers until client brought it one of the Indian vendors to beat down the price. While Indian companies threatened IBM on price, Accenture added IT services to its pre-eminent position in management consulting. That’s when a major shift in strategy happened. IBM acquired PriceWaterHouse to nullify Accenture’s advantage. In addition, over the last few years, IBM, Accenture, EDS and HP have created a major presence in India and their global delivery centers are almost at par with Indian vendors.
While IBM ramped up its global delivery centers in India, Indian service companies acquired companies with specialized domain knowledge and set up delivery centers in countries including China. Despite these efforts, the gap between IBM and Indian service companies still exists. IBM continues to enjoy strong competitive advantage because of its immense experience across hardware, software and services. Having nullified the cost advantage of Indian companies, IBM can bring its domain expertise (from Price WaterHouse) and strong thought leadership in new technological areas. If nothing works, IBM can also steeply discount its software offerings like WebSphere and DB2. Through innovative deals with Airtel and other telecom companies in India, IBM has also demonstrated its ability to take business risks which elevate its status from a vendor to a partner.
While IBM’s competitive edge works well in large and complex IT outsourcing deals, there is little to differentiate when it comes to vanilla projects. Almost all vendors have strong customer references, key skill sets, global delivery capabilities, resources to ramp up delivery and relationship with top clients. The decision in that case invariably happens on price. With rupee threatening to strengthen (after a scare in 2007-2008), Indian companies have a major challenge at hand.
Infosys revenue growth has been muted for last 4 quarters. Now that revenue growth seems to be back, margins appear at risk with rising rupee. What will drive the next phase of growth for Indian IT Service companies? How can Infosys become the next IBM? Do share in your thoughts.
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