The View from the East

Just as important is the question of "domain expertise." In order to provide high-end consulting services, companies need a deep understanding of what makes particular industry sectors tick. Indian firms do not have this expertise — at least not yet. But gradually that's changing. Thanks to a policy of hiring away "rainmaker" consultants from Western rivals, the Indian companies are starting to develop the knowledge and contacts they need.

Many Indian firms also are hotly pursuing acquisition opportunities. In March 2003, TCS bought Aviation Software Development Consultancy from Singapore Airlines to further its penetration in the transport sector. In June 2002, Wipro bought U.S.-based NerveWire, a consultancy serving banks and insurance companies.

Partnerships are another way of gaining much-needed knowledge, such as Infotech Enterprises's five-year relationship with U.S. jet-engine maker Pratt & Whitney, which is helping the company develop skills for the aerospace sector.

Indian firms are also expanding geographically. In December, for example, Infosys bought Expert Information Systems, one of Australia's leading IT-services providers. It also announced plans to set up a 200-seat software-development center in Shanghai.

Clearly, the Indian vendors are moving in the right direction, but Gupta suggests the pace may be too slow. "The progress on anticipated growth drivers — that is, domain expertise, services breadth, and geographical diversification — remains less than satisfactory for most," he says.

Pooja Narayanan, an analyst at BK Securities in Mumbai, highlights another problem. "These companies will need to fight the perception that India and Indian firms are only good for low-end, low-value, low-risk jobs," she warns. "Brand-building will be central to that effort."

Chief Fighting Officer
Inevitably, the CFOs of the Indian firms will play a crucial role as their companies face increasing competition from Western multinationals. Of central importance will be the need to pay close attention to operating margins. Traditionally, many firms have enjoyed margins of as high as 35 percent, not to mention enviable return-on-capital figures — Infosys's was more than 50 percent last year — but that looks set to change.

That's partially because prices at the low-value end of the IT-services market are being squeezed tight, thanks to stiffening competition within India. But as such companies as Infosys, Wipro, and TCS move into higher-value services, they also will need to invest heavily in building new capabilities — a fact that will add further margin pressure.

At TCS, Mahalingam acknowledges that growing margin pressure. "A big part of the game will be about efficiency," he says. "It's vital to work out the optimum utilization rate for the people in your organization so that you have the maximum number working as a billable resource without ignoring the need to train staff and build for the future." He says his target is to have 78 percent of all staff working on billable assignments at any one time.

Just as important, adds Mahalingam, is the need to drive out cost and continually improve TCS's project skills and internal processes. To that end, of the 22 percent of staff who are not working for clients, a good number are employed building software tools that TCS uses internally to operate faster and more effectively.

Equally, Mahalingam oversees a program of activity-based costing that examines every project TCS undertakes to see where money is spent and where it could be saved.

Ultimately, increasing margin pressure creates something of a paradox for the CFOs at these Indian firms, argues McKinsey's Sinha. "There is a weight of expectation around existing margins from investors," he says. "And yet it will be difficult for the Indian vendors to make the necessary investments to survive without diluting those margins." As such, with CFOs typically managing not only the investment-appraisal process but also merger-and-acquisition work and investor relations, the next few years will be tougher than any yet experienced.

Justin Wood is managing editor of CFO Asia, based in Singapore.

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