• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Krishnan Thiagarajan
Bharat Kumar

As yet another robust year is set to unfold for the software services industry, Tata Consultancy Services (TCS), whose revenues are slated to cross $2 billion in 2004-05, is well positioned to ride the offshoring wave. Several variables that continue to inspire confidence in TCS are: Seven of the US Fortune Top 10 are its clients; healthy mix of revenues across geographies, with global development centres in five overseas locations; strong breakthrough into new service lines such as remote infrastructure and process consulting; and a share in excess of 50 per cent of revenues for fixed- price projects.

Phiroz Vandrevala, Executive Vice-President shared his views on the trends dictating the top-tier players in the software market.

Excerpts from the interview:

Do you think that there is a slow, but steady shift in the perspective of Indian frontline companies towards newer service lines away from the core activity of application development and maintenance?

I think the important issue is that every frontline company needs to create an area of excitement, as far as its both internal and external stakeholders are concerned. Also, from a long-term point of view, evolving new service lines and looking at value chain is an integral part of any strategic planning process.

Having said that, revenues from the so-called bread and butter application development and maintenance may be actually moving north So, every organization will have to keep its eye on the ball as far as the core area is concerned and at the same time strategically drive the new services, which will obviously pay dividends, going forward.

Do you think that at least the lower end of the value-chain — especially maintenance — is getting commoditised?

Today, we are also presenting different pricing and value norms to our customer. Five years ago, the concept of having a fixed price for a maintenance contract did not exist.

Today, if we have a customer spending $100 on maintenance activity, we can make a value proposition to the customer, in which in year 1, I will make $100 into 90 and in year five it will be $70. Through this, we have changed the traditional time and material model, with the application of our tools, technologies, certain continuity of staff and other soft processes to incentivise people.

Now we have the ability to meet the $70 target and probably go for $50 over a five-year period. There again, though the activity may be mundane, the project management skills and use of tools and applications also provide a reasonable challenge.

The ability to make maintenance look good and provide a challenge also exists. The key factor also is that maintenance continues to remain a huge market.

In your view, is the application development and management market maturing to a large extent for the Fortune 100 clients?

Look at the Fortune 100 customers. How many $50 million clients does the Indian IT industry have at present? Maybe 8 or 10 put together. Take Deutsche Bank or any telecom company, it will probably an IT budget of anywhere between $1-3 billion. What is our share?

Also, look at this whole area of application development and maintenance, and you will see they still run on legacy systems. As an industry we are not anywhere close to saturation.

Is cross-selling and lock-in strategy as effective as it used to be in the past, given that companies are going to multiple vendors for different kinds of applications or verticals?

Cross-selling today is the largest single opportunity. We have started to build credibility in infrastructure services, in engineering services and package implementation. Cutting across the IT wallet spends, we have the credibility to bid and play in each of these services.

Do you think that a two- or three-vendor strategy employed by clients could expand into multiple vendors?

If you look at the scene between 1997 and 2000, we had a tremendous demand-supply mismatch and hence organisations were forced to adopt a multiple-vendor strategy. Then the dotcom bubble burst and the economic slowdown happened.

Our analysis of the major corporations globally indicates that there is now strong push towards centralisation of vendors and systems and processes. Till two years ago, it was not unusual to see some of the world's best-managed corporates running one system in Latin America, another in America, Europe, Asia Pacific or Middle East. This process of consolidation within organisations has started to happen.

Given that deep relationships and domain expertise are the biggest strength of the multinationals such as IBM and Accenture, how will the frontline companies negotiate this challenge?

Building relationships is our biggest challenge. Accenture today gets 67 per cent of its business without bidding. It is single-source. We have not reached that stage yet. But within some of our relationships, we are getting to that situation.

Do you think that strategy of increasing the deal sizes from $1 million to $10 million to eventually $50 million or more, is a sustainable way in which the industry is likely to grow?

This is exactly the base that gives us the confidence that the growth rates we saw this year will be maintained at 30 per cent plus.

The ability of all of us in the industry, from the top five to top 200 is to leverage the existing relationships and use the revenue milestones to make it happen. And also look at most of us, 92-95 per cent of our revenues come from repeat orders in our existing customer list.

Do you think that selling and marketing expenses will go up sharply as new service lines and geographies such as Europe come into the picture?

Not really. The project-oriented business from the customers is declining steadily. The relationships with customers are getting more strategic than transaction based, at least certainly among the bigger companies. And a large part of the transactional market, I think, is going to the medium and smaller companies.

Three years ago, we would have 100 to 200 customers where we were during 10 or 20 man-years kind of project.

Do you think that inorganic moves by frontline companies can make a difference in Europe?

In Europe, considering the social scenario, for an Indian company to grow out of the box, they will have to make an acquisition. If you want to go from 1,500 people to 4,000 people, I think an acquisition is the answer.

Traditionally, they have had businesses that have developed huge IT shops in-house. Look at Lufthansa, ABB, SAS, Ericsson are all the big names; they have all had 400 to 2,000 people IT departments in-house.

Now, looking at the global scenario, they have come to the conclusion that they have to focus on their core business, and IT is not their core. The great acquisition opportunities are these IT shops because they come with a low risk.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Electronic Settlement for commodities futures

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line