As we move to what Forrester calls ‘The Age Of The Customer,’ enterprises will need to reinvent themselves to systematically understand and serve increasingly powerful customers, we are seeing a notable shift in what the business expects from IT. IT requirements are increasingly being influenced by the business leader who wants technology to not just enable efficiencies but to also provide an edge over competition by helping to develop things like new marketing and sales channels, and applications that provide greater insights on buyer behavior and what influences them.
By 2020, we anticipate that evolving customer expectations will open up tremendous opportunities for businesses, but at the same time, they will evolve so rapidly that businesses that are unable to keep pace will face the threat of extinction. Therefore, the need of the hour is for speed. Getting software products and services to market quickly, cutting product development costs, while continuing to maintain high standards for flexibility, nimbleness, and time-to-market – this is leading to a tremendous increase in interest around Agile development.
Many organizations have already adopted Agile to some extent within their organizations. According to Forrester’s Forrsights Developer Survey Q1, 2013, 19% of developers stated they use Agile (Kanban, Scrum, TDD, XP). However, most of these initiatives are primarily in-house – Forrester’s Agile Survey Q3 2013 showed that the majority of organizations continue to use Agile more widely in-house, than with systems integrators.
Although Brazil’s IT sector has frequently been compared as an up and coming challenger for India’s share of the offshore pie, Brazilian vendors are keener to position themselves as potential local partners rather than as nearshore alternatives. The reasoning is simple - with tremendous opportunity for growth existing locally, there is less motivation to pursue growth in untested and unknown markets. According to statistics provided by Brasscom, the domestic market for ICT is pegged around $123 billion in 2012 with a growth rate of about 10% year-on-year[i]. Moreover, the vendors lack serious muscle in terms of scale, and factors like limited availability of resources and an inability to differentiate on cost adds to this reluctance to compete with Indian offshorers.
Brazilian vendors differentiate on expertise in local market
The raison d'être of the Brazilian IT sector is quite different from that of India and is heavily focused on providing solutions and services to the huge domestic market that exists both within the country and in the rest of Latin America (Latam). Some key features of Brazilian vendors are:
Strong focus on local business’ needs. Most of the businesses in Brazil fall in the small and medium enterprise (SME) category and require a high level of customization of solutions and services to meet requirements, especially around local language interfaces and support. Most Brazilian vendors are very flexible and accommodative of these small clients’ needs for customization and for individually tailored pricing and delivery models.
Infosys held their 3rd annual analyst meet in Boston on the 30th of July. There was none of the usual hullabaloo about growth in revenues or the usual marketing speech that characterizes such events. Instead, Infosys focused on talking about initiatives around Agile, updates about their Edge portfolio and Cloud-based offerings. So, where are they on their 3.0 journey? What have they got right? What more needs to be done?
Infosys’ 3.0 strategy stretches over at least 7 years (both 1.0 and 2.0 lasted about 15 years each) and they are at the tail end of year 2 of the journey. Infosys 3.0 is driven by a focus to be more client-centric by focusing on non-linear growth and increasing stickiness through a vertical-specific go-to-market strategy. This will be supplemented by increasing geographical closeness to clients and supported by a deepening of their horizontal technology portfolio. The ultimate aim is to totally revamp their revenue mix with a heavy focus on driving growth through consulting and products, with objectives to derive 40% revenues from consulting & SI, 20% from products, and the remaining 40% from their traditional basket of business IT service offerings.
Consulting & SIis doing remarkably well and contributed about a 30% of Infosys’ revenues for FY13. The addition of Lodestone has added muscle to their consulting business and this service line may well cross the target of 40% revenue contribution within the next year or so.
During the past year, the Indian Rupee (INR) has been steadily depreciating against the U.S. dollar (USD) due to slower overall economic growth, high inflation rates, and unprecedented and rampant corruption in India. This situation was further worsened by 6.5% depreciation in the INR during the quarter ended June 2013 as the weaker currency keeps pushing up costs of key imports like oil, exacerbating the already high current-account deficit of 5% of GDP. The INR is currently hovering around 60 for a dollar and is expected to stay around this level for the next quarter or so.
Figure 1 The INR has been steadily depreciating against the USD over the past six months
So, what does this mean for clients of Indian IT services suppliers?
■ Leverage this depreciation in the rupee to negotiate better pricing. The fall of the INR often has short-term positive impacts on the revenues of the Indian outsourcing community as the weaker exchange rates help boost income earned in USD. This puts them in a position where they can offer lower rates to stave off competition from global majors like IBM and Accenture and from emerging outsourcing locations like Philippines which is also going through a similar weakening of its currency.
The proposed reforms to the H1B visa standards under the Senate’s Comprehensive Immigration Bill have the potential to have a profound impact on the outsourcing industry, and therefore the sourcing professional. A Computerworld report on leading H1B beneficiaries in 2012 puts Cognizant on top with 9,281 visas, followed by TCS (7,469), Infosys (5,600), Wipro (4,304), Accenture (4,037), HCL America (2,070), and TechM/MSat (1,963) and put together they accounted for 40% of all H1B visas allotted during the year. These companies have often been accused of abusing the H1B visa program by bringing in lower-cost foreign resources to the US and ‘hogging’ the visa quotas, thereby making it difficult for US companies’ to recruit skilled foreign workers.
While the changes are designed to protect the integrity of the H1B visa program and enable US employers access to the skilled resources they need, they could potentially change several crucial aspects of IT services and outsourcing relationships – many in ways that will be harmful to customers. In particular we see that:
One of the major concerns of the sourcing community is that suppliers are unable to deliver the cost and service benefits that had been agreed upon at the start of the contract. As outsourcing contracts become more specific in requirements, clients expect their suppliers to possess intimate knowledge about the industry they operate in — apart from being well-versed in specific technology areas. This is over and above the constant and overarching need to keep costs down. It’s a constant point of pain and one that I’ve seen frequently in my five years as an outsourcing analyst.
Although outsourcing, especially to India, remains an attractive option for deriving cost savings, I see increasing concerns about the quality of the services. As the Indian economy strengthens, the currency arbitrage that the Indian IT Services vendors used so heavily to their advantage is eroding. Moreover, the rising cost of living across major IT hubs in India is fueling wage inflation and attrition, and squeezing the margins for the suppliers. For example, between 2006 and 2012, Infosys’ operating margins have fallen from about 33% to 29%, TCS’ from around 30% to 27%, and HCL’s from around 24% to 15% (all revenues considered in Indian Rupees) in the same time frame.
In this environment, I am often asked about three things: 1) the technical and delivery capabilities of smaller Tier II Indian vendors, 2) the viability of engaging with them, and 3) the feasibility of outsourcing to alternative offshore locations (other than India). To answer these questions: