This article originally appeared in Outsource Magazine Issue #25 Autumn 2011
Global service providers are upping the ante on their investments in emerging markets, driven by the accelerated economic growth in these regions and the relative slowdown in traditionally core western markets.
A growing number of heritage Indian and multinational players, who have historically been present in these regions as local support operations for their global clients, are now actively investing in these markets and scouting for local business. They are willing to dig in deep and stay in emerging regions for the long haul. Big IT services companies like CSC, iGate Patni and MphasiS are reorganising their businesses to make a serious play in these markets.
Earlier this year CSC formalised its focus on developing markets and reorganised its geographies to make Latin America – previously bunched under the Americas – as a separate region, splitting South and Central America from North America.
“A business looking to grow its top line cannot ignore the increasing rate of economic growth from the emerging regions. These regions have the potential to become significant contributors to our revenue. We have won several indigenous businesses and have a healthy pipeline,” says Nick Wilkinson, CSC President, Market and Product Strategy, Managed Services Sector.
Post-merger, iGate Patni too has a wider net to cast. It has restructured its emerging geographies to focus on India, Australia, Asean and Japan.
“To adapt and respond to the different characteristics and cultures of each of these markets, we have now appointed regional heads in each geography to manage local teams. This helps accelerate our growth here,” says iGate Patni EVP and Head of Sales – EMEA, Asia & Australia, Derek Kemp.
IT major Cognizant posted revenues of over $187 million in the last four quarters from the emerging markets, which is an increase of 41 per cent compared with revenue of $111 million over the same period a year ago. Cognizant President and Managing Director, Global Delivery, R Chandra Sekaran says: “From one per cent of our revenue two to three years ago, emerging markets today represent a meaningful three or four per cent of our revenue on a much larger base. We expect this segment to grow faster than the company average this year too.”
MphasiS engaged Boston Consulting Group towards the end of last year to restructure the organisation with a clear focus on emerging regions. “Consequently, we now have a separate market-facing unit that bears in mind the different buying patterns and creates accordingly an end-to-end model with an emphasis on value proposition for emerging markets, specifically India,” says MphasiS’ President – Applications & President – EMEA Sales, Gopinathan Padmanabhan.
While a key area of growth, it would be nevertheless incorrect to state that emerging markets are the primary growth engine. HP Enterprise Services Managing Director and VP, UK and Ireland Craig Wilson says: “The rate of growth in emerging economies is still massively ahead of many economies in the West. So the attractiveness for us is quite simply that we want to take advantage of economic growth in those regions. These markets would be a continued focus and would continue to drive superior growth for us but it will be a long time before as a percentage of revenue they become as significant as the mature markets in the West.”
Drivers like cost, scalability and speed to market steer the outsourcing discussion in the mature markets. Companies of all sizes and shapes constantly look to source expertise required to sustain market share and to further develop their internal business servicing capabilities.
Opportunities to take market share persist. Wipro Consulting Services (WCS) Europe Regional Head, Roop Singh, believes that the demand from the developed markets has not stagnated. “The discretionary spend which is typically outside the IT budget has increased in the developed markets. If I look at our consulting business, our growth is actually in the developed markets,” he adds.
Indian software giant Tata Consultancy Services (TCS) witnessed growth pick up over the last 12-18 months in the UK and Ireland. “Our UK operations contribute 15 per cent to our global revenues and we are focused on growing it. There is enough headroom to grow,” says TCS UK & Ireland Head Shankar Narayanan.
Continued growth is the end goal for both the service providers and their clients. It is therefore inevitable to look for alternatives as traditional areas slow, feels TPI President EMEA, Duncan Aitchison. De-risking revenue dependencies, a search for talent or even a natural strategy to emerge as multinationals are some of the reasons for companies to tap into emerging markets, Aitchison believes. Nevertheless, it is not something to be undertaken lightly or without serious commitment: this is an area that requires continuous investments, where companies will have to be there for the long term, establish relationships and trust in the domestic markets in order to be a player when the growth really takes place.
Despite several indigenous client wins, generally speaking most service providers still have a long way to go (which is of course a great deal of the attraction in terms of potential contribution to growth). Thus far, many providers have piggybacked on existing client relationships and extended support in the emerging markets. Not only do these providers themselves have to set up their operations in a given location, but to tap the indigenous business they need a domestic strategy which is unique to that region. The model employed in India, for instance, may be unsuitable in China or in Latin America – “so this is something they are working on but [it’s] still very early in the growth cycle,” explains KPMG’s Shared Services & Outsourcing Advisory Group Research Director Stan Lepeak.
China, with its huge domestic market, and a base for other regions like Japan and South Korea, is looked at by many as the next big destination after the US and Western Europe. This region however has its own distinct set of challenges. Despite a huge presence of all major multinational and Indian providers, the level of growth has not been as expected – especially when China’s own stratospheric national growth is taken into account. The biggest challenge, Lepeak believes, is the preference of the local public enterprises to steer the business to local Chinese vendors. So most providers still use China primarily to support the efforts of their multinational clients and as a delivery base.
“It’s a wait and watch,” believes Ovum lead analyst Peter Ryan. Many companies are waiting to see some degree of normalisation with regards to dealing with government and everyday business mores before China takes off as a mass market, he added.
Nevertheless, providers continue to invest. Infosys’ Member of Board and Head of Europe and Head, Manufacturing, B G Srinivas, revealed that the company is setting up a campus in China with a planned investment of $150 million. “We currently employ over 3,000 employees and plan to increase this to 10,000 over the next three or four years. With this large investment and enhanced capability we will aim to lead service capability out of China to the global and local markets for business transformation and operations,” he says.
The premier traditional destination for outsourcing too throws up interesting challenges. According to Forrester Research Vice President, Research Director Pascal Matzke, the struggle for globally focused Indian providers is to step back into the Indian business culture and methods. In addition, they face competition from the multinationals, and smaller Tier 2-3 companies, who – perhaps unable to grow significantly outside of the country – prove to be worthy contenders in the domestic market.
“The established world-class resource base from major providers like TCS and Infosys comes at a price, which from an Indian standpoint is relatively expensive. Consequently, in some circumstances, some of the Tier 2-3 companies appear more competitive because the price point is acceptable to the Indian domestic customer,” says Matzke.
HP’s Wilson, on the other hand, believes that India in comparison with some of the other regions already has three precursors needed to succeed in the marketplace: a large, mature skill base; mature global companies; and mature institutions – offering effective data protection laws for example. There is also a growing interest to emulate business models employed overseas, which can be developed in India to increase profitability.
“This pace, which till a few years ago was slow, has now started to accelerate,” says Ovum’s Ryan.
Capgemni CEO Infrastructure Services Steve Sutton concurs with Ryan and points to a discussion with the local departments of the Indian government, where Capgemini demonstrated the work they undertook for public sectors in UK and Europe. “The local departments were excited and have shown interest in similar models,” he said
India, which is in its next stage of the evolution cycle, is also looked at as a springboard for innovation. Some projects in the public sector from a technology perspective are a case in point.
“These are greenfield opportunities which requires no integration with legacy technologies, and therefore can be built from scratch with state-of-the-art technologies [and] consequently, seen as a lighthouse on the basis of which you drive innovation,” said Gartner Research VP Ian Marriott.
Executives from iGate Patni, Infosys, Cognizant, NIIT Technologies, MphasiS and others touch upon innovative opportunities in large turnkey projects, especially within the public sector. MindTree, for example, is currently involved in India’s Unique Identification Authority (UIDAI), wherein they develop an application which captures and manages data from different sources that includes biometric details, and provide maintenance support. MindTree, unlike some of its peers, currently prefers to stay focused on its selected verticals and geographies.
MindTree General Manager & Head-UK (IT Services) Tridip Saha says: “India is our home territory, we have brand recognition and the market expertise. Projects like UIDAI are what we would like to focus on as this has resonance across the world.” India’s contribution to MindTree’s revenue stands at 8.6 per cent.
Some other companies like CSC however take a cautious approach in this region. Though current and expected growth calls for a presence in the Indian market, the company has not set huge expectations of significant growth in the short term. Nick Wilkinson believes that India, with its vibrant IT industry, has the requisite understanding of the types of services and maturity in demand. “This therefore calls for prudence in investments and opportunities we go after. Latin America on the other hand holds huge potential for the company,” he added.
Latin America is definitely the ‘buzz’ region of the moment amongst many ITES providers; European and North American vendors in particular have evinced a huge interest in the region. Peter Ryan of Ovum puts this down in large part to a strong familiarity with the North American service sector, the proliferation of North American products in use in every day life and, importantly, the expansion of the Spanish language in the United States. Ryan adds that “the talent set in particular in Latin America is tremendous and makes me think of the outsourcing talent working in India several years ago.”
Global majors like CSC, Logica, and Capgemini have opted for the inorganic route to aggressively tap into Latin and the South Americas. CSC – which announced its increased presence in Latin America in 2009 with the acquisition of Bearingpoint’s Brazil operation – recently bolstered its position in the market with the acquisition of another Brazilian IT services firm, VIXIA Consultoria e Tecnologia.
Meanwhile Logica recently completed the acquisition of Grupo Gesfor to strengthen support for its European clients across Spain and Latin America. It will initially focus on selling SI professional services and technology security consultancies. Logica UK’s MD of outsourcing services, Peter Hands, says: “We have not seen a big propensity for straightforward outsourcing transactions. But we can see people talking about it and thinking about it, and are accordingly investing in Logica’s capabilities.”
Capgemini’s recent acquisition of the Beijing-based IT services firm Praxis Technology, and of Brazilian IT services company CPM Braxis towards the end of last year, is a demonstration of their commitment to emerging markets. Steve Sutton points out that the company has been selling in the local markets for several years now and will continue with their investments through both the organic or inorganic route.
The Indian heritage players are not far behind their peers, though Forrester’s Matzke believes that the Indian providers – while keen to move into South America – lag a little behind their counterparts in North America and Europe in this context. Even so, many Indian majors have outlined plans to tap the opportunities in these regions too.
NIIT Technologies President Europe Sunil Surya says: “We operate on a three-year business plan that addresses developed and emerging markets. These plans are reviewed annually and unfold over a period of time.” The company acquired Madrid-based IT services firm Proyecta Sistemas de Informacion SA to boost its European presence.
Meanwhile Latin America contributes 3.2 per cent to TCS’s global revenues – “due to ongoing investments and continuing expansion,” according to TCS Europe Chief Marketing Officer Abhinav Kumar. Infosys too expects a significant part of its business to come from both the Latin American and the Chinese markets though it will primarily be from supporting its global clients in those countries rather than from domestic business – for now.
About the Author
Kavitha Nair is a business journalist specialising in Information Technology and processes. She is a graduate of the University of Mumbai.