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In the increasing age of globalization Indian MNCs are coming to the fore. The IT Sector has experienced a kind of revolution. The 'Brand India' in the IT Services and Software sector is well known. To leverage its brand name and expand its presence overseas the Indian Companies have been venturing abroad. The names of Wipro, TCC and Infosys are well known in foreign markets.
In the High Technology Services space which is the subject of study, Indian companies from software service firms to financial services firms like ICICI, SBI all started their global operations a decade back. Most of them have met with remarkable success. In this study, we look at the constraints faced by them in the developed markets of Europe and USA, where they have a primary presence to the strategies followed by them in their operations abroad.
The various critical factors have been analysed and a framework of the various important factors has been developed. This is followed by the extensive analysis of Wipro, one of the global leaders abroad to see how it has derived its success from the basic aspects as outlined in the model and what differently it has done.
'High Technology Services is an area where success is determined by multiple critical factors and strategies in overseas markets are dynamic in nature.'
An attempt has been made to understand the nature of the service companies of Indian origin operating abroad with the help of the initial hypothesis as mentioned above. We move towards making certain observations in the industry and validating the hypothesis.
The study has been divided into three main sections.
In the first, we look at the constraints facing Indian companies in this particular area. For this we have made use of the PESTLE analysis and we look at each of the factors in this model.
In the next section, we have developed a general framework showing the key strategies which companies in the high tech segment are following. This framework has been arrived at by looking and studying different companies in this space. The list of companies analysed and their key features are as mentioned in the Appendix.
Lastly, we look at case of Wipro and understand the business model followed by the company. We highlight the main strategies followed by the company, how it is operating within the frame work developed by us and we try validating our model developed in the second section. Also we mention the unique things done by the company.
The study journals, articles referred to all have been mentioned at the end of the report.
THE RISE OF THE INDIAN MNCs
Why Companies go for Internationalization?
Understanding it in the context of Indian Technology Service Companies venturing into the developed markets of the world.
Gaining access to new markets
This provides Indian companies with an opportunity to grow their revenues and capture a larger part of the global market share of the products and services. Indian companies are emerging as important competitors to the world's largest companies in global markets
Gaining access to new products, processes and technology
Indian companies are gaining technological knowhow by their mergers and acquisitions abroad
Presence Of Congruent Customer Segments across geographies
Indian companies are taking their products and services to the new geographies, and customizing them to meet the local demands of the populace
Availability of a highly educated, English speaking talent pool
This helps when the IT Companies set up base abroad as there are fewer cultural assimilation problems. Managerial talent of Indian origin is considered the best in the world. Indian managers have successfully demonstrated their capability of operating in a multi-lingual, multi-religious and multi cultural environment
Saturation of Home Markets
Diversification Of Risks
PESTLE ANALYSIS OF INDIAN IT SECTOR FOR DEVELOPED MARKET
Political stability: Obama administration has accused Bush administration of creating tax loop-holes which facilitated outsourcing jobs to low cost destination like India and china
Obama has repeatedly said to make US middle class more competitive in the long run and more secure
He has assured to take measures such that industries and future jobs don't go to India and china , but are created right in USA
They have announced to stop giving tax breaks to companies outsourcing jobs and passing the benefits to companies which create jobs in USA
But so far the outlook for outsourcing industry remains positive as what the administration is going to do is quite uncertain
If there is any terrorist attack in USA or it announces any war against any country , this may adversely affect Indian IT companies
Since the world has not fully recovered from the economic crisis , global IT spending remains quite uncertain and there is no growth in demand , though there is no fall
Currency fluctuation (appreciation)may negatively affect Indian IT companies operation in US UK market
Real estate prices: Since there is a slowdown in US and Europe, there is a fall in demand for commercial real estate which has resulted in a low rental cost/expenditure
Attrition: continuing recession, wide scale lay-off and mass reduction in jobs have resulted in a low attrition rate
The current recession has forced US companies to drastically reduce costs , which has found innovative ways to manage spending, which has resulted only in more outsourcing
A large no of working age population
Fundamentally and socially against the free enterprise US system to bar and prevent companies to outsource work and non-core activates to most cost effective and efficient location
The disparity between highly paid US workers and low paid Indian workers for same quality of output is too tempting to just ignore
Clients will always look for most effective location worldwide as the CEOs are under constant pressure for their fiduciary responsibility for shareholders, hence off shoring will continue unabated
Large no of educational institutions and universities which are providing quality manpower for IT industry
A vast majority of English speaking population
Internet grid: India is well connected with USA and Europe with a backbone of undersea optical cables
India is well connected with a vast telephony network with rest of the world
India IT industry is well equipped with modern IT technologies like SOA, web 2.0 ,ERP packages and grid computing etc
Implementation of intellectual property rights remain very elusive and difficult in most countries
Unlawful software copying has become gradually easy over years due to advent of sophisticated technology
Many of the services and products are very difficult to produce and involves a lot of financial cost, but they are very easy to replicate
But most Indian IT services companies are involved in maintenance activities for which replication by other companies is not a very big problem
Indian IT companies are involved in custom made solutions for specific problems to the specific requirement of clients which is difficult to replicate for exactly another scenario which doesn't match the problem for which the software is originally designed for
The framework has been divided into three key aspects:
The Market Entry Strategy
The Operational and Functional Strategies
Post Entry- Business Model and Work Practices
We look at each of the three aspects by understanding the different possibilities and then looking at which is the best suited for our segment. The study of different companies operating in the high tech area has been done. Also the strategies vary according to the conditions and requirements of the companies, so a one size fit all is not possible.
THE MARKET ENTRY STRATEGY
Most firms begin their global expansion as exporters
Avoids cost of building capacity abroad
Substantial economies of scale from centralization
Not suitable if production costs are lower abroad e.g. Plastics manufacturing in China
Not suitable if product transportation costs are high e.g. Automobiles
Risk of divided loyalties of local agent abroad
JOINT VENTURE STRATEGY
Most popular method by Indian firms in the past decade
Usually a 50:50 ownership
Benefit of partner's local knowledge and experience
Sharing of risks with local partner
Legal restrictions may make it the only feasible entry mode
Very important modern organizational form used to enter international markets
Collaborative development, production and marketing
Exchange of components and technology
Companies can concentrate on their core competencies
Horizontally and vertically integrated business
Gives scale advantages of large size and flexibility of small size
E.g. Deutsche Bank and IBM
Wholly owned subsidiary in the foreign country
Transferring differentiated products to foreign markets
Primarily 4 kinds of strategies
Cost Pressure Low
Local Responsiveness Low
Similar product across different markets, but no standardization.
Inefficient Production Facilities
MULTI DOMESTIC STRATEGY
Cost Pressure Low
Local Responsiveness High
Often translates into same firm having many subsidiaries working independently
Production-based core competencies are not shared to new plants
Cost Pressure High
Local Responsiveness Low
Standardized product across all market
All possible benefits from scale of operations and location economies are reaped
Cost Pressure High
Local Responsiveness High
Flow of skill from one foreign subsidiary to another
Will have to simultaneously achieve cost reduction and differentiation.
SUMMARY OF THE STRATEGIES TO BE FOLLOWED
The strategies followed by Indian IT Companies include all the above i.e mergers, acquisitions, joint ventures and organic growth.
The merger of Polaris with Citigroup's OrbiTech or Wipro's acquisition of Spectramind and GE Medical Systems Information Technology (India) or Mphasis BFL's acquisition of a Chinese firm, the rationale has been to grow the company in size. In order to compete with global IT majors setting up base in India, Indian IT companies will acquire other IT Companies to expand their global reach.
Banking and financial services sector too has been a prominent player in global
acquisitions. ICICI Bank's acquisition of the Russian Investitsionno Kreditny Bank, SBI's
takeover of Mauritius Bank and the merger of Bank of Punjab with Centurion Bank are
some of the prominent examples in this sector. In insurance, as well, one of the biggest
deals occurred when Standard Life of UK sold its 4.9 per cent stake in HDFC to CLSA
Merchant Bankers for Rs. 1018 crores.
GEOGRAPHIC PROFILE OF INDIAN IT M&As ABROAD
Source: Journal Of Emerging Knowledge on Emerging Markets Nov 2009 issue
Various Functional Strategies followed by the Indian Companies:
Human Resource Management Policies:
Job Rotation of personnel among the subsidiaries acts as a bond to international technology transfer. Hiring the local people is also an effective strategy. They add credibility to the company and lead to greater acceptance among the local community.
Also this leads to a better understanding of the local culture, practices and policies.
Organizational Control Policies
Control policies can also be used to create bonds for international technology
transfer. Establishing a single profit center for knowledge creator and utilizer
subunits located in different countries establishes a common goal. Compensation policies are also integrated into the plan to have universal pay policies.
To increase penetration into the developed markets and to come at par with the other companies these IT firms are following a comprehensive marketing strategy. The idea is to increase investments in the technology, infrastructure and networking space to attract the high end clients.
Financial and Accounting Practices:
Almost all the IT Firms which have set up base abroad are following global accounting and reporting policies. This is done to ensure uniformity and transparency in the practices. Also the units are subject to regulatory norms and checks in the foreign markets wherein following common practices becomes all the more important.
BUSINESS MODEL FOLLOWED BY THE INDIAN COMPANIES
High quality delivery:
To measure the benchmark of performance of IT companies, Carnegie Mellon Software Engineering Institute has developed a model known as capacity maturity model. According to its survey of high maturity organization and high maturity workshop research, the most no of companies to have got CMM5, the highest level of certification are from India. Hence Indian companies have shown highest quality of system management processes and methodologies.
The industry government partnership:
Over years successive governments have focused on mutually conducive policy framing which has led to a win-win situation for both. It has encouraged an exponential growth for the sector, which is both multi directional and multi dimensional. Tax holidays, special SEZ act, concession in custom duties has led to a double digit growth for the sector. In return IT sector has given a committed export growth and employment opportunities. It has helped India to be considered as the most cost effective destination for IT investment which has resulted in increased FDI flow in the sector year after year. India's democratic government by virtue of its proactive and aggressive business policy, has created a niche for itself in the global IT market. It has put India's technological landscape in line with international developments.
Innovative Leadership and Pioneering practices
Most of Indian IT companies have been pioneers in the world IT services industry. In addition to being rated as the employers of choice in India, they have been the first to achieve a number of significant milestones that have solidified India's reputation in the marketplace. For example, most of the top tier IT companies have developed and deployed a global delivery model, attained SEI-CMMI Level 5 certification for both offshore and onsite operations, completed with the quarterly certification requirements of the U.S. Sarbanes-Oxley Act of 2002, introduced campus style development centers, listed on a U.S. stock exchange, reported Indian GAAP audited quarterly financial statements and reported U.S. GAAP financial statements.
Global Delivery Model
Highly evolved Global Delivery Model represents a key competitive advantage. Over the past decade, they have developed onsite and offshore execution capabilities to deliver high quality and scalable services. In doing so, they have made substantial investments in the process, infrastructure and systems and refined their Global Delivery Model to effectively integrate onsite and offshore services. The Global Delivery Model provides clients with seamless, high quality solutions in reduced timeframes which enables the clients to achieve operating efficiencies and realize significant cost savings. The Global Delivery Model allows them to produce where it is most cost effective and sell services where it is most profitable. In a typical offshore development project, they assign a team of IT professionals to visit a client's site to determine the scope and requirements of the project. Once the initial specifications of the project have been established, their project managers return to the relevant global development center to supervise a larger team of IT professionals dedicated to the development or implementation of the solution. Typically, a small team remains at the client's site to manage project coordination and address changes in requirements as the project progresses. Teams return to the client's site when necessary to ensure seamless integration. To the extent required, a dedicated team provides ongoing maintenance from the global development centers. The client's systems are linked to the facilities enabling simultaneous processing in their global development centers. The model ensures that project managers remain in control of execution throughout the life of the project regardless of location. Approximately 70% of the total billed person months are performed at global development centers in India, and the balance of the work are performed at client sites global development centers located outside India. This is possible because of a number of factors including
access to our large pool of highly skilled IT professionals
a 24*7 execution capability across multiple time zones
the ability to accelerate delivery times and to meet stipulated time constraint of large projects by simultaneously processing project components at different locations
physical and operational separation of client projects to provide enhanced security
Knowledge management systems that enable the reuse and update of solutions wherever and whenever appropriate for efficient on time delivery and cost reduction.
Complete, Finished and Sophisticated Solutions:
Indian software giants provide complete and end-to-end, solutions and provide maintenance service throughout the entire software product life cycle. These deliverables enable them to obtain a greater slice of clients' future IT budgets, establish a long term relationships, increase the occurrence of sale of services and products for new clients, with whom relationship is built through existing clients. The broad area of end to end solutions start from conceptualizing to designing, coding, testing, installing ,maintaining and gradually phasing out once the life cycle comes to end. Through the domain competency group and software engineering, technology and R& D labs, they do extensive research and engineer new innovative solutions for the clients.
Commitment to Highest Quality of Delivery and Project Execution
Over years they have developed a sophisticated project management methodology to ensure timely, consistent and accurate delivery of superior quality solutions to maintain a high level of client satisfaction and continued relationship. The quality control processes, programs and testing measures are designed to minimize defects and ensure adherence to pre-determined project parameters. Additionally, software quality advisors help individual teams establish appropriate processes for projects and adhere to multi-level testing plans like white box and black box testing and rectification of mistakes using top down and bottom up approach. The project manager is responsible for tracking metrics and parametric measurements against the standard set, including actual man-hours spent versus initial estimates, project budgeting and estimating the remainder of billable hours required on a project. On this front they follow the internationally acclaimed designed solutions and billing methodology.
Long-Standing and Continued Direct Client Relationships
They have long-standing direct client relationships with large multi-national corporations of which many of them come under fortune 500 list. Their track record of delivering high quality solutions across the entire software life cycle and the strong industry expertise help them to solidify these relationships and gain increased business from their existing clients. As a result, they have a history of client retention and derive a significant proportion of their revenues from repeated old clients. The focus on building a robust, financially sound, successful and respected software services company is dictated by the drive to create this in a manner wherein there is a culture of openness, wherein leadership and decision making is being handed down to the dynamic younger generations of employees, and the accent is on people and processes in a generic way rather than on select individuals or systems. This is very divergent from the traditional model of focusing on growth .To some extent this divergent approach is also necessitated by the intense global competition and business demands. As software service organizations, they focused on building intellectual property for clients, servicing existing IP that the client owns. Hence their business requires them to uniquely distinguish their proprietary processes to differentiate from their competitors' in the industry.
Leadership, Learning ,Continuous Enhancement and Upgrading of Skill Sets
Indian IT companies have set out on a planned and systematic approach for fostering a culture of supporting creativity and leadership in order to develop future business leaders of tomorrow. Senior leadership proactively supports approaches taken by young and dynamic subordinates to learn new management systems/processes and benchmark performance vis-à-vis best in class across the globe. For knowledge transformation they have set up global learning centers with world class infrastructure and best faculty to nurture future technology as well as management leaders of tomorrow.