The Hindu Business Line : No smooth passage

Gotobavaria, the Free State of Bavaria's location marketing and inward investment agency for the ICT sector, is promoting Munich as the top destination for Indian IT companies. As are other location marketers, notably InvestUK. However, apart from the investment mode — which is what these territories are looking at — what are the prospects for Indian IT companies in the European market for their services? eWorld finds out.

Whatever the reasons for the `think Europe' sentiment — derisking revenue sources, tapping new markets — for three years now, frontline IT companies have been serious about the move. Having dealt with the easier American market, they, and the smaller IT companies, are now better able to understand that the European market is tougher to crack.

As one analyst put it, until the rise of SAP, the German industry resolutely resisted using packaged software, preferring, instead, to rely on its own data processing departments or on captive service companies located in the same city. Even today, Italian businesses often prefer to buy from local IT suppliers. So, for example, a firm in Milan would be unlikely to buy software from a services company in Rome.

Dealing with European companies involves more problems: The competitive disadvantage of preferring local sellers is compounded by rigid cultural and regulatory environment. Further, the EU is a high-cost and high-taxes market and to try and safeguard the tax base the EU imposed the distance selling directive. "You can expect similar measures to target outsourcing deals," says G. Lawrie, senior analyst, Forrester Research.

According to Peter Englert, Head, International Operations, gotoBavaria, with the proposed expansion of the European Union eastwards to include Estonia, Latvia, Lithuania, Rumania etc, the availability of low-cost skills or India's famous cost arbitrage will no longer be its USP.

European firms also tend to see off-shoring as losing control over the project. Further, language and communications gaps may result in misunderstandings, and there is the general European inward looking culture that may hinder the efforts of Indian companies trying to get outsourcing deals from the EU.

Says R. Datar, Principal Analyst, Gartner India, Research and Advisory Services, "European businesses are seen to be more conservative in their attitude towards outsourcing.'' And more so, regarding offshore outsourcing — largely due to the business culture in Europe compared to North America. "There is also an increasing level of awareness among the labour unions about the possibility of losing jobs due to offshore outsourcing. There might be pressure on EU governments to prevent this through regulatory barriers. Considering that UK has said `No' to offshore outsourcing as have the even more liberal American States, the pressure will come as no surprise to Indian players."

In a chicken-and-the-egg situation, the aggressive presence of Indian companies in the region — Wipro, Infosys and TCS are all pushing for increasing the European share of their revenues — has also resulted in better visibility for India as an outsourcing destination. With mindshare established, the market share now remains to be pursued.

When looking at outsourcing as an issue in Europe, it is important to remember that IT outsourcing remains far less significant in Europe than it is in the US. Forrester estimates that the proportion of IT spending on outsourcing among European companies is around half the proportion in the US market. One reason why outsourcing has less mindshare in Europe is because several European countries apply highly restrictive employment legislation. In countries such as France and Germany, says a Forrester analyst, such legislation makes traditional outsourcing arrangements more difficult, and less financially advantageous. According to Englert, the best way to deal with these conservative attitudes is to invest in a European company and use that as a front-end to do business with local companies.

Where India can score

So much for the obstacles. What, then, is working in India's favour? Indian companies have established market presence. "We have strong case-studies." The primary interest for off-shoring to India is the cost savings. "However, that is the door opener. What is making this possible is the availability of solutions and the capabilities in the country," says Prasanna G. K., Vice-President, TIS, Wipro.

It is important for Indian companies to stress not just the cost advantage — which may not be one for much of the East European nation comes within the EU fold — but the lead-time compression, says a Forrester analyst. Since IT development is done against deadlines, Indian development time has the advantage that the lead-time can be compressed for most projects — a major argument in favour of outsourcing.

To counter the hesitation among companies in the EU about outsourcing itself, and control issues that they have, Indian companies must emphasise their process maturity, tight co-ordination and communication systems.

According to analysts and company officials, Europe may prove a tough nut to crack, but it is both possible and lucrative. The market must be treated as both strategic and long-term to reap the most benefits. Strategies for Indian companies could include starting in the UK where cultural alignment apart, Indian companies may find UK shareholders pressing their managements to take advantage of offshore outsourcing opportunities.

priya@thehindu.co.in

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