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
CAGR
• Off-shore players growing :
7% TCS, Wipro, Infosys
Technology
• 47% Annual growth
(2003 vs. 2004)
• Still 0.8% market share

Source: IDC
Fragmented market
 IT Service Industry : Value Chain – Current
Supplier Enterprise Customer

Software
IT Department
Service/Product IT Consulting Business Users
(CIO, CTO, COO)
Vendor

Pure Play Pure Play Large Enterprises

• SAP • Accenture
• Insurance, banking, & financial ,
• Oracle
30%
• Infosys
• Telecom, 20%
End-to-end Service Provider • Manufacturing, 13%
• Retail, 8%
• IBM • CSC
• EDS • Cap Gemini
IT Service Industry : Value Chain – Emerging
Supplier Customer

Software
SaaS IT Department
Service/Product Business Users
(CIO, CTO, COO)
Vendor
• Salesforce.co
m Small/Medium Businesses
• SugarCRM

Web Internet Service IT Department

2.0 Business Users
Provider (CIO, CTO, COO)

• Google
• Microsoft Individual Users
 IT Service Industry : Transformation
Experimen Convergence
-tation

Trigger

After the Disruptive

DotCom Crash Business Models

1 Change in
Technology
1 Off-shore Biz Model (incl. GDM)
2 SaaS (Software as a Service)
?
2 Change in
Customer Needs 3 Enterprise 2.0
 IT Service Industry : Transformation

Change in Customer Needs Change in Offerings

• Invest in new technologies • Traditional enterprise

on faith and without strong application packages
links to ROI measurements • Homogeneous infrastructure
(Over-purchase!)

• More demanding in ROI • Off-shore IT services

• Get more out of tech • SOA (Service-oriented
investment Architecture) & Web
• Rapid adaption /modification services
• Specific point solutions • Applications as services
 Infosys Technologies – Company
Background
• Started in 1981 for $225
• Built up in 1980s and 90s through customized
software solutions, 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,
acquisition of smaller IT service providers, and
alliances with larger companies.
 Infosys Technologies – Business Model
Global Delivery Model
Definition Vehicles Customer Value

“The process of 38 global 1 Lower Cost

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

CAGR
CAGR 45%/30%
43%

EBITDA
Margin % 33% 33% 32% 32%
Infosys Technologies – Business Performance
Revenue by Industry Revenue by Geographic Market
 Infosys Technologies –
What are the Competitive Advantages?
India
Abundant supply of
Infosys Technologies
low-cost scientists
and engineers Excellent training
program Brand/ Cost &
reputation quality
advantage
Global Delivery Model coming from
Open/transparent •Global development Customer
& performance- relationship GDM and
centers
driven culture •Right Talents
low-cost
labor
Flat organizational
Domain structure
knowledge Right reward system
(stocks, career visions)
 Infosys Technologies –
Sustainable? : vs. Current Competitors
On-shore Incumbents Other Off-shore Players

• Trying to adapt GDM • Can NOT completely migrate

while maintaining their
existing business model &
organizational structure
• Adding more off-
shore workforce
through M&A or
expansion
• However…
to GDM because…
• It can jeopardize existing
businesses
• There is fundamental
organizational difference
(i.e. Hierarchic vs. Flat)
which would make it hard
to attract right talents for
GDM
 Infosys Technologies –
Sustainable? : vs. Current Competitors
On-shore Incumbents Other Off-shore Players

• Already offering the same • Still behind Infosys in terms of

services by copying the
tangible part of business
model
• 24/7 services
• Global offices
• Competing for the
same talents
• However…
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.g.
Culture, HR, reputation)
 Infosys Technologies –
Sustainable? : vs. Current Competitors
On-shore Incumbents Other Off-shore Players

Performance Comparison

Gross Net
USD (Mil) Margin Income
Margin

Infosys 42% 26%

Wipro 33% 19%

TCS 46% 22%

 Infosys Technologies –
Sustainable? : vs. Potential Competitors
They are disruptive not only to Infosys’s competitive
incumbents but to off-shore players advantages no
longer sustainable
• Significantly easier &
faster implementation • No need to have
SaaS • Very low up-front expensive IT service
capital investment providers
• Very low entry
• User-focused, not barrier
buyer-focused : self- • Force incumbents
Web 2.0 service IT to change product
• Very cheap or free & pricing
funded by Ad model
 Infosys Technologies – SWOT Analysis
Strengths Weaknesses
M • Operational excellence L • Over-reliance on US
to deliver GDM economy
H • Capability to attract & M • Limited position in
keep talents value chain (i.e. No Significance
L • Strong financial presence or of Impact
M • Strong relationship relationship with
with Large consulting business) H High
Corporations M Medium
H • More cost/speed H • Wage inflation due to
L Low
conscious customers competition on talents
M • Market growth (15+% / year)
M • Higher awareness on H • Newer disruptive
off-shore model business models (i.e.
web services, web 2.0)

Opportunities Threats
 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
 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, IBM, Capgemini, EDS)
• Off-shore IT services players
(Wipro and TCS)
• Largest shares held by Accenture and IBM
 Infosys Consulting – Business Model
“1-1-3” Model
Definition Vehicles Customer Value
Lower blended
“Integrate the 1
• On-shore rates
business consulting
management
and technology 2 Faster
consulting talent
implementation •On-shore liasons Implementation
lifecycle. ‘1-1-3’ •Off-shore resources 3
model gives one Integration
client one ICI
resource onsite, one
Infosys Tech
resource onsite, and “1-1-3”combined
3 Infosys Tech with GDM
resources offshore.”
 Infosys Consulting –
What are the Competitive Advantages?

Access to Infosys
Large supply of
Technologies
low-cost
clients
IT/process Strong
resources operational Cost & speed
skills advantage
coming from
“1-1-3” Model “1-1-3” and
•Blend on/off shore GDM model
Unique, •Cost efficient
blended model Easier to
integrate
offshore with
onshore
 Infosys Consulting –
ICI vs. Current Competitors
On-shore Incumbents Other Consulting Players

• Trying to adapt GDM • Can NOT completely migrate

while maintaining their
existing business model &
organizational structure
• Adding more off-
shore workforce
through M&A or
expansion
• However…
to GDM/”1-1-3” because…
• It can jeopardize existing
businesses
• May be brand equity
erosion
 ICI Experiencing Revenue Growth
Revenue (USD Mil) • High double-digit year on year
$60.00 $54 revenue growth

$50.00 • Approximately 2/3rds of

$36 revenue from the United States
$40.00
• Key industries: Retail,
$30.00 Transportation, High Tech,
Banking, Energy/Utilities
$20.00
$5.30
$10.00
• Reflects steady growth in
$0.00 number of clients:
FY05 FY06 FY07E • 25 clients in FY05
• 54 clients in FY06
• 89 clients in FY07
But Increasingly Dim Profitability Results
Net Income & FCF
$0.00
FY05 FY06 FY07 • Infosys still deems Infosys
($5.00) Consulting to be in “investment
phase.”
($10.00) ($8.10)
($9.40) • Potential causes:
($15.00) •cheaper blended rates

($20.00) •expensive on-shore resources

($25.00) •Learning curve in managing

consulting business economics
($30.00) ($28.20
Net Income (Loss) )
 Infosys Consulting vs. Current Competitors
Operational Scale & Performance
On-shore Incumbents

ICI Accenture IBM BCS

Revenue ($M) $54 $11,856 N.A. Still a marginal player vis.a.vis
Employees 209 126000 60,000
consulting units of both the
on-shore as well as off-shore
Other Off-shore Players majors.

ICI WCS TCS

Revenue ($M) $54 N.A. N.A.
Employees 209 5,000 34,000
 Infosys Consulting – SWOT Analysis
Strengths Weaknesses
M • Unique blended model H • Low brand equity

M • Access to Infosys clients H • Inexperience with

consulting relationships Significance
M • Strong in operations of Impact
M • Challenge attracting
top consulting talent H High
M Medium
H • More cost/speed M • Easy replicability of L Low
conscious customers model
M • Market growth • Increasing IBM/ACN
M
M • Open up new segment presence in India
of market • Culture clash with
H
Infosys Technologies

Opportunities Threats
 Infosys Consulting: Cost or Profit Center?
What is ICI’s place in the Infosys Technologies Portfolio?

• Approaching profitability or break even

Key • Collaborating effectively with Infosys Technologies
Challenges • Impending replication of ICI business model by others
• Find firm, differentiated place in industry value chain

• Revisiting pricing and/or cost structure

Needed • Integrate client management with Infosys Technologies
Responses • Use ICI to monitor client trends & the “next big thing.”
• Capitalize Infosys “flat world” aura to achieve positioning
 Moving forward… : Infosys’ Strategy
Infosys should leverage ICI ,
1)To strengthen its position in current market, and
2)To prepare for further industry transformation

ICI Infosys Technologies

• More wallet share from • Stronger relationship
More Value
current customers through involving higher-
from Existing
• Integration rather than level decision making
Customer
expansion • Provide more agile and
Base
customized solutions
• Antenna to sense changes • Acquire them as customers
Strategic
in the market or partners
Alliance with
• Influence customers’ • Develop capabilities to offer
Emerging
strategic moves right services/products in the
Competitors
• Relationship building with long-term
emerging players