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A new generation of corporate dinosaurs is helplessly awaiting extinction. A study by management consulting company Katzenbach Partners reveals that such outsourcing stalwarts as EDS, Capgemini and Accenture will be undone, gradually but inexorably, by more nimble, more efficient and more profitable Indian companies such as Infosys and Wipro.
Katzenbachs study relies on a metric called RVG (relative value of growth), which shows that the growth orientation of companies such as Infosys and Wipro is standing them in good stead not only for the present but for the future. Investing for growth is rewarded by Wall Street, which blesses these companies with higher valuations. The higher valuations create credibility and an incentive for greater investment. Its a positive, self-reinforcing and probably unbeatable loop, according to Richard Schroth, a partner at Katzenbach.
“Indian companies are taking 5 percent of current revenue and investing it in innovation. EDS would have a hard time investing that amount,” said Schroth. “The market is acknowledging the Indian outsourcers have a cost structure thats less than U.S. outsourcers.” In contrast, companies seeking profitability through better margins will probably try to boost the bottom line by trimming their commitment to long-term customer deals, a move that wont be rewarded by significantly improved shareholder value, he said.
Katzenbach relies on published figures from publicly held companies and so does not study IBM Global Services, the numbers of which are not broken out in detail by IBM, nor does it track privately held companies such as Deloitte.
The RVG uses an arcane formula to “generate a number that expresses the impact on share price of additional growth versus a boost in a companys operating margin,” according to Katzenbach officials. An RVG of 7 means that a company would have to have a 7 percent gain in its margin to have the same impact on shareholder value as a 1 percent gain in revenue. The RVG of Infosys is 53.2; that of Wipro is 25.6; Accentures is 1.1; and EDS is 0.8.
The state of affairs recalls a parallel history in the auto industry. Consider the relative position of GM and Toyota circa 1965. Toyota was much smaller but was building better cars, pricing them lower and making more profit on them—healthy practices that enabled the upstart to grow steadily while the industry titan was striving to keep short-term profits up while trimming costs and quality.
With the handwriting on the wall and plenty of lead time, what should the old guard do? Schroth said the only thing to do is dump big, costly U.S. offices—to get out of here and get where there are less expensive and more brilliant and talented people. “Indian companies are capturing the best talent,” Schroth said.
An EDS spokesperson countered that his company plans to spend $400 million to streamline its infrastructure and work force and will spend $100 million on its “agile enterprise” bid to standardize its technologies and services. He added that EDS has 42 low-cost offshore locations.
Schroth, however, stressed that high-cost U.S. offices must be jettisoned. “An Indian presence is not enough,” he said.
Out and about
Every current has a countercurrent. Boston-based Keane scored a coup in landing Wipros Richard Garnick, who jumped ship to become Keanes head of North American operations—90 percent of Keanes business. Garnick will get to spend time in his hometown of Boston, instead of being in India half the time.
As a five-year veteran of an Indian company, Garnick said the Indian players will face challenges in maintaining their astronomical growth rates. Wipro, with 45,000 employees, will need to hire 15,000 people this year to achieve a 30 percent growth rate. Thats hard for any company to do, and it will put stress on the companys infrastructure in Bangalore, he said.
Hes also betting that a high-touch approach—achieving business value in the United States while leveraging global resources—will be Keanes ticket to growing faster than its U.S. competitors and boosting its growth rate to a level comparable to the Indian companies.
Stan Gibsons e-mail address is stan_gibson@ziffdavis.com.