Tag: IT service providers

Will the U.S. Government “Arthur Andersen” Infosys? | Sherpas in Blue Shirts

US v Infosys

As is well-documented at this time, a whistle blower and current Infosys employee has brought suit against Infosys claiming that Infosys has criminally manipulated U.S. immigration law to allow it to bring large numbers of employees into the United States to do work under visas that do not allow such activities. This in turn led the U.S. Citizenship and Immigration Services to launch a criminal investigation of Infosys.

This brings to mind a notorious case in which the government’s criminal investigation of accounting firm Arthur Andersen related to its conduct at Enron created unintended consequences. Andersen was subsequently found not guilty; however, the government’s enthusiastic pursuit of the case and aggressive use of its position “to protect the public good” created an environment in which Arthur Andersen went out of business. The investigation and subsequent closing of Andersen caused massive disruption in the Anderson audit base, put tens of thousands out of work and destroyed the lives of thousands of Andersen partners.

Infosys is unlikely to be put out of business, but I think there is a warning which should be applied to this emerging, but eerily similar, situation. As the criminal probe progresses, one could imagine that the consular officials overseeing issuing visa’s in India cast a jaundiced eye over Infosys visa applications. If Infosys starts to be seen by these consular officials as a criminal organization, or at least practicing overly aggressive strategies in applying for visas, we could see increased scrutiny of Infosys’ visa applications, which could create a scenario that might impede Infosys’ normal operations. Such a scenario is not altogether unbelievable given the current political climate with 9 percent unemployment and the early stages of a presidential election brewing, which could drive populist rhetoric on such issues. Should this behavior indeed transpire in part or in whole, it would have a substantial effect on Infosys’ ability to conduct operations as normal in the United States. Costs would rise, knowledge transfer could be delayed or forgone and Infosys’ ability to find and capture new work could be impacted. No wonder Infosys stock price is down today.

The worst case scenario is that a more aggressive posture by U.S. immigration officials on top of an environment that is already unfriendly could spread to Indian heritage service providers and outsourcers in general. At this time it is too early know if what scenario will unfold, but the situation deserves close attention. Like the Arthur Andersen situation, we may find well-intentioned and vigilant public employees operating in a time of high political tension create unforeseen and negative consequences well beyond the intended scope of the investigation and without regard to what the actual resolution of the investigation turns out to be.

The Risky Side of Offshore Growth: Operational Challenges with Indian Majors? | Sherpas in Blue Shirts

In my May 3 blog entitled “Size Does Matter – The Real Pecking Order of Indian IT Service Providers” – I commented on the rapid growth achieved by the Top 5 Indian IT majors or WITCH (Wipro, Infosys, TCS, Cognizant, and HCL) in the last few quarters. Last week as we were rounding up our latest service provider risk assessments, I couldn’t but help notice that this very growth has taken its toll on some of these providers, with buyers increasingly highlighting service delivery concerns especially as it relates to the quality (or lack thereof) of resources deployed on their engagements.

Since the Satyam crisis in early 2009, Everest Group has been tracking global and offshore majors across a number of dimensions to analyze patterns that indicate deviation from “ideal” behavior, and thereby highlight risks to service delivery. Based on analysis of 1Q 2011, our risk dashboard for the WITCH majors required a change in operational parameters from “No Risk” to “Marginal Risk.” While individual, provider-specific rating changes are common, this is the first occurrence of a collective group rating change since we started our assessment over two years ago.

WITCH Risk Dashboard

At the core of these operational challenges is the strain on the labor model of the offshore majors that are “blessed” with an environment of hyper growth. With attrition levels at a three-year high, service providers are being forced to meet the commitments for new logos/projects by rotating employees out of existing accounts, especially smaller ones. This practice of robbing Peter to pay Paul is eroding service quality and creating concerns for clients. Further, the hiring freezes and cutbacks at the peak of the economic crisis in late 2008 and most of 2009 created an imbalance in the labor model. Service providers are now having to back-fill for attrition through relatively junior and less-experienced resources than those to which clients were typically accustomed.

Attrition Trend for WITCH

WITCH Attrition Trend

To clarify, this is not a “WITCH hunt” and should not be read as propaganda against offshoring, India, or the WITCH majors. I firmly believe in the fundamentals of offshore growth, India’s delivery competitiveness, and the capabilities of WITCH majors’ management to navigate what we hope are merely short-term hiccups. The issue, however, reinforces the need for a more robust approach to global sourcing risk management in which being proactive is key to staying ahead of the game. While a proactive approach does not guarantee prediction of the next major crisis (e.g., Satyam), our experience suggests that a focused and consistent approach can deliver early warning signals to buyers, who can then use them to potentially undertake mitigation or course correction strategies. After all, as the old saying goes forewarned is forearmed!

In a complimentary Breaking Viewpoint released earlier this week, I shared additional information on this topic, and provide perspectives to better manage the current set of offshore delivery challenges. Download the complimentary Breaking Viewpoint.

Expect Changes in the IT Security Landscape | Sherpas in Blue Shirts

The worldwide IT security market is already quite sizeable, exceeding US$25 billion. And all industry analysts are predicting 20-30 percent growth in the next three years. Multiple drivers will fuel this growth, including increasing complexity of IT solutions – which raises the level of challenges for supporting security – and much higher value assigned to proprietary information.

Yet, I believe the structural nature of demand will drive quite an important shift in customer buying preferences going forward. As large enterprise clients recover from the global economic crisis of 2008, they are increasing their emphasis on costs. And despite increased willingness to pay, IT security cost is not immune to this pressure. In order to avoid separate management costs associated with standalone IT security service agreements, enterprises prefer to bundle IT security support with either large IT outsourcing deals or existing telecommunications contracts, as the network is still perceived as the most security-exposed element of IT delivery. Moreover, large corporate clients prefer to deal with a single point of responsibility for actual IT delivery and corresponding security support, which eliminates any risk of finger pointing, and streamlines their governance activities.

So what are the implications of buyer preferences for the existing provider landscape? I believe they will be game-changers primarily for niche IT security service providers and traditional security software vendors. Under the threat of missing their portion of anticipated incremental demand, they will be actively seeking alternative distribution channels and experimenting with different forms of industry cooperation. Everest Group also expects to see increased M&A activity in the IT security industry as large, integrated IT suppliers will be seeking ways to further enhance their capabilities in efforts to capitalize on the rapid growth of this market.

So let’s check in one year from now on the state of the IT security industry, although there is no doubt that it will look different from what we see now.

Size Does Matter – The Real Pecking Order of Indian IT Service Providers | Sherpas in Blue Shirts

Earlier today, Cognizant reported its financial results for the first quarter of 2011, bringing to an end the earnings season for the Big-5 Indian IT providers – affectionately referred to as WITCH (Wipro, Infosys, TCS, Cognizant, and HCL). Cognizant’s results were yet again distinctive: US$1.37 billion in revenues in 1Q11, which represents QoQ growth of 4.6 percent and YoY growth of 42.9 percent. The latest financial results reaffirmed – yet again – Cognizant’s growth leadership compared to its peers and are a testament to Cognizant’s superb client engagement model.

Q1 2011 financial highlights for WITCH:

WITCH Q1-2011 Financial Highlights

In a recent blog post, my colleague Vikash Jain commented on the changes in the IT services leaderboard, and especially the questions and speculation on the relative positions of Wipro and Cognizant in the Indian IT services landscape. Cognizant’s 1Q11 revenues are now just US$29 million below Wipro’s IT services revenues, and based on current momentum, Cognizant could overtake Wipro as early as 2Q11, making it the third largest Indian IT major in quarterly revenue terms. The guidance provided by the two companies for the next quarter – Cognizant (US$1.45 billion) and Wipro (US$1.39-1.42 billion) – provides further credence to the projected timelines.

How important is this upcoming change in the relatively static rank order of the Indian IT industry (the last change happened in January 2009 post the Satyam scandal)? Not very, in our opinion. As and when this happens, the event will indeed create news headlines and the occasional blog entry, but the change in rankings does not imply a meaningful change to the overall IT landscape. Further, other than providing Wipro with even more conviction to make the changes required to recapture a faster growth trajectory, the new rank order does not suggest any changes in the delivery capabilities of either of these organizations.

As we advise our clients on selecting service providers, we believe that it is more important to understand the service provider’s depth of capability and experiences in the buyer organization’s specific vertical industry. While total revenues and financial stability are important enterprise-level criteria, performance in the vertical industry bears greater relevance and significance as buyers evaluate service providers. In our 1Q11 Market Vista report, we examine the CY 2010 revenues of the WITCH group to determine the pecking order in three of the largest verticals from a global sourcing adoption perspective – banking, financial services and insurance (BFSI); healthcare and life sciences; and energy and utilities (E&U).

As we recognize there are differences in the way these providers segment results, for simplicity we are relying on reported segmentation (which we believe does not meaningfully alter the results). The exhibit below summarizes the results of our assessment:

Industry leaderboard for WITCH:

WITCH Industry Leaders1

Our five key takeaways:

  1. The ranking of WITCH based on enterprise revenues has limited correlation to industry vertical rankings. The leader in each of the three examined industries is different.
  2. In BFSI, while TCS is the clear leader, Cognizant is rapidly closing in on Infosys for the second spot. (Note: Wipro is already #4 in this vertical).
  3. In Healthcare and Life Sciences, Cognizant emerges as the clear leader with 2010 revenues greater than those of Wipro, TCS, and HCL combined. (Note: Infosys does not report segment revenues for Healthcare).
  4. In E&U, Wipro leads the pack and is expected to widen the gap through its acquisition of SAIC’s oil and gas business. TCS achieved the highest growth in 2010 to move to third position ahead of HCL (TCS was #4 in 2009) and narrow the gap with Infosys (Note: Cognizant does not report E&U revenues).
  5. Finally, the above ranks are going to change quickly. Based on the results announced for the first calendar quarter of 2011 alone, we anticipate a change in the second position for each of the three examined verticals:
    • Cognizant’s Q1 BFSI revenue of US$570 million is nearly identical to that of Infosys’ US$572 million
    • TCS’ Q1 Healthcare and Life Sciences revenue at US$ 119 million is higher than Wipro’s US$111 million (which also includes services)
    • TCS reported Q1 E&U revenues of US$103 million, versus Infosys’ US$93 million

While it will be interesting to see the impact on a full year basis, the above changes in momentum already indicate further changes in the industry leaderboard before the end of the year.

On an unrelated note, by the time we revisit the Wipro versus Cognizant debate when the Indian majors announce their Q2 results starting mid-July, WITCH will assume an additional meaning – the last installment of the Harry Potter movies is due for release on July 15, 2011!

Staff Augmentation – Alive and Well | Sherpas in Blue Shirts

“The reports of my death have been greatly exaggerated.” – Mark Twain, American author and humorist

For years, the business model of and precursor to modern IT outsourcing – staff augmentation – has been designated as dead. In fact, this notion of staff augmentation is so pervasive that even the providers of these services tend to deny or hide that it is the business in which they operate. For example, I know one US$400 million firm that has grown its top line revenue by 30 percent in the last 12 months. Yet go to its website, do a search on staff augmentation, which constitutes US$250 million of its revenue, and no results!

But the reality is, when you look at the financials of the large and small offshore IT services firms, much of what they are doing for their customers is simple staff augmentation, either on an individual or project level. Supplying qualified people to IT shops for temporary work to help headcount/budget stressed organizations get done what needs to be done is a booming business, and has been for the last 18 months. It’s a straightforward case of demand and supply.

However, use of staff augmentation firms is becoming increasingly challenging for the buy-side.  Roles with similar titles – such as database administrator with five years experience, and several varieties thereof – mean different things to different people, and the rates may vary dramatically from firm to firm for what is the same delivered service. Yet in their quest to find the “right” talent, customers are increasing the number of augmentation firms with which they engage. One large bank I know of has a portfolio of more than 125 service providers supplying more than 3,500 people! This type of overload provider environment is exceptionally complex to manage.

All of which is to say… the staff augmentation business is booming, and that is good for both buyers and providers. But it does demand a new paradigm of service provider management, including clear role rationalization, metrics for measurement firm to firm and a center of excellence that manages the process.

Let’s recognize the existence of staff augmentation, and let the vendors be proud they do it. And in its recognition, we can develop process and techniques to improve and manage it for the benefit of the customer.

Knowing that Mark Twain was alive allowed his stature to increase, and the same can be true for staff augmentation.

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