Feedback and Comments Conference from Delegates and ...

1Value Leadership Group

International Strategy Conference

“The New Competitive Paradigm in

European IT Services”

Stockholm June 12 & 13, 2007

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Delegates and Speakers Conference

Review & Analysis


The New Competitive Paradigm in European IT Services Peter Schumacher reports from Stockholm on the new competitive paradigm in European IT services. In June 2007, Handelsbanken Capital Markets from Sweden and the international management consultancy, Value Leadership Group, organised a global strategy conference in Stockholm that was attended by more than 100 senior executive delegates from 18 countries and supported by CEO magazine. The theme of this innovative conference was the new competitive paradigm in European IT services – how globalisation is transforming the services industry and triggering a broad and fundamental shift in the underlying competitive dynamics of local and global businesses.

Peter Schumacher addresses delegates at the recent global strategy conference in Stockholm. The theme of this innovative conference was the new competitive paradigm in European IT services. In this well-moderated and highly interactive conference, participants from industry and finance were able to capture new insights, discuss key issues, and benchmark their ideas, strategies, and experiences against those of some of the best performing IT services companies in the world including TCS, Wipro and Cognizant.

Keynote speakers included the chairman of NASSCOM, Lakshmi Narayanan and the co-founder of Office Tiger, Joe Sigelman. Other speakers included CEOs and senior executives from TCS, Capgemini, TietoEnator, Hexaware, MindTree, Sasken Communications, Sonata Software, Volvo IT, Credit Suisse, SAP, and the Value Leadership Group. GLOBALLY-MINDED BUSINESS The conference highlighted how a new breed of fast-moving companies led by growth-oriented globally minded entrepreneurs, enabled by global capital and digital communication technologies, are reshaping the European IT services landscape. India has become a global launching pad for rule-breaker companies whose ambition is to redefine the services industry. The enormous growth of the IT industry in India is creating a services and value hub around which a new competitive ecosystem is developing that is of global significance.

"The global strategy conference in Stockholm that was attended by more than 100 senior executive delegates."

First published 7 September 2007


A NEW OFFSHORE UNDERSTANDING To gain more market share in Europe, the offshore services firms are investing heavily in sales, domain expertise, onshore delivery and consulting capabilities, in addition to acquiring companies and engaging in alliances.

In a difference to the monolithic presentations given in previous years, the offshore companies reflected a deeper understanding of Europe's intricacies and a willingness to adapt their go-to-market strategies to meet the requirements of Europe's many different markets. Responding to the new competitive realities, the presenting European firms countered that they are initiating comprehensive measures to catch-up that include rethinking their operating models and making holistic organisational changes. Petteri Kekkonen, senior vice president with TietoEnator summed it up best when he said that a strong offshore capability is no longer an option, but, a strategic imperative, if European IT services firms want to survive.

But, the globally integrated operating model is based on a new way of managing organisations and processes, leveraging global talent, skills and capabilities. What sets companies apart and determines success is not the specific activities performed offshore, but the degree to which these activities are embedded in the DNA of the business.

Keynote speakers included the chairman of NASSCOM, Lakshmi Narayanan; Sunil Surya, the head of Europe for Hexaware; Arnab Dasgupta, head of global offshore sales at Capgemini and Petteri Kekkonen, senior vice president with TietoEnator. Offshore activities need to be fused together again efficiently into a compelling value proposition that the organisation can deliver seamlessly. Migrating to this new way of working represents a huge transformation challenge, in particular, for European IT services firms that lack such experience.

In light of these new realities, the market is becoming increasingly cautious about European IT services firm valuations. Already today, the top five offshore IT services firms have about $100bn market cap – about five times that of the top five European firms. The conference showed that European IT services firms face a complex set of strategic and operational challenges. Under any scenario the European IT services market is likely to see fundamental structural change these next few years. INDIA GIVES THE WEST A REALITY CHECK Lakshmi Narayanan, vice chairman of Cognizant Technology Solutions and chairman of NASSCOM, opened the conference with insightful analysis and perspective on the evolution and outlook for the Indian IT and BPO services industry.

"Keynote speakers included the chairman of NASSCOM, Lakshmi Narayanan and the co-founder of Office Tiger, Joe Sigelman."


He highlighted NASSCOM's strategic initiatives aimed at supporting the industry's ambition to move further up the value chain and become a critical enabler of technology-driven business innovation.

Lakshmi Narayanan, vice chairman of Cognizant Technology Solutions and chairman of NASSCOM, opened the conference with insightful analysis and perspective on the evolution and outlook for the Indian IT and BPO services industry. While many independent analyses show that India is by far the largest and most favourable location for offshore services, Narayanan presented comparative data from Goldman Sachs showing that European IT services firms have fallen far behind in taking advantage of globalisation opportunities.

Switching roles, and speaking as the vice chairman of Cognizant, Narayanan, highlighted that Cognizant's European revenues grew 98% last year. Cognizant has become the fourth largest offshore IT services firm, while it is the fastest growing with an annual compound growth rate exceeding 40%. Cognizant projects that its revenues will hit $2.11bn in 2007, a tremendous increase from the scant amount of $1.7m recorded in its first year, 1994. EUROPEAN COMPETITION Girish Ramachandran, the head of TCS in Europe, reported that in 2006 TCS became the first offshore services firm to achieve more than $1bn in European revenues. Ramachandran explained that it is a strategic priority for TCS to build a globally integrated delivery capability by expanding beyond India.

Most European IT services firms lack this global delivery capability, which puts them at a disadvantage when competing against TCS. TCS's win of the large ABN AMRO global contract in 2006 validates this strategy. Five IT services firms were awarded parts of this huge contract – three were offshore firms – not one was a European firm. Sunil Surya, the head of Europe for Hexaware, who presented on behalf of Hexaware's president and CEO, Rusi Brij, explained the company's differentiation strategy. As a medium-sized firm, Hexaware has found success in pursuing a niche strategy of building deep expertise in industries and domains the company considers underserved.

To illustrate this strategy, Surya highlighted that Hexaware had operated the largest global development and support facility for PeopleSoft until 2003.

Sunil Surya, the head of Europe for Hexaware, who presented on behalf of Hexaware's president and

CEO, Rusi Brij, explained the company's differentiation strategy.

"India has become a global launching pad for rule-breaker companies whose ambition is to redefine the services industry."

"The offshore companies reflected a deeper understanding of Europe's intricacies and a willingness to adapt."


While this centre has since been transferred to Oracle under a BOT-agreement, Hexaware still has among the largest teams worldwide in PeopleSoft and Oracle applications with special domain expertise in HR. EUROPEAN FIRMS ARTICULATE THEIR STRATEGIC RESPONSE Arnab Dasgupta, head of global offshore sales at Capgemini, presented Capgemini's strategy for competing in the new paradigm. Capgemini is Europe's largest IT services firm with 2006 revenues of €7.7bn and almost 70,000 staff.

After sustaining near catastrophic losses between 2002 and 2004, the company has been on a steady recovery track since 2005. Capgemini's improved performance has not gone unnoticed and its stock has more than doubled these last two and a half years, outperforming the CAC 40 and all of the large listed European IT services firms. Today, Capgemini is the European IT services firm with the strongest offshore capabilities in India. This is a significant accomplishment, then just a few years ago analysts saw it as being slow to respond and most vulnerable to competition from offshore services firms.

With the acquisition of Kanbay in 2006, Capgemini doubled its operation in India and now employs more people in India than in any other country, except France. Underscoring the transformation underway at Capgemini, India will surpass even France in number of total employees by 2008.

Petteri Kekkonen, senior vice president of Software Centres, presented on behalf of TietoEnator. He is responsible for implementing TietoEnator's globalisation strategy. Petteri Kekkonen, senior vice president of Software Centres,presented on behalf of TietoEnator. He is responsible for implementing TietoEnator's globalisation strategy. TietoEnator is the largest listed Nordic-based IT services firm with about €1.6bn in revenues and 15,000 employees.

In his presentation Kekkonen emphasised that in TietoEnator's view, global sourcing is not a differentiator, but a tool to deliver services and solutions globally in a manner that meets customers' quality and cost expectations. OFFSHORE FIRMS GROW IN EUROPE WITH WIN-WIN ALLIANCES The conference showcased four innovative partnerships between European and offshore firms from four countries across Europe. Three of these alliances involved IT services firms. Many participants appreciated these presentations because they provided detailed insights into specific examples of relevant onshore-offshore alliance models that are working. These cases show that offshoring must not be a zero sum game for all companies. The presenting European firms demonstrated that win-win alliances with offshore firms can open up new strategic options. These cross-border alliances are allowing both parties to acquire new capabilities and competitive strengths to do things they would not be able to do otherwise.

"Offshore activities need to be fused together again efficiently into a compelling value proposition."


Many of the Nordic participants were particularly interested in Sasken's presentation about its acquisition of Botnia. Although incubated in Silicon Valley, Sasken is today a Bangalore-based R&D services provider for the telecommunications industry.

In 2006, the company acquired the Finnish firm Botnia for $45m. Since acquiring Botnia, Sasken has increased employment in Finland by 15%. Prabhas Kumar, president of Sasken's IT services business, explained that the challenges of creating a win-win alliance rest in the many soft factors of collaborating across borders. Ramaswamy, CEO of Sonata Software, gave a joint presentation with Heinz Kreuzer, CEO of TUI InfoTec of Germany. In 2006, Sonata Software acquired 50.1% of TUI InfoTec, the captive IT services firm for the TUI AG travel group. This JV reflects the entrepreneurial energy found in many medium-sized Indian offshore services firms.

By combining the strengths of both firms, Sonata will be able to develop more business in Germany and TUI InfoTec can create new services offerings leveraging the organisational capabilities of Sonata Software. Krishnakumar Natarajan, president and CEO of MindTree's IT Services, provided an interesting look into the history and unique culture of the firm. Founded by several top executives from Wipro in 2001, MindTree is India's first venture-backed IT services firm to go public. In 2006 MindTree was ranked the second-best company to work for in India. Intellectual Capital Sweden AB, an organisation that ranks intellectual capital assets, gave Mindtree an 'A' rating in 2006 placing the company in the top 12% of all companies rated worldwide. Wipro's client partnership with Credit-Suisse highlighted the firm's commitment to building meaningful relationships with large European corporations in non-English-speaking markets. Among the leading firms, Wipro has the highest share of European revenues (31%). The company made three acquisitions in Europe last year and has a significant and growing presence in the Nordics where it generates about 12.5% of its revenues.

The conference highlighted how a new breed of fast-moving companies led by growth-oriented globally minded entrepreneurs, enabled by global capital and digital communication technologies, are reshaping the European IT services landscape. The alliance permits Credit-Suisse to shift Wipro's resources almost seamlessly, and on short notice, as required between three different engagement models – outsourcing, co-sourced, and captive. This alliance had helped Credit-Suisse minimise risk and stabilise the processes in its CoE in Pune. Wipro's alliance model with Credit-Suisse

reflects the innovative thinking and flexible value propositions offshore IT services firms are offering to European firms.

"The enormous growth of the IT industry in India is creating a services and value hub."

"A strong offshore capability is no longer an option, but, a strategic imperative."


GLOBAL ENTREPRENEURSHIP AND INNOVATION In an inspiring lunch presentation, Joe Sigelman, the co-founder of Office Tiger, and former Goldman Sachs investment banker, shared his personal experiences and views on creating a 'rule-breaking' offshore services firm. Sigelman explained how Office Tiger developed into an innovative professional support services firm that offers judgement-dependent services to some the largest international investment banks.

Clas Neumann, the CEO of SAP Labs India, SAP's largest R&D centre outside Germany with more than 3,500 software engineers, flew in from Bangalore for a special networking event we organised one day prior to the conference. Neumann, who is the youngest member of SAP's senior executive team, also heads up SAP's breakthrough innovation initiative. He spoke of the innovation capabilities SAP is developing in Bangalore and how SAP derives strategic value from the world's largest technology cluster that has become reality in Bangalore.

This meeting with Neumann made clear to everyone who attended that despite rising compensation and a tighter labour market, Bangalore is growing in importance and has already become a critical hub in the global shift towards a knowledge-based economy.

Editorial Contributor - Chief Executive Officer Peter Schumacher, CEO, Value Leadership Group

Peter Schumacher is the founder, president and CEO of the Value Leadership Group, an independent management consultancy with offices in India, Europe and the US. The Value Leadership Group helps companies address difficult issues in the areas of global business strategy, business model innovation and growth. Originally from the US, Peter Schumacher is a global entrepreneur with ten years' experience of India. Schumacher started his career in

management consulting with CSC Index where we worked with thought leaders and leading companies in the USA and Europe. His previous experience includes building an innovative and successful logistics business in Japan and Asia from the ground up, and cross-border M&A.

Peter holds an MBA in finance and strategy from the Leonard N Stern school of business at New York University. Schumacher is a member of the global editorial board for the Indian Management Review, the leading management journal in India. His research work has been published, he is a frequent speaker, and has been quoted in the international business press.

Copyright 2007 SPG Media Limited a subsidiary of SPG Media Group PLC

"The market is becoming cautious about European IT services firm valuations."

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