Multinationalizing the Indian IT Industry:

Sourcing & Vendor Relationships Advisory Service Executive Update Vol. 11, No. 7 Multinationalizing the Indian IT Industry: Latin American Investments A Sign of Things to Come by Joyojeet Pal, Yogesh Trivedi, and Bharat Rao The Indian IT industry has long been associated with outsourcing. This in turn is frequently referenced in a half-derogatory tone of implying work on the low-end of the value chain, often eating into engineering jobs from client countries. As the Indian IT services industry has grown, especially in the last decade, such characterizations are no longer just offensive, but they are entirely detached from reality. Several of the leading Indian IT firms not only provide technological services across a range of domains in more traditional markets, such as the US and Western Europe, but now also compete with established global firms on technology contracts in new markets. This Executive Update will show how Indian IT firms are moving toward becoming global multinationals in the technology space. To support this claim, we highlight two important trends related to Latin America. First, we examine the growth of Indian investment in technology firms in several countries in that region. Second, we look at the manpower profile of these firms, especially that of Tata Consultancy Services (TCS), the largest Indian firm, and find that the employee profile of the companies indicates a significant shift in hiring practices away from the early days of manpower-driven cost savings to a more service-driven model that emphasizes quality over savings. Many studies have examined the impact of the Indian IT industry, both on India itself as well as the global economy. There is already a healthy body of work on the effect of outsourcing on employment in regions that contract out jobs as well as on developing regions, on the increase and spread of innovation, and on the macroeconomic affects of outsourcing, especially on India. At the firm level, there has been research in the following areas: the Indian global delivery model, executive training for international operations, global knowledge management, dispersed team functioning, and the brand value of India in the outsourcing market. In short, looking through the areas that are most discussed in this context, we find a bias toward topics that are relevant to an earlier generation of the Indian IT industry. There has been hardly any work on the broader geopolitics of the emergence of Indian firms in the global competitive environment in the IT industry or on how the growth of these firms are an important facet of the evolution of software multinationals. Today, the top three Indian firms are among the top 15 software and services firms in the world. Each of these TCS, Infosys, and Wipro have significant holdings outside their home territories. Most important, the external presence of Indian IT at these enterprises is not restricted to offshoring locations; each has sales and development centers throughout the world, including Latin America, the Middle East, Africa, and various parts of Asia. Indeed, a new breed of multinationals has entered the game. THE INDIAN IT INDUSTRY A report from the National Association of Software and Services Companies (NASSCOM) claims that total revenue of the Indian IT industry in 2008/2009 stood at US $71.6 billion. 1 Share of exports from total revenue was $47.3 billion, with an impressive Compounded Annual Growth Rate (CAGR) of 27% in the last five years. Indian companies have been trying hard to diversify into different geographies; the US now accounts for only 60% of their exports as compared to more than 70% in 2004/2005, followed by 23%, with the EU and the remaining coming from the rest of the world. The most interesting aspect of this Indian IT industry ascendance phenomenon is the sustained growth of the domestic industry, indicating a maturity of the companies beyond being just service providers for foreign firms (see Figure 1 2 ). As reported by NASSCOM, the

2 SOURCING & VENDOR RELATIONSHIPS ADVISORY SERVICE domestic IT market was around $24.3 billion, with a sustainable 23% growth over the last five years. 3 What is even more important here is the rising share of products and engineering services as compared to IT services, which is generally the case between a developing country and a developed market economy. Furthermore, software products, R&D, and engineering services were $9.6 billion for the year 2008/2009, up from $3.8 billion in 2004/2005 a healthy growth of Software products/ engineering services 9% 8% IT services 34% Hardware 49% Figure 1 Domestic IT services market. (Source: IBEF.) 40%. 4 The fast-growing IT services industry in this region has had significant impact on direct employment creation as well as indirect employment through growth in ancillary industries, as illustrated by the IT services value chain in Figure 2. 5 In fact, direct employment in the IT industry reached 2 million, while indirect jobs reached 3 million. 6 In total, the IT industry created 6.5 million jobs; the job market is growing at a healthy CAGR of 26%. India s movement up the value chain is the result of two factors. First, there s the improved R&D in India, in part due to the country s intellectual property rights (IPR) laws and compliance with the United Nations World Trade Organization s Trade-Related Aspects of IPRs, which has resulted in more international research firms in India as well as more annual patent filings. Second, there has been a spate of international acquisitions (see Table 1). Several of these acquisitions are extensions to the traditional offshoring business and are mostly related to missing competencies of the firms themselves (e.g, semiconductor design, consulting, and banking) or competitive acquisitions related to existing business Current position Hub of global IT activity Service offering Offshoring of low-end back-office services Cost arbitrage, manpower Low Testing services, entry-level projects Recognition of quality, skilled resources, large contract projects R&D, KPO Economies of scale, talent on par with global standards Sector competencies Domain expertise, improved legal framework Climbing up the innovation ladder Figure 2 IT services value chain ladder. (Source: IBEF.) High The Executive Update is a publication of the Sourcing & Vendor Relationships Advisory Service. 2010 by Cutter Consortium. All rights reserved. Unauthorized reproduction in any form, including photocopying, downloading electronic copies, posting on the Internet, image scanning, and faxing is against the law. Reprints make an excellent training tool. For information about reprints and/or back issues of Cutter Consortium publications, call +1 781 648 8700 or e-mail service@cutter.com. Print ISSN: 1551-6261 (Executive Report, Executive Summary, and Executive Update); online/electronic ISSN: 1554-7094. Vol. 11, No.7 2010 Cutter Consortium

EXECUTIVE UPDATE 3 (e.g, business process outsourcing [] and IT infrastructure). However, in both cases, the intent of the acquisitions was not necessarily to build a business in the countries where the acquisitions happened, but rather to consolidate existing offshoring businesses. As we look further into the newer acquisitions in Latin America later in this Update, distinctions will be clear. Early expansion of the Indian IT firms into international markets was aided by two important trends in the early 2000s. First, there was a general growth of confidence in software as a service (SaaS). These and a range of other services related to virtualization and cloud computing have been critical to the transformation of the services outsourcing business, including growth of the Indian IT sector. Second is the issue of vendor consolidation. While on the one hand businesses are consciously choosing to outsource their services, there is a preference for outsourcing to a single vendor (i.e., vendors that are either vertically integrated or able to provide services across domain areas). For companies that need to outsource services, the decision to invest in a service provider in the developing world is frequently coupled with the additional intent to expand into markets in those countries. This has frequently been the case for some of the major software companies, such as Microsoft, HP, and Dell. A quick glance at recent figures in the services market from NASSCOM reveals where Indian firms stand in this space: 7 Total IT spending in 2008/2009 was $1.6 trillion, with the share of IT-enabled services at $967 billion for a growth rate of 6%. BRIC Brazil, Russia, India, and China spending on IT, despite being small in overall scale, still reflects a growth opportunity for the IT market at $110 billion and a growth rate of 9%. Europe s current share of global IT spending is at 37% for IT. In short, India is a clear leader in the IT space, with the main value in this business coming from Europe and the US. Thus, the expansion of Indian firms into Latin America cannot be seen purely from the perspective of expanding traditional offshoring operations. INDIAN FIRMS IN LATIN AMERICA Traditionally, India s trade exchange with Latin America has been very limited; India is not among the top 10 trading partners of any Latin American nation, or vice versa. However, India has two existing trade agreements: a preferential trade Agreement (PTA) with Chile as well as an agreement with Mercosur member countries (Brazil, Argentina, Paraguay, and Uruguay). IT still remains a small part of trade between the regions, but is one of the fastest growing. Basic commodities (particularly sugarrelated acquisitions in Brazil) and petroleum remain the largest imports from Latin America to India. The flight of technology manufacturing (IBM, HP, Dell, EDS) out of Latin America and into China has led to the conversion of many former factories into service centers, hurting the technology and electronics hardware Company Company Acquired Country/Year Target Segment TCS FNS Australia, 2005 Software solution Comicrom Chile, 2005 Spanish-language Total Communication Australia, 2007 Consulting Solutions Infosys MindTree Consulting Wipro Tech Mahindra Table 1 Major Acquisitions by Top Five Indian IT Companies Since 2005 (Source: NASSCOM-Deloitte.) Networks In Motion Solvern Innovations Citigroup Expert Information Services Royal Philips Electronics McCamish Systems Purple Vision Technologies NewLogic Technologies Oki Techno Center 3D Networks Infocrossing Citisoft Nitor Global Solutions India, 2009 Australia, 2003 The Netherlands, 2007 France, 2007 Austria, 2005 Singapore, 2007 Singapore, 2007 US, 2007 UK, 2005 UK, 2007 Telecom products Information security Banking/finance Integrated solutions Electronic design Chip design Semiconductor design Telecom solutions IT infrastructure Consulting Infrastructure management www.cutter.com Vol. 11, No. 7

4 SOURCING & VENDOR RELATIONSHIPS ADVISORY SERVICE industry in Latin America as a result. Further, lack of growth in the international software industry, despite the existence of a few significant pockets of excellence (e.g., the second-largest pool of Java programmers in the world is in Brazil) has resulted from the limited proliferation of the English language, the converse of which has been exploited very well in India. The size of the industry is significantly short of what could constitute a large industry with export potential only 5% of all global offshoring centers between 2003 and 2009 were set up in Latin America, despite the proximity of Mexico to the US. 8 Indian IT sales, however, are more than three times greater than most of the Latin American region. Among the largest homegrown companies in the region are Sonda Technologies, CPM Braxis, Softtek, Neoris, and Politec. Since the early 2000s, Indian IT companies have created a presence in Latin America both through greenfield investments and acquisitions. Early drivers for Indian firms in the region were nearshoring options to service existing North American clients, such as the Sasken development center in Monterrey, Mexico, which serves a US client. As Varadharajan Sridhar, a fellow at Sasken told me in an interview: Coordination and collaboration costs can sometimes be so high that it undermines the advantage of being at Bangalore. It is culturally much easier to interact, and logistically easier to get testing done with the proximity to the US. We started the operation with a large number of Indian engineers, but gradually scaled back to where almost the entire staff is now Mexican. 9 The conversion of several former hardware factories to service centers has been a valuable source of both manpower and infrastructure. In 2010, a handful of major Indian firms employ at least 10,000 Latin Americans in IT jobs. 10 While this number in itself may not seem impressive, the jobs themselves are high in dollar value, and their growth, more important, has been very significant. Table 2 shows several of the typical European and North American acquisitions, building on existing business strengths, such as s. However, we also see, especially from TCS, several delivery centers that serve only local markets. In these cases, firm-level ownership is Indian, but staff, including top management, is local. The Latin American expansions represent a new direction for Indian IT as multinationals fundamentally because the focus is on profits through the transfer of technology on service delivery from home headquarters, while conducting entire operations in a local region. In contrast, much of the work with North American or European clients was either shipped to headquarters in Bangalore or done onsite by Indian-trained visiting engineers. Company Development Centers Employees Type of Work TCS Columbia, Chile, Uruguay (2), Brazil (2), Ecuador 5,000 Infosys Wipro Cognizant Patni Computer Systems Mahindra Satyam Geodesic Polaris Software Mexico (2), Brazil Argentina, Brazil (2) Argentina Mexico Brazil (2) Uruguay Chile 457 350 50 1,200 40 100 Flatworld Solutions Mexico, Bogota, Peru, Bolivia, Paraguay HCL Technologies Sasken 24/7 Evalueserve Firstsource Aptech Table 2 Indian Companies in Latin America Brazil (2), Argentina Mexico Guatemala Chile Argentina Brazil, Mexico, El Salvador, Peru 150 500 350 CMMi Level 5 certified global solution centers,, global delivery center, delivery center Delivery center Nearshore delivery center Design center Mobile applications Banking solutions Infrastructure management, delivery center, IT development center Knowledge process outsourcing IT training Vol. 11, No.7 2010 Cutter Consortium

EXECUTIVE UPDATE 5 CONCLUSION In summary, three general areas of work are likely to continue to grow for Indian firms in Latin America. First, the nearshoring business will continue to be an important part of the Latin American portfolio, especially in places such as Monterrey, an important hub for Indian business. Second, IT acquisitions in Latin America do not simply serve as satellite service centers for US-based, Spanish-speaking markets, but are instead primarily targeting the service needs of local firms. Finally, the highest value end of the Latin American markets for Indian firms is likely to be IT consulting and implementation. Firms such as TCS are already competing with US-based service giants, including IBM and Accenture, on major IT consulting contracts in the region and boast portfolios with a large number of local giants, such as Itaú, Banco Real, and Santander. Indian involvement in Latin American markets is not only important from the perspective of the evolution of IT companies as a whole. In addition to the software and IT companies, even technology training institutes from India have begun setting up shop in Latin America; the trend is far from a passing fad. For many global IT businesses traditionally dominant in the region, competition from Indian firms is already a reality. From the perspective of the Indian firms, what remains to be seen is how far these expansions into new markets will help reposition the Indian firms as true global IT multinationals competing for the highest-value projects, bidding for them backed by experience of success with a wide range of markets. The next decade will be crucial in answering many of these questions. In the meantime, experts on India Latin American trade should not be too concerned about the impact of the global recession of various varieties on their own prospects. ENDNOTES 1 IT- Sector in India: Strategic Review 2010 Executive Summary. The National Association of Software and Services Companies (NASSCOM), 2010 (www.nasscom.in/upload/ SR10/ExecutiveSummary.pdf). 2 India Brand Equity Foundation (IBEF) (www.ibef.org) -- MORE COMPLETE SOURCE?? 3 NASSCOM. See 1. 4 NASSCOM. See 1. 5 India Brand Equity Foundation (IBEF) (www.ibef.org) -- MORE COMPLETE SOURCE?? 6 Indian IT/ITES Industry: Impacting Economy & Society. NASSCOM, 2008. 7 Indian IT- Industry 2009: NASSCOM Analysis. Fact sheet, NASSCOM, February 2009 (www.nasscom.in/upload/ 5216/IT_Industry_Factsheet-Mar_2009.pdf). 8 Gereffi, Gary, Mario Castillo, and Karina Fernandez-Stark. The Offshore Services Industry: A New Opportunity for Latin America. Policy Brief, Inter-American Development Bank, December 2009 (http://idbdocs.iadb.org/wsdocs/ getdocument.aspx?docnum=35030707). 9 Personal communication with author. 10 Need source. ABOUT THE AUTHORS (EXPAND?) Joyojeet Pal is a Visiting Assistant Professor at Polytechnic Institute of New York University (NYU-Poly) and an NSF Computing Innovation Fellow at the University of Colorado. Yogesh Trivedi is a graduate student at NYU-Poly. Bharat Rao is the head of the Technology Management Department at NYU-Poly. www.cutter.com Vol. 11, No. 7