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Infosys: Making the right moves - Views on News from Equitymaster
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  • Sep 7, 2002

    Infosys: Making the right moves

    As IT services organisations in India face a point of inflection from where life is going to be a lot tougher. Some like Infosys are already talking about making life difficult for global IT services majors. Though, it will take quite some time before Infosys’ presence become anything comparable to the IT services majors like IBM (US$ 8 bn in revenues from services). But Infosys is certainly dreaming big.

    Infosys has identified outsourcing, systems integration and IT consulting as growth opportunities. This is where the big money really is. Global IT companies have traditionally dominated these competencies.

    Corporates in the west have most of mission critical applications running on legacy systems. The task of keeping these systems up and running is daunting and more importantly, expensive. Companies are increasingly finding it more beneficial to completely outsource their IT requirements to IT services companies. While there are qualitative benefits in terms of reduced time to solutions, better availability of skill sets and disaster recovery, the real catch lies in the quantitative benefits.

    Unlike IT projects, which results in improved efficiency of operation and reduced cost of operations over a period of time, the impact of outsourcing is almost immediate. Corporates like Tata Chemicals no longer need to maintain an IT department. They have completely outsourced their IT requirements to TCS. To put things into perspective, many of the mega corporates in the US have IT departments that are larger than most Indian software majors. Thus, the saving potential just in terms of manpower costs is immense. The savings is not only in terms employee costs, there is substantial saving in terms of infrastructure cost also. The corporates do not need to have huge information technology divisions, which are expensive to set up and maintain.

    IT outsourcing: The gamut
    Datacenter Management Consulting Services
    Managed services Consulting and implementation
    System administration IT process consulting
    Network administration Hosting portfolio analysis
    Database administration Helpdesk consulting and implementation
    Security management  
    Service desk / Incident management Hosting Services
    Vendor management Enterprise hosting
    Desktop management Web hosting through partners
    Application Management  
    Operations management Disaster Recovery Services (DR)
    Execution of batch jobs DRP implementation, testing and recovery
    Production support Continuity services

    Source: Infosys

    While the benefits of outsourcing are crystal clear, the biggest impediment is the fact not everybody is comfortable with the idea of outsourcing mission critical operations. Organisations need to be very comfortable with security of information in the hands of the IT vendor. Added to this is the issue that since the scale of operations is very comprehensive, not many are going to change vendors’ everyday. The business continuity of the vendors is a must. Therefore, corporates are likely to outsource from organisations that are better known.

    From the vendors’ perspective, economy of scale is important. To manage operations virtually the companies need to have huge bandwidth availability. Infrastructure like data centres also has to be large. This would mean that gradually the business would become capital intensive. Thus, only large IT companies like Infosys are likely to benefit from the emerging opportunities. Another barrier to entry is the availability of skill sets. Only the top rung software companies are capable of providing end to end IT services (from consulting to maintenance). Many companies do not have infrastructure like data centres to address this kind of market.

    Infosys’ foray into the IT outsourcing space has begun by taking over the management of applications for two of its clients. According to one of agreements, the company will provide 24x7 support to mission critical applications for a financial services company from India. According to Gartner, the IT outsourcing market in North America will grow from US$ 101 bn in 2000 to US$ 160 bn by 2005. This translates to a CAGR of 10%. Outsourcing contracts are typically very large in size. They run into hundreds of millions of dollars and many times are over a billion dollars. Also, these contracts run into several years giving the IT services companies’ strong revenue visibility.

    Infosys is positioning itself in the consulting segment, which is at the highest end of the software value chain. Not only will this help the company get higher billing rates but will also give it an opportunity to work far more closely with the top management of client companies. E-consulting is expected to be one of the fastest growing segments in the IT sector. According to IDC (International Data Corp), spending on E-consulting is expected to grow at a CAGR of 58% over the next three years. The market for E-consulting will be US$ 78 bn by 2003, up from US$ 7.8 bn in 1998. Infosys earned 4% of its revenues from consulting in FY02.

    IT Consulting: Infosys dominates
    Revenues (Rs m) FY01 FY02 Change
    Infosys 931 1,094 17.4%
    % Contribution 4.9% 4.2%  
    Sector* 2,280 3,560 56.1%
    % Contribution 1.1% 1.5%  
    Market share 40.8% 30.7%  
    *Source: Nasscom

    However, the barrier to entry is extremely high in the consulting segment. Firstly, Infosys is a relatively unknown brand, especially when it comes to the IT consulting segment. Secondly, traditionally, it has been the business consulting companies that have created an IT road map for clients. Thus, when an IT company comes up with a business road map clients are likely to be a bit apprehensive. Further, considering the stakes involved are extremely high, getting business is certainly not going to be easy.

    In the end, “The issue is not technology. The issue is whether an organisation can apply new technology”. But for apply technology sot that it complements business even IT companies need to do a lot of homework. A sound technological background and excellent execution skills does not guarantee understanding of a business domain. Without this knowledge, it would be almost impossible to deliver. Thus, the next step for Infosys will be to steadily strengthen understanding of various industries and build domain expertise.

    Infosys has till date stood out amongst others due to its fleet footedness, people management skills and execution skills. The IT spending of clients has driven the previous business focus areas like Y2K and e-commerce. If Infosys’ foray into IT consulting is a success, this time the company will direct its clients IT spend. It will add another feather to its cap and that is its vision.



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