International Trade & Competition in High-Tech

Heaven Kim Shruti Yadav Eric Chin Adam Schindla Florent Heidet October
31st,

‘07

IT Service Industry : Overview
• On-shore incumbents are still larger: IBM, Accenture • Off-shore players growing : TCS, Wipro, Infosys Technology • 47% Annual growth (2003 vs. 2004) • Still 0.8% market share

CAGR 7%

Source: IDC

Fragmented market

13% • Retail. 20% • Manufacturing. & financial . COO) Business Users Pure Play Large Enterprises • SAP • Oracle • Infosys • Accenture End-to-end Service Provider • Insurance. 30% • Telecom.IT Service Industry : Value Chain – Current Supplier Enterprise Customer Software Service/Product Vendor Pure Play IT Consulting IT Department (CIO. banking. 8% • IBM • EDS • CSC • Cap Gemini . CTO.

COO) Business Users Small/Medium Businesses Web 2. COO) Business Users Individual Users . CTO.0 Internet Service Provider • Google • Microsoft IT Department (CIO. CTO.com • SugarCRM IT Department (CIO.IT Service Industry : Value Chain – Emerging Supplier Customer SaaS Software Service/Product Vendor • Salesforce.

IT Service Industry : Transformation Experimen -tation Convergence Trigger Disruptive After the DotCom Crash Business Models 1 Change in 2 Change in Technology Customer Needs 1 Off-shore Biz Model (incl.0 ? . GDM) 2 SaaS (Software as a Service) 3 Enterprise 2.

IT Service Industry : Transformation Change in Customer Needs Change in Offerings • Invest in new technologies on faith and without strong links to ROI measurements (Over-purchase!) • More demanding in ROI • Get more out of tech investment • Rapid adaption /modification • Specific point solutions • Traditional enterprise application packages • Homogeneous infrastructure • Off-shore IT services • SOA (Service-oriented Architecture) & Web services • Applications as services .

Infosys Technologies – Company Background • Started in 1981 for $225 • Built up in 1980s and 90s through customized software solutions. and alliances with larger companies. acquisition of smaller IT service providers. developed in offshore (Indian) development centers • Also develops and markets software products • Flagship product is ‘Finacle’. . a modular banking solution for retail. corporate and banks • Grew mostly through new business contracts.

China. or offshore) where they can be delivered at maximum value. Mauritius and Czech Republic. the UK.Infosys Technologies – Business Model Global Delivery Model Definition “The process of breaking projects down into their logical components and then distributing those components to locations (onsite.” Vehicles 38 global development centers • 20 in India • 18 in the US. Canada. nearshore. Modular Global Sourcing Framework Customer Value Lower Cost 2 Faster Implementation 1 3 4 Lower Risk Measurable Innovation to Meet New Customer Needs . Australia.

Infosys Technologies – Business Performance CAGR 43% CAGR 45%/30% EBITDA Margin % 33% 33% 32% 32% .

Infosys Technologies – Business Performance Revenue by Industry Revenue by Geographic Market .

career visions) .Infosys Technologies – What are the Competitive Advantages? India Abundant supply of Infosys Technologies low-cost scientists Excellent training and engineers program Brand/ reputation Global Delivery Model Open/transparent • Global development & performancecenters driven culture • Right Talents Customer relationship Cost & quality advantage coming from GDM and low-cost labor Flat organizational Domain structure knowledge Right reward system (stocks.

Infosys Technologies – Sustainable? : vs. Flat) which would make it hard to attract right talents for GDM .e. Current Competitors On-shore Incumbents • Trying to adapt GDM while maintaining their existing business model & organizational structure • Adding more offshore workforce through M&A or expansion • However… Other Off-shore Players • Can NOT completely migrate to GDM because… • It can jeopardize existing businesses • There is fundamental organizational difference (i. Hierarchic vs.

reputation) .g. Current Competitors On-shore Incumbents • Already offering the same services by copying the tangible part of business model • 24/7 services • Global offices • Competing for the same talents • However… Other Off-shore Players • Still behind Infosys in terms of operational excellence because… • Infosys’s core competency is ‘People’ and supporting system to attract/keep talents • Intangible assets and congruence of the whole system are hard to copy (e.Infosys Technologies – Sustainable? : vs. Culture. HR.

Infosys Technologies – Sustainable? : vs. Current Competitors On-shore Incumbents Other Off-shore Players Performance Comparison Gross Margin Net Income Margin 26% 19% 22% USD (Mil) Infosys Wipro TCS 42% 33% 46% .

Infosys Technologies – Sustainable? : vs. Potential Competitors They are disruptive not only to incumbents but to off-shore players • Significantly easier & faster implementation • Very low up-front capital investment Infosys’s competitive advantages no longer sustainable • No need to have expensive IT service providers • Very low entry barrier • Force incumbents to change product & pricing SaaS • User-focused.0 service IT • Very cheap or free funded by Ad model . not buyer-focused : selfWeb 2.

0) L Low Opportunities Threats . web services.e. No presence or relationship with consulting business) H • Wage inflation due to to deliver GDM H • Capability to attract & keep talents L • Strong financial M • Strong relationship with Large Corporations H • More cost/speed Significance of Impact H High M Medium conscious customers M • Market growth M • Higher awareness on off-shore model competition on talents (15+% / year) H • Newer disruptive business models (i.e. web 2.Infosys Technologies – SWOT Analysis Strengths M • Operational excellence L Weaknesses • Over-reliance on US economy M • Limited position in value chain (i.

Infosys Consulting – Company Background • • • • Started in April 2004 with initial investment of $20M Chose a wholly-owned subsidiary model Led by former leadership of Deloitte Consulting India Focused on the Global Delivery Model (GDM) and more cost-competitive consulting rates • Integrating the business consulting and technology implementation lifecycles • Engagements sourced from parent company and existing client base of Infosys Technologies .

IBM. EDS) • Off-shore IT services players (Wipro and TCS) • Largest shares held by Accenture and IBM .IT Consulting Market Context & Structure • Subset of overall IT services market • Projected single-digit growth of 5% • Largely fragmented market with 2 key segments: • On-shore consulting and IT services players (Accenture. Capgemini.

one Infosys Tech resource onsite.Infosys Consulting – Business Model “1-1-3” Model Definition “Integrate the business consulting and technology implementation lifecycle.” Vehicles • On-shore management consulting talent •On-shore liasons •Off-shore resources Customer Value Lower blended 1 rates 2 3 Faster Implementation Integration “1-1-3”combined with GDM . and 3 Infosys Tech resources offshore. ‘1-1-3’ model gives one client one ICI resource onsite.

Infosys Consulting – What are the Competitive Advantages? Large supply of low-cost IT/process resources Access to Infosys Technologies clients Strong operational skills Unique. blended model “1-1-3” Model •Blend on/off shore •Cost efficient Easier to integrate offshore with onshore Cost & speed advantage coming from “1-1-3” and GDM model .

Infosys Consulting – ICI vs. Current Competitors On-shore Incumbents • Trying to adapt GDM while maintaining their existing business model & organizational structure • Adding more offshore workforce through M&A or expansion • However… Other Consulting Players • Can NOT completely migrate to GDM/”1-1-3” because… • It can jeopardize existing businesses • May be brand equity erosion .

00 $40.00 $30.00 $50. Banking.30 • Reflects steady growth in number of clients: • 25 clients in FY05 • 54 clients in FY06 • 89 clients in FY07 $54 $36 • High double-digit year on year revenue growth • Approximately 2/3rds of revenue from the United States • Key industries: Retail.00 FY05 FY06 FY07E $5. Energy/Utilities .00 $10. Transportation.ICI Experiencing Revenue Growth Revenue (USD Mil) $60. High Tech.00 $20.00 $0.

” • Potential causes: •cheaper blended rates •expensive on-shore resources •Learning curve in managing consulting business economics ($9.00) ($28.00) ($20.20 Net Income (Loss) ) FY05 ($8.00) ($30.00 ($5.But Increasingly Dim Profitability Results Net Income & FCF $0.40) .10) FY06 FY07 • Infosys still deems Infosys Consulting to be in “investment phase.00) ($10.00) ($15.00) ($25.

000 Still a marginal player vis.vis consulting units of both the on-shore as well as off-shore majors.a.A. Current Competitors Operational Scale & Performance On-shore Incumbents ICI Revenue ($M) Employees Accenture IBM BCS $54 $11. 209 126000 60.A.000 Other Off-shore Players ICI Revenue ($M) Employees WCS $54 N. .A. 209 TCS N.Infosys Consulting vs.000 34.856 N. 5.

Infosys Consulting – SWOT Analysis Strengths M • Unique blended model M • Access to Infosys clients M • Strong in operations Weaknesses H • Low brand equity H • Inexperience with consulting relationships M • Challenge attracting Significance of Impact top consulting talent H • More cost/speed M • Easy replicability of H High M Medium conscious customers M • Market growth M • Open up new segment of market model • Increasing IBM/ACN M presence in India • Culture clash with H Infosys Technologies L Low Opportunities Threats .

” Capitalize Infosys “flat world” aura to achieve positioning . differentiated place in industry value chain Key Challenges Needed Responses • • • • Revisiting pricing and/or cost structure Integrate client management with Infosys Technologies Use ICI to monitor client trends & the “next big thing.Infosys Consulting: Cost or Profit Center? What is ICI’s place in the Infosys Technologies Portfolio? • • • • Approaching profitability or break even Collaborating effectively with Infosys Technologies Impending replication of ICI business model by others Find firm.

1) To strengthen its position in current market. and 2) To prepare for further industry transformation ICI More Value from Existing Customer Base Strategic Alliance with Emerging Competitors • More wallet share from current customers • Integration rather than expansion • Antenna to sense changes in the market • Influence customers’ strategic moves • Relationship building with emerging players Infosys Technologies • Stronger relationship through involving higherlevel decision making • Provide more agile and customized solutions • Acquire them as customers or partners • Develop capabilities to offer right services/products in the long-term .Moving forward… : Infosys’ Strategy Infosys should leverage ICI .

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