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Tech Services: The New Schizophrenia

April 7

The twin pressures of declining demand and offshore competition have bedeviled US-based information technology service vendors for several years now. As an example, in 2000 premium-level SAP specialists could bill at up to $200 per hour: today, $140 or less is the norm.

In response, American tech services players have cut prices and, in general, lost money. Out of the wreckage, however, has arisen an attractive new model perhaps best represented by Cognizant, Wipro, Infosys, Tata and Satyam. In general, these companies are growing about 25% per year and are quite profitable. What’s their secret?

They’re offshore outsourcers. As may be divined from their names, they’re predominately Indian: they ship the bulk of their heavy-lifting “back-end” code work to Puni, Mumbai or Bangladore while maintaining a marketing, project management and business process analysis “front-end” in the States.

Now, however, the worm turns again. Indian outsourcers are themselves feeling competitive heat from even cheaper sources of talent in other parts of the globe: China, Eastern Europe and the Philippines. Talent in these countries is also well-educated and, if possible, hungrier.

What’s a tech services vendor to do? In the face of rapid back-end commodization, two arguments for preserving margin remain: 1) Back-end diversity and, 2) Ever-closer front-end support.

Specifically, customers care where the coding happens. Some otherwise appropriate venues can be marred by geo-political risk (India vs. Pakistan), others raise questions about intellectual property protection (China). The answer, while somewhat theoretical, is back-end diversity, or the ability to source from among a variety of locations depending on which ones appear most suitable at the moment. EDS is currently making this value-add argument to its clients: it is an argument that can only be made by larger entities who own the back-end facilities, or that have sufficient volume to contract back-end assignments out to reliable coding shops.

The other opportunity for margin preservation is effective front-end support: today, in our opinion, that’s best characterized by Cognizant’s deliberate strategy. The company concentrates on putting an American face on American client interactions. That means it attempts to deliver a comprehensive understanding of the business issues its clients want to solve, a perception critical to directing the work of coders a continent away. At the highest end, such services comprise strategic analysis, the sort of expertise that has been an American competitive advantage, with companies like McKinsey, Bain, BCG and various former accountancies having established a strong historical dominance in the realm.

In effect, the IT services business is splitting into two dissimilar but related functions: one is becoming an outsourced commodity within an outsourced vendor, the other is a service that operates at the highest levels of the client’s general and IT management. Managing them both simultaneously is the challenge.

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