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[INDIA] Infosys Technologies & Co-Founder/Chariman Narayana Murthy

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  • madchinaman
    The next Hurdle For Indian IT The McKinsey Quarterly, 12.13.04, 5:55 PM ET India is fast becoming a global hub for back-office services as U.S. and European
    Message 1 of 1 , Dec 13, 2004
      The next Hurdle For Indian IT
      The McKinsey Quarterly, 12.13.04, 5:55 PM ET

      India is fast becoming a global hub for back-office services as U.S.
      and European companies increasingly shift their information
      technology services, call-center operations and other business
      processes to it, either by opening their own units there or by
      outsourcing processes to Indian service providers.

      What's fueling the stampede, of course, is the desire to gain access
      to the country's lower-cost, high-quality labor--in some technology
      areas, higher-quality labor--as well as global technological changes
      that make it possible to offshore white-collar activities that once
      had to stay close to home.

      The McKinsey Quarterly makes available its research by special
      arrangement with Forbes.com. Click here to read the full text of
      this article on The McKinsey Quarterly site. Free registration is
      required.

      Infosys Technologies (nasdaq: INFY - news - people ), one of India's
      premier technology services companies, is based in Bangalore, ground
      zero in the offshoring ferment. Founded in 1981, it helps Fortune
      500 companies design, build and maintain very large business-
      software applications, such as an integrated merchandising solution
      and a Web-based broker trading platform, and also provides IT-
      consulting services.

      Infosys grew modestly during its first decade, finishing 1991 with
      $3.89 million in revenue. The liberalization of the Indian economy
      in 1991 spurred the growth of the company, which took the
      opportunity to globalize its operations. Its revenue exploded, to
      about $121 million by fiscal year 1998-99. Application-development
      costs in India were one-fifth of U.S. levels, so Western customers
      continued to jump on the offshoring bandwagon. By fiscal year 2002-
      03, the company's revenue stood at $754 million.

      Yet the Indian IT-outsourcing market is already changing, and
      analysts point to some dark clouds on the sector's horizon. Giant IT
      services firms, such as Accenture (nyse: ACN - news - people ) and
      Electronic Data Systems (nyse: EDS - news - people ), and many
      global IT-consulting firms, such as Computer Sciences (nyse: CSC -
      news - people ), are opening their own software-development centers
      in India. So are large Western software-product companies, such as
      Microsoft (nasdaq: MSFT - news - people ) and Oracle (nasdaq: ORCL -
      news - people ). All these will compete with Indian companies for
      local talent.

      Global IT-services firms also compete for work against Infosys and
      its Indian peers. Eventually, the software-product companies may
      even encroach on some service areas. At the same time, customers are
      squeezing IT vendors--including Indian technology firms--for price
      cuts across the board. Margins have fallen.

      Narayana Murthy, the co-founder and chairman of Infosys, believes
      that his company is well positioned to compete with both Indian and
      Western challengers in the fast-growing market for offshore IT
      outsourcing. Offshoring isn't solely a matter of arbitraging low-
      cost labor, he argues. Providing low-cost, high-quality software-
      development services remotely requires well-developed processes for
      managing large-scale projects in distributed locations--capabilities
      that Indian technology services companies have honed during the past
      two decades.

      In a conversation at the company's Bangalore headquarters with
      Jayant Sinha and Gautam Kumra, both principals in McKinsey's Delhi
      office, Murthy discussed these capabilities, the economic
      differences between Indian and Western IT services firms and the
      challenges facing Infosys.

      McKinsey Quarterly: Western companies have long had the opportunity
      to move IT services offshore, but until recently only a few pioneers
      did. Now the climate has changed dramatically. From your
      perspective, what has put the bloom in the offshoring rose?

      Narayana Murthy: While the pressure on Western corporations to
      leverage the power of technology has been mounting for years, it
      became acute in the late '90s, and there was a tremendous shortage
      of trained manpower to do the application-development work involved.
      Infosys and other Indian companies have the trained manpower and can
      do the work while giving greater value for money. That, I would say,
      is what's driving this.

      But we also have had to work hard to create awareness among Western
      companies that we could do the work. In the early '90s, when we went
      to the United States to sell our services, most chief information
      officers didn't believe that an Indian company could build the large
      applications they needed. The CIOs were very nice to us, of course.
      They offered us coffee or tea, listened to what we had to say and
      then said, "Look, don't call us--we'll call you." We realized that
      there was a huge gap between, on the one hand, how prospective
      Western clients perceived Indian companies and, on the other, our
      own perception of our strengths.

      Thanks to a concerted effort by our industry association--the
      National Association of Software and Service Companies--by
      individual companies in our industry and by the government of India,
      we mounted a campaign to enhance awareness among prospective clients
      in Western countries of our sector's value proposition. Western
      companies had a tremendous shortage of trained manpower, and we made
      them aware that we had a solution. That was how it took off. By
      1999, about 185 Fortune 500 companies had started sourcing software
      from Indian companies. The fact that the revenues of India's
      technology services sector grew from about $160 million or so in
      1991 to about $10 billion last year is a very clear indication that
      there is greater acceptance of our sector's value proposition.

      Still, I would say that awareness among Fortune 500 CEOs of what
      Indian companies can offer has become even sharper since 2001, when
      the technology bubble burst and companies started trimming their IT
      budgets and looking for better value for their money.

      The McKinsey Quarterly, 2003 Special Edition: Global directions

      India is fast becoming a global hub for back-office services as US
      and European companies increasingly shift their IT services, call-
      center operations, and other business processes to it, either by
      opening their own units there or by outsourcing processes to Indian
      service providers. What's fueling the stampede, of course, is the
      desire to gain access to the country's lower-cost, high-quality
      labor—in some technology areas, higher-quality labor—as well as
      global technological changes that make it possible to offshore white-
      collar activities that once had to stay close to home.

      Infosys Technologies, one of India's premier technology services
      companies, is based in Bangalore, ground zero in the offshoring
      ferment. Founded in 1981, it helps Fortune 500 companies design,
      build, and maintain very large business software applications, such
      as an integrated merchandising solution and a Web-based broker
      trading platform, and also provides IT-consulting services. Infosys
      grew modestly during its first decade, finishing 1991 with revenues
      of $3.89 million. The liberalization of the Indian economy in 1991
      spurred the growth of the company, which took the opportunity to
      globalize its operations. Its revenues exploded, to about $121
      million by fiscal year 1998–99. Application-development costs in
      India were one-fifth of US levels, so Western customers continued to
      jump on the offshoring bandwagon. By fiscal year 2002–03, the
      company's revenues stood at $754 million (see sidebar, "A choice of
      models").

      Yet the Indian IT-outsourcing market is already changing, and
      analysts point to some dark clouds on the sector's horizon. Giant IT
      services firms, such as Accenture and EDS, and many global IT-
      consulting firms, such as CSC, are opening their own software-
      development centers in India. So are large Western software-product
      companies, such as Microsoft and Oracle. All these will compete with
      Indian companies for local talent. Global IT services firms also
      compete for work against Infosys and its Indian peers. Eventually,
      the software-product companies may even encroach on some service
      areas. At the same time, customers are squeezing IT vendors—
      including Indian technology firms—for price cuts across the board.
      Margins have fallen.

      Narayana Murthy, the cofounder and chairman of Infosys, believes
      that his company is well positioned to compete with both Indian and
      Western challengers in the fast-growing market for offshore IT
      outsourcing. Offshoring isn't solely a matter of arbitraging low-
      cost labor, he argues. Providing low-cost, high-quality software-
      development services remotely requires well-developed processes for
      managing large-scale projects in distributed locations—capabilities
      that Indian technology services companies have honed during the past
      two decades. In a conversation at the company's Bangalore
      headquarters with Jayant Sinha and Gautam Kumra, both principals in
      McKinsey's Delhi office, Murthy discussed these capabilities, the
      economic differences between Indian and Western IT services firms,
      and the challenges facing Infosys.

      The Quarterly: Western companies have long had the opportunity to
      move IT services offshore, but until recently only a few pioneers
      did. Now the climate has changed dramatically. From your
      perspective, what has put the bloom in the offshoring rose?

      Narayana Murthy: While the pressure on Western corporations to
      leverage the power of technology has been mounting for years, it
      became acute in the late '90s, and there was a tremendous shortage
      of trained manpower to do the application-development work involved.
      Infosys and other Indian companies have the trained manpower and can
      do the work while giving greater value for money. That, I would say,
      is what's driving this.

      But we also have had to work hard to create awareness among Western
      companies that we could do the work. In the early '90s, when we went
      to the United States to sell our services, most chief information
      officers didn't believe that an Indian company could build the large
      applications they needed. The CIOs were very nice to us, of course.
      They offered us coffee or tea, listened to what we had to say and
      then said, "Look, don't call us—we'll call you." We realized that
      there was a huge gap between, on the one hand, how prospective
      Western clients perceived Indian companies and, on the other, our
      own perception of our strengths.

      Thanks to a concerted effort by our industry association—the
      National Association of Software and Service Companies—by individual
      companies in our industry, and by the government of India, we
      mounted a campaign to enhance awareness among prospective clients in
      Western countries of our sector's value proposition. Western
      companies had a tremendous shortage of trained manpower, and we made
      them aware that we had a solution. That was how it took off. By
      1999, about 185 Fortune 500 companies had started sourcing software
      from Indian companies. The fact that the revenues of India's
      technology services sector grew from about $160 million or so in
      1991 to about $10 billion last year is a very clear indication that
      there is greater acceptance of our sector's value proposition.

      Still, I would say that awareness among Fortune 500 CEOs of what
      Indian companies can offer has become even sharper since 2001, when
      the technology bubble burst and companies started trimming their IT
      budgets and looking for better value for their money.

      The Quarterly: How global is the offshoring wave? Are your clients
      primarily based in the United States or throughout the world?

      Narayana Murthy: We have offices in 16 countries—in the United
      States, Europe, and Asia. The United States is a very important
      market for us: it is the country most open to outsourcing and to
      partnering with vendors to derive business benefits. Over 95 percent
      of our revenues come from the G-7 countries.1 In fact, out of our
      total revenue, about 73 percent comes from the United States, about
      17 percent from Europe, about 5 percent from Japan, and the rest
      from elsewhere in the world. The United States is a highly
      competitive market, and for companies competing there the need to
      get better value for money is most pronounced. As US companies
      became more interested in outsourcing their IT services to India, in
      the late '90s we had compounded annual growth of over 70 percent or
      so in revenues and a similar percentage in earnings per share. As
      the US economy slowed, our growth rate slowed to 32 percent in 2001–
      2002 and 38 percent in 2002–2003.

      The Quarterly: But the boom in offshoring has also inspired US-based
      services companies such as Accenture to open up operations in India—
      essentially to compete with you on your own terms in your own
      backyard. What will this mean for Infosys?

      Narayana Murthy: I think we're well positioned against the big
      multinational IT services companies, such as Accenture, IBM Global
      Services, and EDS. Their customers now have a greater awareness that
      Indian companies can offer very high-quality application-development
      and IT-consulting services at much lower cost. The US IT services
      firms are under tremendous pressure from their customers to
      demonstrate better value for money. That is why they are now here—to
      lower their costs.

      But their coming here doesn't change the basic economic difference
      between their businesses and ours. Typically, in the application-
      development work we would do for an average client, about 70 percent
      of the effort is done in India or another cost-competitive country.
      Our general and administrative expenses are centered primarily in
      India and are about 7.5 percent of revenues today. By contrast, the
      US companies that are our competitors, despite a strong presence in
      a country like India, by and large have the majority of their
      workforce in the United States or in the local market. It is not
      easy to let go of that workforce. So the economics differ.

      Also, it's not easy for the multinationals to create a workforce
      equal to ours in a country like India. The multinationals have to
      compete here for the talent and then train the people. There are
      many processes that have to be built up over a period of time to do
      that effectively. And of course, just having talented employees
      trained to deliver services is not enough. We have developed tools,
      methodologies, processes, and the management expertise for providing
      services to clients across geographic distances. We develop software
      in a geographically distributed way, in collaboration with
      customers. Our approach takes advantage of the 24-hour workday. It's
      not just a question of renting a building and hiring a few people
      and then saying to customers, "The shop is open." So for now, our
      primary competitors will continue to be India-based companies, such
      as Tata Consultancy Services and Wipro.

      The Quarterly: What you're saying is that offshoring is more than
      just a game of arbitraging labor costs. It's also about having
      distinctive capabilities.

      Narayana Murthy: Yes. It's about distinctive capabilities that
      leverage the economic advantage of having cost-effective talent. Let
      me tell you a little more about those capabilities. Infosys was the
      first company to articulate the concept of a global delivery model.
      In this model, we partition a large-scale software-development
      project into two categories of tasks. The first includes those that
      must be done close to the customer. The second consists of tasks
      that can be done remotely in talent-rich, scalable, process-driven,
      technology-enabled development centers located in cost-competitive
      countries like India.

      The first category of activities—the ones that must be done close to
      the customer—involves defining the project with the client and
      helping the client to install and use the software once it is
      developed. These activities include business consulting, IT
      consulting, defining requirements, installing the software, training
      the customer to use it, and rapid-reaction maintenance services. The
      second category of activities—the ones done in our development
      centers in India—consists of technology tasks done most cost-
      effectively in remote locations. They include detailed function-
      design tasks, detailed technical design, database design,
      programming, testing, creating documentation, and long-term
      maintenance services.

      At Infosys, `we have completed more than 85 percent of our projects
      on time and more than 70 percent of them within budget'
      We have created processes to help us seamlessly integrate the
      customer-side activities with those on our development side. That is
      our sophisticated, collaborative, distributed software-development
      model. We fulfill our customers' large-scale software needs at high
      quality and at high levels of productivity. For example, we have
      completed more than 85 percent of our projects on time and more than
      70 percent of them within budget, as compared with the industry
      standard—which is completing 65 percent of projects on time and less
      than 40 percent on budget. Our model works thanks to well-developed
      management and development processes and thanks to well-developed
      hiring and training activities. Also, to maintain very high levels
      of quality, we've developed a process model that integrates the
      capability maturity model with ISO and Six Sigma.2

      The Quarterly: Tell us a little more about how you hire and train
      talent in India.

      Narayana Murthy: In August, a survey of engineering-college students
      in India rated Infosys as the number-one company to work for. This
      is one way in which we are very competitive with respect to other
      Indian IT services companies. We are also 10 to 15 percent more
      productive, per capita, than most of our competitors in India. Last
      quarter, we received over 250,000 employment applications from
      students, and we recruited about 2,600 people, which is about 1
      percent. You know, most of these students have excelled academically
      at engineering school. We put them through a rigorous test
      for "learnability" before hiring them. New hires go through a 14-
      week training program where we teach them generic analytical-
      thinking and problem-solving skills. We also teach them general
      principles of operating systems, database-management systems,
      networking, and so on. In later training sessions, we teach them
      customer-facing and negotiation skills.

      The Quarterly: To what extent do you measure the performance of your
      processes?

      Narayana Murthy: With our tremendous focus on systems and processes,
      we lay great emphasis on measurement. In fact, the capability
      maturity model—we are accredited at level 5, which is the highest
      level—requires the measurement of quality and productivity at every
      phase of the software-development life cycle. We measure people's
      performance closely as well. Anywhere from 25 to 50 percent of an
      employee's salary is variable, based upon the performance of the
      company, the team, and the individual.

      `To manage risk, we make sure we do not depend too much on any one
      customer, any one technology area, any one application area'
      We collect data and we use data. Let me give you an example. To
      manage risk, we make sure we do not depend too much on any one
      customer, any one technology area, any one application area, and so
      on. For example, we measure and monitor around 120 parameters on a
      weekly basis, including macro and micro measures, looking at various
      markets, various technologies, various customers, and employees. Our
      risk-mitigation group reviews this data and makes recommendations on
      actions we should take to manage risks. An internal group of company
      executives meets every two weeks to discuss the analyses and
      recommendations of the risk-mitigation group.

      Let me give you a data point to demonstrate the efficacy of our
      systems. In October 2001, we conducted surveys of our customers and
      prospective customers as well as of industry pundits and observers
      in the United States, Europe, and Japan. We then forecast that our
      growth in revenue for fiscal year 2001–2002 would be about 30
      percent—a fall from the 90-plus percent of the 2000–2001 fiscal
      year. The whole market was upset with us. Our own industry
      association did not agree with us and said that our sector would
      grow by 45 percent, and some of our competitors estimated that they
      would grow by more than 50 percent. Well, as it turned out, in 2001–
      2002 our top line grew by 32 percent, the sector growth rate was
      about 24 to 25 percent, and our competitors grew by 20 to 25
      percent. The point I'm making is simply this: in our company, we are
      very focused on analytics at every level.

      The Quarterly: How sustainable is your model? In your sector,
      pricing is under increased pressure. Some large prospective
      customers are opening their own development centers in India. China
      is looming as a new market for low-cost technology talent. And in
      any sector, competitors eventually replicate or duplicate a
      successful company's capabilities.

      Narayana Murthy: I think our focus on speed, imagination, and
      excellence in execution is a sustainable competitive difference
      between us and others. So is our ability to attract and train the
      best talent in India.

      At the same time, we are moving into higher-margin businesses. For
      example, last quarter, our enterprise services group accounted for
      14 percent of our total revenue, and the group's margins are much
      higher than those of our other practices.3 We are developing the
      skills to do more IT consulting and, now, business consulting. We
      have somewhere around 300 business consultants. These are people who
      do work that then leads to downstream software work. We have also
      started a systems integration practice as well as a business-process-
      outsourcing arm. We want to provide a large portfolio of services to
      our customers.

      In China we just opened an office, which we will convert into a
      subsidiary. We believe that China is an important market, both for
      potential customers and for talent.

      The Quarterly: As you move into these new services—competing with
      large IT services companies that have established capabilities in
      these lines—what do you see as your challenges?

      Narayana Murthy: There are many. Our biggest challenge is to become
      proactive problem definers rather than be reactive problem solvers.
      Right now, we solve problems our customers define. We need to be
      able to go to customers and say, "These are the problems we believe
      you will face, and here are some solutions." Our focus is on
      providing solutions leveraging IT. We need to help shape the design
      of the technology solutions and then implement those solutions. This
      is the biggest challenge we face—there's no doubt about that.

      The second challenge is to become more and more and more
      multicultural. Employees of 38 nationalities work for Infosys. We
      have efforts under way to integrate people across various cultures.
      For instance, on large deals we make sure that people from different
      parts of the world contribute, on a collaborative basis, to prepare
      a proposal, to defend the proposal, and to execute the proposal.

      We also lay great emphasis on integrating leadership. We rotate
      selected managers from our operations everywhere in the world
      through our Infosys Leadership Institute, in Mysore, just south of
      Bangalore. The institute was modeled after leading management-
      development centers, such as those of GE, Motorola, and Philips.
      Infosys senior executives teach the courses. The courses include
      such areas as how to act ethically in ethically challenging
      situations, how to integrate people from different cultures on a
      team, and how to build relationships with customers that have
      operations across different nations. The institute helps not only to
      build leadership capabilities but also to create integrated systems
      across our geographically dispersed offices. It is also an
      opportunity for managers who attend the institute to interact with
      and build relationships with each other.

      But there is much more that we need to do. For instance, it has not
      been easy for us to transfer somebody from the United States to
      India. We are able to transfer people from the United States to
      Europe and from one function to another—from software development to
      sales and marketing, for instance. But transferring an employee from
      the United States to India is not easy.

      And finally, the third challenge is to continue to retain the soul
      of a small organization in the body of a large organization. We now
      have more than 19,000 employees worldwide. It will be tricky to
      balance the tension between scaling the organization as quickly as
      we have been doing against the need to maintain disciplined
      processes as well as an integrated multicultural organization.

      A choice of models
      There is no plain-vanilla model to follow when IT or other business
      processes are outsourced to offshore vendors. A Western company can
      engage vendors to manage processes remotely or to help build an
      offshore center that it owns itself; it can even set up a joint
      venture with vendors to serve other customers. Each approach
      requires investment, managerial commitment, and offshoring
      experience to varying degrees, and each is used for somewhat
      different purposes. Indeed, smart companies today are managing a
      number of different offshoring arrangements with vendors and
      choosing different options for different processes.

      Six approaches to working with offshoring vendors are now in use:

      To supplement staff. Outsourcing vendors can pitch in to provide ad
      hoc, supplemental support for IT projects (specialized skills, for
      example) or extra manpower (such as telemarketers) to cover peaks in
      demand. This approach is typically used to cover temporary, variable
      needs at very low cost.
      To build turnkey projects or provide ongoing support. In traditional
      outsourcing, vendors undertake specific one-off tasks (say,
      designing and building business applications) or provide ongoing
      services (for instance, maintaining IT help desks). This model is
      the predominant one for offshoring information technology services,
      with Western companies choosing to outsource IT application-
      development or -maintenance projects.
      To gain assistance in building centers. Sometimes companies choose
      to build their own offshore centers—say, to house critical IT
      activities at relatively low cost or to operate key processes, such
      as call centers, that they don't want to entrust to vendors. In this
      case, they can work with partners to recruit and train staff,
      establish processes, set up the premises, and so on. Although one
      large bank had experience outsourcing IT activities to India, it
      chose to work with vendors when building a development center a few
      years later; familiarity with offshoring persuaded it that vendors
      could help manage many unknown risks.
      To build, operate, and transfer facilities. Alternatively, a Western
      company can ask its vendors to set up and, initially, run a center
      but set a date (or make an option) for transferring ownership and
      management of the assets to itself.
      To provide specialized assets. Vendors have built and staffed
      centers to provide specialized IT services to telecommunications,
      manufacturing, and financial-services companies that are operating
      in India. This approach is practical for the buyer and valuable to
      the provider only when the work can be defined and priced clearly
      and when the demand for the service—transaction processing, for
      instance—is fairly steady and predictable.
      To enter joint ventures. Finally, a handful of Western companies
      have become part owners of Indian business-process-outsourcing
      companies. Such a joint venture not only provides services to the
      Western company but also sells them to others. The owner gets what
      it needs and, potentially, can share in the joint venture's equity
      growth.
      A few companies that have several years of experience offshoring IT
      activities to India now use a mix of models, tailoring the right
      approach to the right need. A mixed approach also helps to spread
      risk. Many experienced offshorers with their own centers in
      countries such as India use vendors in a "hub-and-spoke" model:
      strategic applications or functions are maintained in-house, while
      labor-intensive, nonstrategic activities (such as testing) are
      outsourced to a few vendors. This approach gives the company the
      best of both worlds. One large bank, for example, operates its own
      center in India to manage some of its Internet-banking operations
      remotely—a function too critical to turn over to a vendor—but
      outsources some of its customer service operations.

      —Noshir Kaka


      Noshir Kaka is a principal in McKinsey's Delhi office.

      Return to reference

      About the Authors
      Gautam Kumra and Jayant Sinha are principals in McKinsey's Delhi
      office.

      Notes
      1Canada, France, Germany, Italy, Japan, the United Kingdom, and the
      United States.

      2The capability maturity model is a software-development approach
      that is an international standard for high quality. ISO
      qualifications are well-recognized standards for high-quality
      manufacturing. Six Sigma is a corporate-wide approach to achieving
      high performance.

      3This group, which develops and sells sector-specific solutions, has
      focused first on the banking and retail sectors.
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