India's Big Four services champions want to become software vendors

Feature India’s outsourcers grew and grew by working on other peoples’ software.

Whether it was cutting bespoke code for the world, or making SAP and Oracle applications sing, Indian companies have collectively made a case that they belong on every services-centric shopping list for the last two decades.

It’s worked brilliantly. The largest players – the so-called “Big Four ” – Infosys, HCL Technologies, Tata Consulting Services (TCS) and Wipro – now have a combined market capitalisation just short of $300bn at the time of writing.

TCS alone has 285 offices in 26 countries and employs 469,000 people, more than Microsoft, Apple, and Alphabet combined. India’s outsourcing sector now comprises 16,000 companies and employs 4.4m at home. The industry’s revenues shot up from $8bn in 2000 to $190bn last year, according NASSCOM, the vastly influential IT lobby group.

But now the Big Four are looking to become software vendors. In 2020, Infosys launched Cobalt, a portfolio of services, platforms and solutions aimed at helping companies move to the cloud. TCS's artificial intelligence platform, Ignio, is expected to hit close to $100m in revenues this year. After buying a slate of IBM products for $1.8bn in 2019, HCL saw its new license deals skyrocket 250 per cent year-on-year in its latest quarter. Wipro's website lists over 80 “industry solutions”, including Holmes, an AI and automation platform.

Not a new trick

Selling software isn’t entirely new for the Big Four outsourcers. Infosys's core banking platform, Finacle, is 21 years old and serves 450 million end-customers. HCL's software unit has 475 products ranging from video chat applications to analytics platforms.

But while some products have been spun out into profitable businesses in their own right, the vast majority are what the industry calls "sprinklers" – products that were made to make the companies' service business more attractive rather than be monetised directly.

This latest push is different, says CJ Sengupta of Everest Group, an outsourcing consultancy. He says that over the last five years, the Big Four have concentrated their product development on creating new products and bolster existing ones that can be directly licensed to customers, providing them with a new and more resilient source of revenue.

“For a long time, a lot of the Indian companies didn’t have the know-how or the muscle to go down the product development route. But now they’ve come of age and have renewed their focus,” he says.

That doesn't mean they have any intention of taking on the industry's giants like Oracle and SAP, he adds. "That would be totally crazy." Instead, he says the Big Four are focusing on "white areas" that will complement their traditional service business. All four companies have launched their own software suites that aim to more fully automate business processes, for example.

"They're looking to future proof their businesses, not reinvent them. Their traditional services business is still their bread and butter," says Sengupta.

Another issue is that the services sector is changing, fast.

"The traditional outsourcing business model was about throwing people at a problem," explains Nick McQuire of CCS Insight, a consultancy. "You hire an outsourcer for a quarter of the price [it would cost to do the job in-house] and they send you a consultant on a plane to support you on your projects."

"That's no longer possible, so the outsourcing support model has had to shift away from lowering cost and towards providing more business value."

COVID-related travel restrictions aren’t the main cause of the shift. Even before the pandemic, the sector's growth had sputtered. Revenues rose just six per cent in 2019, a quarter of its historic rate through the 1990s and 2000s. Western competitors that were once priced out of the services market, such as Accenture, IBM, Deloitte, and EY, have established substantial Indian presences to take advantage of cheap labor. Former clients of the Big Four have done likewise, creating Indian subsidiaries that operate "captive centres" and hire local engineers in-house.

Those ex-customers get lower costs and deprive the outsourcers they once patronised of both revenue and potential staff.

Enterprise technology is also shifting away from high-maintenance monolithic software suites and towards "composite architectures", says Nick Ford of Mendix, a vendor of low-code software platforms. Rather than hiring outsourcers to customise a big solution, companies are mashing together applications from different vendors.

The big outsourcers are therefore ironically pushing their wares to remove some of the complexity that feeds their traditional services business.

Will the plan work?

The argument goes that, at least on paper, trusting one company handle both an IT product and its deployment should give clients confidence. The Big Four are already deeply ingrained in Western firms' work practices and have proven their technological competency many times over. It also opens the doors to better value with larger package deals.

But these package deals could also deter customers. One of the biggest appeals of the big Indian outsourcers is that they are "product agnostic" and have no ties to the products and systems that they consult on and manage. If they begin selling their new-minted products in package deals with their service contracts, it will raise alarm bells for some customers, who fear they will be trapped in vendor lock-in. "No-one wants a reprisal of the IBM and Unisys days," as one consultant who asked not to be named by The Register put it.

The traditional Indian outsourcing model is not going anywhere. The industry’s value proposition remains unchanged: they can still deal with common problems at a good price, even if their model is challenged.

On the upside, the COVID-19 has proven that offsite – or offshore – work is more than viable. Indeed, Infosys recently signed a $7.1bn deal, its largest ever. But for Big Four to get swim free of the software whales, they may need to venture into more dangerous waters. ®