Once they chased America’s H-1/L-1; now they scramble for Government of India’s L1-T1. Like the proverbial chickens, Indian IT companies are coming home to roost.
In the film Matrix, déjà vu happened when the master program was changed. In six months from now, a similar sensation might grip you in the Indian passport office. “Wasn’t I here a few days ago getting a banker’s cheque made?” you might wonder. You’d be wrong, of course. “The ambience of these kendras will be like that of [an] MNC bank branch, and it will take you only 45 minutes to submit your application,” says Tanmoy Chakrabarty, who heads the global government industry group at Tata Consultancy Services (TCS), which is changing the genetic code of the passport office.
And the passport office is also changing how TCS works. Chakrabarty has spent the last 12 months scouting for locations for these modern passport issuing centres, negotiating the leases, getting them fitted, setting up data centres and disaster recovery sites. He is even hiring 1,500 people to help the ministry of external affairs (MEA) to enable speedy disbursal of passports. Basically, TCS functions as a co-owner of this official project.
This is not stuff that Indian software companies do elsewhere in the world. There they are just contractors executing the specific task assigned to them. Then, why do they do the heavy lifting with the government at home, which can’t pay them the way Fortune 500 companies do?
One reason is ambition. The world over, Indian companies are still seen as artisans, not architects. The Indian government is letting these companies conceive and build big projects from scratch. In the process, Indian companies are learning change management, system integration and innovative pricing. Even things they know well--like estimating costs of a project upfront--are now seen in a new light, because you have to get the pricing right in one attempt with a government project.
Lead actors
Another reason is that such large government projects aimed at fundamental change are rare. “How many such deals are there in the global markets today?” asks Sivarama Krishnan, executive director, PricewaterhouseCoopers. Even where such projects are being implemented, Indian companies don’t get to do them in full. They are given only small slices. Only in India, and that too in government projects, do they get that opportunity.
According to industry experts, the government will spend at least $8-10 billion over the next three to five years on a wide range of projects. A few examples are automating tax payments, digitising records, streamlining prison administration and tracking of crime suspects and automating staff services at the Railways.
The terms set by the government make it easier for Indian companies to get these projects rather than foreign ones. This would be poetic justice. For years, multinationals like IBM, Microsoft, Accenture and Cap Gemini have used their “home-grown” card in the US, UK or France to win government orders and keep Indian companies at the level of second-tier suppliers. In India, the shoe is on the other foot and this fact has not been lost on anyone.
Infosys’ head of India business unit, H R Binod, has been given a revenue target of a $1 billion in three years. Wipro Chairman Azim Premji wants 10 percent of his company’s India revenues to come from the government practice. TCS is also looking to rapidly scale its government business. And for once they’re comfortable with
being in charge with multinationals playing the role of suppliers.
Take for instance the hospital management project that Wipro is doing for Employee State Insurance Corporation (ESIC).
ESIC provides healthcare services to more than 40 million people at government-subsidised rates. The current system is cumbersome because the hospitals are not linked and there is considerable paperwork required when employees get transferred. Wipro is now working on a project to create digital medical records. Ranbir Singh, Wipro’s general manager for government and defence segments, compares it to the core banking solutions that have made banking so easy for Indians. In much the same way, the hospital management system will make it possible for covered employees to receive healthcare from any dispensary or hospital in the ESIC system. Wipro will hand over 20 million biometric cards to beneficiaries throughout the country.
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Wipro can’t do this all alone. So while it is playing the lead in designing the new system, Cisco, Sun or IBM supply products and the hardware. Not just that, it is also got on credit. The multinationals are willing to extend credit to companies like Wipro that integrate various parts of such projects, because the order size is typically quite large. “A Rs. 50 crore order is big for them too,” says Singh of Wipro.
Learning the rules
The euphoria of being the lead player in large, complex projects is only part of the picture. Every Indian company pushing for government projects is now realising that it is much tougher than doing deals with Fortune 500 companies. The key reason is the tendering process. The government gives out works through L1-T1 tenders: lowest price, best technology. Indian companies have little experience in such cost estimation.
The ESIC project itself demonstrated that. When the first tender for the ESIC project came out in September-October 2008, the government had originally fixed a price of Rs 950 crore. But when the bids were opened they turned out to be way higher! Wipro’s bid was Rs 1,881 crore and all the companies had quoted between Rs. 1,600 crore and Rs 2,200 crore. The tender was cancelled and a fresh round of bidding launched after a few months. Wipro went back to the drawing board and found that if it replaced the proprietary software with open source software it could substantially bring down the cost. The two ends could now meet. Six months later, Wipro had placed the winning bid of Rs 1,128 crore.
The government can’t accept a second-grade service or risk being accused of over-spending. But in some projects, technology is more important and in some others, achieving the lowest cost is. So the trick for IT companies, says Krishnan of PWC, is to understand that it isn’t always about the best technology at the cheapest prices. Most bids have a ratio of price and technology in their relative importance. While in data centres the ratio of price to technology is 55:45, in application development projects it could be 70:30. The challenge is in estimating the weightage correctly, every percentage point shift, Krishnan says, could mean the costs going up by Rs 1 crore.
Once a contract has been awarded, the Indian companies have to do another thing that they haven’t done globally. They have to deploy their own capital to complete the project and wait till it starts working to make money. In the traditional outsourcing model, they are paid as soon as they do their part of the work. The shift could redefine the cash flow model for software companies, requiring them to adjust to a different rhythm.
On its part, the government is also willing to change the way it works to make public-private partnership succeed. But government finances are’nt designed to provide upfront payment for services. Invariably, the IT companies will have to pitch in. The Big Three in software are cash-rich with at least $6 billion of cash on their balance sheets. But they don’t like the Build, Own, Operate, Transfer (BOOT) model too much. They say, the end of tenure takes away the customer and any intellectual property developed in its course.
Capital commitment
TCS is definitely doing it for the passport deal. In a few weeks, TCS will inaugurate the first seven of the 77 new passport seva kendras (service centres) that it is setting up as part of the outsourcing deal it got from the ministry of external affairs in October 2008. Although TCS declined to share how much it will invest, industry sources say that the figure could be as high as Rs. 700-800 crore. The investment will surely be gilt-edged because it is a government project.
Infosys, which won a Rs 250 crore pilot project this year from the Income Tax Department to handle the tax returns in four states as well as all online returns, is setting up the first central processing centre in Bangalore. While the government has provided the building for the CPC, the rest of the investment on hardware, transporting paper returns, scanners, data centre and applications are all borne by Infosys. The IT department will pay Infosys a fixed sum for every return it processes.
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In the ESIC deal, it will take Wipro at least 18 months to build and implement the entire solution and during this time the government will not pay it anything. All the initial investment, which the industry estimates to be around Rs. 400 crore (Wipro declined to detail its investments), will have to be borne by Wipro. At the end of six-and-half months, ESIC might take over the project from Wipro.
Krishnan of PwC says that working with the government can have huge upsides since the business is virtually guaranteed. “Payments may be delayed but they are never lost,” he says. Take the TCS Passport deal. The government will allow TCS to collect Rs. 175-200 from every citizen. Only 3 percent of Indians now own passports. As the service levels improve, more people will apply. Industry projections put the potential revenue for TCS at Rs. 1,700-1,800 crore in the five years after the project
is commissioned.
If the government makes it compulsory then the investment that Infosys will make in building the platform for online processing will be realised in no time.
One user at a time
To make it all stick, these companies have had to learn new ways to price their offering and do some change management programmes as well.
Consider pricing first. In the passport deal, TCS will be paid a sum each time a passport is issued. Now Indian IT companies also do not have too much experience of running transaction priced models which are far riskier than the time and material models used in their global deals.
The other challenge is to change the way the government employees staffing the new system work. “In a private company, just one email from the CEO or Chairman, and everything falls in place. In the public sector it is not so simple” says Singh of Wipro. Wipro has organised 10 regional conferences--where senior ESIC officials and Wipro managers address any concerns about the project.
The government, though, will have the final say. “Premji had come and met me after the bids were decided and he gave a commitment that this project will be successfully implemented within the specified time line” says P C Chaturvedi, director general of ESIC. Wipro can be penalised up to Rs 50 lakh for each day’s delay.
Till now, these companies have kept to the government beat. “Government now views these companies not as suppliers of hardware or software but as business partners,” says Guru Malladi of Ernst & Young. This is what Indian companies have wanted. Finally, they have found it in the most unexpected quarter: their own country. n
(Additional reporting by Udit Misra, Neelima Mahajan Bansal, and Rohin Dharmakumar.)
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