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The Rediff Interview/ Nandan Nilekani, Mahaging Director, Infosys

'The game has gone from big deals to efficiency'

Narayana Murthy remarked: 'I worry about the state of the Indian software industry.' What did he have in mind?

Technology spending has been one of the biggest drivers of economic growth and productivity improvement ever since the first computer was introduced. Today, more than 50 per cent of capital spending by US companies is on technology.

This accelerated during 1999-2000. It was driven by the Y2K boom, Internet boom and the fear of being rendered technologically obsolescent. It was driven by huge amounts of venture capital coming into the market and was a positive spiral. That created an opportunity for technology companies and everybody was booming.

That was followed by a precipitous crash. Now the rules of the game have changed, companies are much more wary about spending on technology - they are doing a lot more due diligence and are looking carefully at return on investment.

So it is becoming harder for everyone to make a sale and make profits. What Murthy was alluding to was that in a boom all the rising ships float; it is only during the bad times that the economy starts differentiating between the strong and the weak.

Is a sustained 30 per cent growth rate for the industry unreal?

There is still growth, a lot of opportunity in the BPO (business process outsourcing) space. It will grow faster than the IT space because of a smaller base. Whatever it is, it is going to have a huge impact on the economy.

For the first time in 25 years we have a current account surplus because of inward remittances and software exports. And the rupee is appreciating. You have something like the Dutch disease.

How is Infosys changing?

The customer wants end-to-end capability. So, firstly, we are offering many new services - BPO through Progeon, IT outsourcing, systems integration. Second, our focus ia on marketing, selling and branding.

We invested in these areas even when it was a challenging environment. We are also examining how we can improve our entire customer experience. A total value proposition is being worked out - reducing cost, improving productivity, aligning technology spending with business better.

We have also made sure that our every proposal or solution starts with a business understanding.

All this leads to consulting, but your consulting revenue is quite small.

Look at it as a lead-in; it is the tip of the arrow, behind it is the whole execution capability we have. We are combining our consulting capability with our execution capability.

The big Indian players are looking for even bigger orders.

What is happening today is that our value proposition is very compelling. You are getting higher value, higher quality, faster time to market at a lower, more value-for-money price. However, in the real world, it takes time for people to understand this, develop comfort with it and ascertain the risk.

So outsourcing is a slow process. But because of the economic challenges being faced by the world's largest corporations, now they are looking at outsourcing much more seriously and faster than before. Hence, though the economic problems are present, companies like us are growing.

Do you see competition from multinationals setting up their own shop?

That's been there right from 15 years back when this game started. You have had TI, HP, Oracle, Intel, and then many of them have a combination approach, like Cisco, which has its own operations and also works with Infosys. That's part of the landscape.

What about order sizes?

When you have a total outsourcing deal, companies take over the client company's computers, data centres, people, and so on and they sign six- to seven-year deals. So a $700 million deal for seven years is actually $100 million per year.

Our idea is not to undertake total outsourcing but application outsourcing. If you are taking over employees then you have to make a commitment about keeping them. We have a couple of small deals in that space but we have not done any huge outsourcing deals that will involve taking over hundreds of employees.

There is an increasing trend towards outsourcing of applications where customers - though they don't say we'll give you X million dollars for X number of years - chose you as a strategic partner.

They have two to three companies they are going to work with and they are going to outsource all their business to these two or three companies. That itself will lead to a lot of business in the future.

The biggest challenge for large corporations is they have created an expense structure for an earlier era. And now they are entering a situation in which revenue is slow, flat or negative in some cases, pricing growth is very difficult, productivity per employee is up but profits are not going up, and they really have to bring their expense structure in line with today's reality.

One of the big boxes in their expense structure is called IT. The challenge is how do I get more IT saving without sacrificing the business.

In other words, more for less. There are many ways of doing this: extending the life of the hardware; consolidation and having fewer servers. One critical element in squeezing IT spending is outsourcing to companies like Infosys.

As contracts become due for renegotiation, how is the name of the game changing?

There is no particular trend. We have two kinds of situations; strategic sourcing, which is where companies want to outsource in a big way to bring some alignment on their cost front. Strategic sourcing tends to be high volume but price competitive.

And then we have the value business where people are looking for end-to-end solutions. So we have to do both. If there is a pricing decline you have to manage your pricing within that. That management comes from greater efficiencies - managing projects more efficiently.

What is the experience with BPO?

Very good. We think that BPO is an emerging trend. We see a lot of global corporations looking at BPO in India in a systematic way. Some of them are, of course, coming in on their own and setting up their own operations.

Many of them would like to work with companies like us. And, because we are looking at it from a business-led point of view - that is looking at the business and then the BPO - I think that is important and does make a big difference.

You are optimistic about the future of your BPO business?

Yes.

What's the overall mood?

Cautious optimism. There is no question that after a period of explosive growth in 1999-2000, we entered a period of slow growth. Also, the markets were a little uncertain because they themselves suddenly found a dramatic change in their milieu. So there was a lot of indecision because of that change.

In a corporation, everyone is used to working in a certain paradigm, what is called the mental model. When you are growing, your focus is on recruitment, the supply side. When the external economy changes, it takes some time for companies to readjust their bearings.

In 2001 and early 2002, companies were readjusting their bearings to the new economic situation. There was some amount of disbelief and everybody had to recalibrate their minds. That, I think has happened.

Companies are now very focused on what they need to do to be successful in this round; how to consolidate, how to cut costs, become more profitable in a period where revenue growth is stagnant.

It translates into more outsourcing opportunities for us, directly. The game has gone in the corporate world from big deals and mergers to how to get the machines and the organisations to become much more efficient and effective.

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