Scholarly article on topic 'Non-linear growth: The road ahead for Indian IT outsourcing companies'

Non-linear growth: The road ahead for Indian IT outsourcing companies Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Y.L.R. Moorthi

Abstract India-centric IT services companies (major among them being the SWITCH companies -- Satyam, Wipro, Infosys, TCS, Cognizant and HCL) grew rapidly for more than a decade by providing low cost, high quality business process and IT outsourcing services. With the bigger companies already crossing the 100,000-employee mark, they are now turning their attention to non-linear revenue (i.e. revenue less dependent on the number of employees or greater revenue earned per employee). For this, they need to pursue ‘disruptive’ strategies which are distinctly different from the ‘incremental’ initiatives they adopted in the past to maintain linear revenue. This paper first outlines the disruptive and the incremental initiatives of the SWITCH companies and the road ahead for them. This is followed by an interview with R Chandrasekaran, President and MD, Global Delivery, Cognizant, who discusses Cognizant’s key operating principles – which include customer-centricity, their unique Two-in-a-Box operating model and their emphasis on working together with clients to make their businesses stronger – and how they have contributed to the company’s spectacular growth story.

Academic research paper on topic "Non-linear growth: The road ahead for Indian IT outsourcing companies"

IIMB Management Review (2011) 23, 151-162

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INTERVIEW

Non-linear growth: The road ahead for Indian IT

outsourcing companies

The Cognizant experience: In conversation with

R. Chandrasekaran, President and MD, global delivery,

Cognizant

Y.L.R. Moorthi*

The Indian Institute of Management, Bangalore, India Available online 12 July 2011

KEYWORDS

Outsourcing;

SWITCH;

Non-linear;

Cognizant;

Wipro;

Infosys;

Abstract India-centric IT services companies (major among them being the SWITCH companies - Satyam, Wipro, Infosys, TCS, Cognizant and HCL) grew rapidly for more than a decade by providing low cost, high quality business process and IT outsourcing services. With the bigger companies already crossing the 100,000-employee mark, they are now turning their attention to non-linear revenue (i.e. revenue less dependent on the number of employees or greater revenue earned per employee). For this, they need to pursue 'disruptive' strategies which are distinctly different from the 'incremental' initiatives they adopted in the past to maintain linear revenue. This paper first outlines the disruptive and the incremental initiatives of the SWITCH companies and the road ahead for them. This is followed by an interview with R Chandrasekaran, President and MD, Global Delivery, Cognizant, who discusses Cognizant's key operating principles - which include customer-centricity, their unique Two-in-a-Box operating model and their emphasis on working together with clients to make their businesses stronger - and how they have contributed to the company's spectacular growth story.

* Tel.: +91 80 26993190; fax: +91 80 26584050. E-mail address: ylrm@iimb.ernet.in 0970-3896 Peer-review under responsibility of Indian Institute of Management Bangalore. doi:10.1016/j.iimb.2011.06.002

Introduction

Changes wrought by organisational initiatives can be categorised as 'disruptive' (Christensen, 1997) or incremental. 'Disruptive' changes change the way products and services compete in the market. To give an example, videoconferencing reduces the need for travel. However the underlying technologies of travel and videoconferencing are not the same. But they compete with each other because they both address the same basic need, i.e. to communicate and conduct business. Tushman and Anderson (1986) call them radical innovations (Tushman & Anderson, 1986).

Incremental changes are those that enhance or better the performance of an existing technology or product. For example, a Pentium chip is ahead of a 486, though both have the same design philosophy and are from the same firm. Literature on disruptive and incremental innovation focuses on technology. However the concepts of disruptive and incremental change can be applied to almost any aspect of an organisation. This article applies them to the realm of strategy, marketing and organisational initiatives. There are firms that adopt incremental initiatives and there are others that adopt disruptive initiatives. More often than not firms adopt both these approaches because incremental initiatives answer today's needs and disruptive initiatives answer tomorrow's.

Indian IT outsourcing companies have been doing a bit of both. When they shot into the limelight, a decade ago, they were seen by several Fortune 2000 companies as a smart way of cost saving. They earned the acronym SWITCH (Satyam, Wipro, Infosys, Tata Consultancy Services (TCS), Cognizant and HCL). Of these TCS, Infosys and Wipro are the biggerones, with Cognizant rapidly closing the gap (http://timesofindia ... Cognizant-may-replace-Wipro-at-No-3). Today, however, after a period of unprecedented growth they face the question: Will the future be the same as the past? Or will it be different? In the past they grew by increasing their headcount and earning revenues proportional to the number of employees. The bigger among them already have more than one hundred thousand employees. Infosys earns $46,352 per employee while TCS earns $43,379 per employee (http:// economictimes ... Revenue-per-employee-picks-up-at-TCS-Infosys-and-Wipro). How far can this growth proportional to the number of employees continue? This is pushing them to look at non-linear growth, i.e., earning more revenue per employee. To map it to what we discussed in the beginning, while incremental initiatives gave them steady growth so far, is the future in the realm of disruptive initiatives? That discussion forms the basis of this paper.

SWITCH companies are initiating up several incremental and disruptive initiatives. Some of those initiatives are listed in Fig. 1 and Fig. 2 below. It may be noted that the same

Fig. 1 Disruptive initiatives for growth by Indian IT outsourcing companies.

Fig. 2 Incremental initiatives of Indian IT outsourcing companies.

generic initiative can be implemented differently making it either incremental or disruptive.

Initiatives for incremental growth

Rapid growth

Rapid growth is in itself a mechanism of maintaining a gap between the firm and its competition (Bhattacharya & Michael, 2008). The SWITCH companies' growth was assisted by an English speaking and relatively low wage force, technical education and proactive government policy besides the large number of Indian employees working in Silicon Valley (Srinivasan, 2005). Morgan, Kaleka, Katsikeas (2004) show that a firm's performance in foreign markets depends directly on resources and capabilities, but less directly on competitive intensity. SWITCH companies have been growing more rapidly than others because they saw the potential of the outsourcing market before the others and built capabilities to deliver growth. TCS was involved in the IT services business right from 1968 (www.nasscom.com). Infosys, the other well known Bangalore based firm, was incorporated in 1981 (www.infosys.com). HCL initially started with the idea of offering IT products in the year 1976 (www.hcltech.com). Wipro set for itself the ambitious target of 4-in-4, that is, 4 billion dollars by 2004 (Hamm, 2007). Thus the SWITCH companies had a head start vis-a-vis smaller Indian and other IT outsourcing companies. They managed to get a critical mass of clients before the others and grew over a period of several years. Recent results also confirm this. Mid level IT firms like Mastek, MindTree and Mphasis have not been able to deliver the results that the SWITCH companies delivered (www.smartinvestor.in. Mastek_plunges_5_on_poor_Q4_results; http://www.make

mystocks.com.MindTree-succumbs-to-poor-Q1 -results-slips-most; http://www.moneycontrol.com. mphasis-plunges-25poor-dec-qtr- results). Early high growth is one of the reasons why the SWITCH companies are much ahead of their smaller competitors.

Adding manpower

SWITCH companies are actively working on three aspects of manpower planning, namely, number, quality and retention. They have built commendable scale over a period of time by recruiting in large volumes. (TCS's recruitment of 1075 students from the batch graduating in 2009 from VIT University has entered the Limca Book of Records (http:// www.hindu.com, 2011). Recruitment is followed by training to match the expectations of customers. With experience goods such as services, employees are expected to have basic skills but are expected to be tuned to customer delight, are trained to perform tasks of medium complexity and the specialists among them are expected to have a reasonable knowledge of the adjacent domains (Moorthi, 2002). Zeithaml and Bitner (1996) call the frontline employees in any service 'boundary spanners' (Zeithaml and Bitner, 1996). Both the image and the delivery of a service depend crucially on boundary spanners. Research also confirms that customer focus and organisational citizenship behaviour leads to customer satisfaction which in turn leads to sales (Schneider, Ehrhart, Mayer, Saltz & Niles-Jolly, 2005). Thus the quality of service personnel is the key to the success of a service firm. Chandrasekharan, President and MD, Cognizant Technology Solutions (one of the SWITCH firms) feels that while quantity is not a problem, quality of personnel available is an issue. The company runs a training academy to address this issue besides conducting job fairs and recruiting from institutes like the Board of Apprenticeship Training (http://www.financialexpress.com). SWITCH companies are also working on retention. Attrition levels grow as economies grow and opportunities multiply. Infosys is planning to circulate the jobs and compensations available in an internal job market to provide choice to employees (http://in.ibtimes.com ... infosys-talent-strategy-2015). Wipro is restructuring its hierarchy and giving restricted stock options (http://www.financial-express.com ... it-majors-reboot-employee-retention- initiatives). Thus working on quantity, quality and retention of manpower is one of the prongs of incremental growth.

Depth of engagement

The greater the incremental business a company gets from a given client, the more predictable its revenue gets. It is known that acquiring new customers is costlier than growing through existing customers (Pfeifer, 2005). Gupta, Lehmann & Stuart (2004) find that a 1% improvement in retention, margin, or acquisition cost improves firm value by 5%, 1%, and 0.1%, respectively. They also find that a 1% improvement in retention has almost five times greater impact on firm value than a 1% change in discount rate or cost of capital. Therefore it is better to increase the depth of engagement with existing customers rather than scout for new ones. However what matters to customer retention

in different domains is different. Gatignon and Xuereb (1997), for instance, conclude that firms should be consumer- and technology-oriented in markets in which demand is relatively uncertain (Gatignon and Xuereb (1997)). In the IT domain where product obsolescence is high, consumer needs shift rapidly (Gordon, 2009). This presents a challenge in retaining existing customers and increasing the depth and breadth of engagement. In Infosys, 80% of the revenue is contributed by 100 of their 600 clients (Interview with S Gopalakrishnan, 2011). Wipro won the Nasscom process innovation award for 2009 for its Cigma initiative which it claims has improved its depth of engagement with customers (http:// outsourceportfolio.com). HCL has signed a 5-year contract with Merck to streamline their operational efficiencies and consolidate their information technology (http:// www.hcltech.com). Other SWITCH firms are also signing long term contracts to deepen their engagement.

Reusable components/Solution accelerators

The service marketing mix consists of the 7Ps, namely, product, price, place, promotion, people, physical evidence and process (Booms & Bitner, 1981). Of these the last three elements are of specific importance to services because services firms often do not have control over the product (e.g. IT service companies have no control over hardware because it is manufactured by other IT companies, though they can pick and choose). Among these, process is separately listed as an important prerequisite for running a successful service (Yap & Sweeney, 2007). In fact some companies have successfully adapted processes from other industries like the Toyota lean manufacturing process to software (Hamm, 2007). Processes can and should be improved by inputs received from employees, customers, suppliers and intermediaries. When employee suggestions are implemented, organisational costs tend to go down (Arthur & Huntley, 2005). While the software requirements for different customers are different, there are elements of commonality that can be standardised. With minor modifications, large pieces of software code can be re-used because the methodology is largely the same as is the desired functionality. Such standard modules of software are called solution accelerators or reusable components. Indian IT companies are developing standardised templates for specific industries so that they need not write code for big projects from scratch (Sharma, 2010, pp. B.6; 'Indian Rivals ...', Wall Street Journal, 2010, pp. B.6). TCS has over 50 Centres of Excellence which track domain and technology trends and address the most critical client needs through specific frameworks or methodologies that accelerate the implementation process for third-party products (http://www.tcs.com). HCL is part of TI's elite design house to write solution accelerators for aerospace, medical and consumer electronics ('HCL Technologies', Accord Fontech, 2010).

Training employees for transformation

With software companies emphasising non-linear revenue, employees will have to not only work smart but also

differently. For instance, more employees will be engaged in consulting work which demands an understanding of the business problems of customers rather than coding. Such ever-increasing demands on expertise call for a wide knowledge base (Sauser, 2000). They demand a wide variety of academic, technological and social skills and grounding in diverse disciplines and capabilities. It is such educational diversity that enhances information use and thereby makes information processing more efficient (Dahlin, Weingart & Hinds, 2005). For this reason bulge bracket consultancies hire bright young MBAs from diverse disciplines (O'Shea and Madigan, 1997). Cognizant, head quartered in the US and modelling itself after the big five consultancies, has been hiring MBAs for several years now. The other Indian IT outsourcing companies have also been aggressively recruiting senior consultants from global consulting firms. Even straightforward coding to specifications is not easy as outsourcing is done across boundaries. Nuances in cross culture communication can create difficulties. For instance, while American contracts are explicit, Japanese tend to be more implicit. Therefore staffing, training and relationship management are the key drivers for success in software projects (Krishna, Sahay & Walsham, 2004).

Cloud computing

An IT solution delivered to a customer is used only by his/ her organisation. However a solution put on cloud can be shared by several customers. It saves the effort of coding and adds to non-linear revenue. The research firm IDC predicts that spending on public IT cloud services will grow more than five times the rate of the IT industry in 2011, up 30% from 2010. Besides social software, gamification and consumerisation have been identified as the big themes for cloud applications in 2011 (Lev-Ram, 2010). On-demand enterprise software revenue will break the $10B barrier compared to the global packaged enterprise software application market at about $90B. Cloud has moved from near zero to 90,000 virtual computers created per day on Amazon. It allows developing countries to use the infrastructure already available on the cloud without sinking money themselves (http://www.economist.com). SWITCH companies have announced big initiatives on cloud computing. Profit margins on cloud however, are low compared to brick and mortar products. Thus what value is offered on cloud and how it is offered is crucial to profitability. TCS has configured an SME cloud for firms in the Rs 50 to 500 crore (500 million to 5 billion) revenue band (TCS bets big on 'SME Cloud', 2011). Infosys, with well trained people and processes, claims to give substantial savings through cloud based offerings (Eluvangal, 2010). Each of the SWITCH companies is finding its way of adding value on the cloud.

Delivery for all stakeholders

The long term prospects of an organisation depend on its ability to create value for all stakeholders. (In the course of one of the author's programmes, the executives of a leading enterprise application software firm said that for

every dollar the company earned, many more dollars were earned by the partners!) In IT unless the ecosystem benefits as a whole, an innovation will not achieve scale. In fact in IT, the stakeholders go beyond other collaborating companies and 'Porter's Five Forces' (Porter, 2008). They also include third-party developers, open communities, educational institutions, solution brokers, R&D establishments and universities (Nikolov and Ileiva, 2004; Parker and Pohlmann, 2007). The founder of Acer concurs when he says, 'Indeed, executives have to ignore what works best solely for themselves and give the idea of benefiting others precedence over their own interests. They themselves can thus benefit the most. This philosophy is similar to that of an ecological system, which can be sustained by interdependence' (Lin & Hou, 2010).When the big IT companies like IBM did not take the initiative to improve the Industry Standard Architecture (ISA) bus, a chip maker like Intel seized the opportunity. Prior to that, since the bus was slow everything from the hardware to graphics ran slowly. By erecting an ecosystem that benefited everybody Intel co-scripted the PC revolution with Microsoft (Gawer & Cusumano, 2002). When a typical service provider like TCS or Infosys provides a solution on the cloud, other companies like Amazon or IBM might provide the cloud services. Thus Infosys's solution will find acceptance in the market only if all the stakeholders benefit from it. This demands that the hardware providers, the application providers, collaborating Internet or telecom companies and finally the service provider act in unison.

Taking over a department

Outsourcing generally brings efficiencies to the outsourcer (Amaral, Anderson, Parker, 2011; Bertrand, 2011). It traditionally meant hiving off non-core aspects of the business to an entity that could deliver the same economically and save costs (Clott, 2007). At the least outsourcing means voice business process outsourcing (BPO) work. However as the interaction matures the service provider takes over an entire department of the client organisation or even runs the department for the client. This would change the way client companies work, reconfiguring their business processes, work flow, functions and departments (Contractor, Kumar, Kundu & Pedersen, 2010). SWITCH companies, of course, are keenly aware of the limitations of outsourcing. They cannot forever depend on the low cost advantage because companies from other countries like Philippines are aggressively competing for BPO work. The Philippines in 2010 earned $5.7 billion for call centre work from the US, Europe, and Australia compared to the $5.5 billion of India's call centres, according to the Everest Group, an outsourcing advisory firm (Srivastava, 2010, p. 1). China is also playing for a greater share of the outsourcing pie (Flinders, 2009, pp. 7). Therefore SWITCH companies are trying to move to the higher end of the service spectrum. Infosys and Wipro are racing to broaden the services they offer and compete for higher-level work that usually goes to larger rivals including IBM, HP and Accenture. They are aggressively pursuing onsite work like managing companies' entire IT departments, networks and help desks (Sharma & Worthen, 2009, p. B.1).

Nuanced pricing

There are many different ways of pricing an IT service. The three well known methods are those based on time and material, fixed cost, and risk-reward sharing. In the first type of pricing the service provider charges based on the man-hours spent on the project. In the second, the overall cost of the project is fixed. In the third, the service provider gets paid based on the gains the client gets from implementation. There are also hybrid models of the three. Czerniawska (2003) feels that consultants are yet to prove their worth on risk-reward sharing and therefore 50% of the contracts continue to be time and material based (Clott, 2007). Recent research in outsourcing IT contracts shows that the link between project parameters, pricing and profitability is more subtle than is imagined. In general clients prefer fixed cost pricing to time and material pricing. But the SWITCH companies may have reasons to prefer the latter. Other things being constant, time and material contracts lead to Rs 748,000 (roughly $16,000) more than fixed cost pricing. In repeat projects counter-intuitively there is less profit than is usually imagined. Thus there is a lot of scope for intelligent pricing of software projects (Gopal, Sivaramakrishnan, Krishnan & Mukhopadhyay, 2003). Dolan and Simon (1996) point to several ways of adjusting price through addressing market segmentation, customer needs, competitive environment and several other such variables (Dolan & Simon, 1996). Traditionally Infosys earned more margins than Wipro because it executed more lucrative projects (http:// www.wikinvest.com). Cognizant is able to price better with its two-in-a-box strategy where a delivery person and a client service executive are jointly responsible to a client. By addressing the customer needs better they have been able to get greater traction for both top line and bottom line.

Executing the same strategy differently

It often happens that the strategy is sound but the execution fails (Bossidy & Charan, 2002). A given strategy can yield different results. For instance, SWITCH companies have been recruiting employees in large numbers. But what sort of employees they recruit can make a difference to the ultimate performance of the organisation (Zeithaml & Bitner, 1996). If a given organisation recruits a greater number of consultants as a proportion of its employees it is more likely to aim for higher-order work. Which is why the revenue earned per employee is much higher for a Mckinsey than a typical SWITCH company (http://www.careers-in-business.com; www.infosys.com). Similarly while all SWITCH companies might adopt cloud, what they deliver on cloud can be different. Infosys entered the infrastructure business relatively late but since they adopted an asset light strategy the move locked up fewer resources and eased profitability. Each of the SWITCH companies might be pursuing blue ocean initiatives (Kim & Mouborgne, 2005) but what each of them treats as blue ocean might be different. For instance, Vineet Nayar, the CEO of HCL Technologies treats people, ideas and mindset as blue ocean 'droplets' (Nayar, 2010).

Initiatives for disruptive growth

Disruptive initiatives are more difficult to implement than incremental initiatives. Developing a brand or a product IP is more challenging than running a client department. So also acquiring consulting skills needs a change in method, mindset, processes and people. Similarly acquisitions are more a marriage of culture than convenience. These initiatives require fundamental changes in the way the organisation functions. However, when implemented over the long term they tend to yield results with an order of magnitude difference. We discuss below the following disruptive initiatives namely branding, product IP, consulting and acquisitions.

Branding

Kapferer (2008) believes that brand is a name that influences the buyer (Kapferer, 2008). There is also general consensus that a stronger brand can charge a higher premium (Aaker, 1991, Ailawadi, Lehmann, Neslin, 2003, Keller, 2003, Leuthesser, Kohli & Harich, 1995. Aaker (1996) opines that there are four components to a brand namely, brand as product, as organisation, as person and as symbol (Aaker, 1996). While IBM is seen as an end-to-end brand on the brand-as-product dimension, SWITCH companies might be seen basically as IT service brands. However, if among the SWITCH companies some brands are stronger than others, they can charge a premium. TCS is the oldest brand. Thus it has been able to deliver more projects than the others. Its global footprint is wide and deep. Infosys, on the other hand, is seen as a strong brand. Wipro is seen as strong in 'telecom' while Cognizant is strong in the health domain. Each of these companies can therefore charge a premium in their respective domains of strength. This contributes to non-linear revenue.

IT service companies traditionally did not focus on product. Krishnan, Kriebel, Kekre and Mukhopadhyay (2000) show that more capable personnel, adequate deployment of resources at the design stage and better software development process result in better software products Krishnan et al., (2000). Cusumano (2004) in fact suggests that it is good for all product companies to have services and all service companies to have products (Cusumano, 2004). Fang, Palmatier & Steenkamp (2008) believe that the impact of a firm's transition to services on firm value (as measured by Tobin's q) remains relatively flat or slightly negative until the firm reaches a critical mass of service sales (20%—30%), after which point they have an increasingly positive effect Fang et al (2008). Bajaj (2009), pp. B.1 gives reasons why India is slow on developing IT products (Bajaj, 2009, pp. B.1). However companies like Infosys and TCS do have finance products. Infosys is trying to acquire product IP in mobile applications. Traditionally it was difficult for service companies to acquire IP because the IP rests with the customer. Now they are finding interesting ways to share IP with clients. Infinite Computers, an Indian IT outsourcing company, for instance, has the highest IP based revenue among the mid-tier IT firms (IIFL report, 2010). This gives them licence income which is independent of effort.

End-to-end consulting

Consulting can be a difficult business because a consultant cannot canvass his own service and is dependent on referrals. Professional services (like consultancies) apprehend that any attempt at aggressively marketing their service might bring down their reputation and consequently harm their business prospects (Bloom, 1984). Contrary to what is expected, consultants not only need to work with clients but also with each other. This is because clients seek more than one opinion on important problems, often paying more for the second opinion (Sarvary, 2002). According to Czerniawska (2003) most big projects involve multiple vendors (Czerniawska, 2003). Further, most research is agreed that the reputation of the consultant plays an important role in selection as well as post delivery satisfaction. Hill, Garner and Hanna (1989) confirm the view and show that the knowledge and comfort dimensions are the most important selection criteria for choosing a professional service provider. Complementing this view, Brown and Swartz (1989) believe that inconsistencies in expectations lead to poor service experiences (Brown & Swartz, 1989). While all SWITCH companies would like to do business consulting, it is more difficult to deliver than IT implementation. However, they are now recruiting aggressively from big consulting firms though they could still take time to establish credibility. Business consulting requires deep domain knowledge which the SWITCH companies are now acquiring. If SWITCH companies do acquire expertise in business consulting and domain expertise, they can enhance their non-linear revenue and also pose a significant threat to pure business consulting companies in future.

Acquisitions

Tsai and Esingerich (2010) classify internationalising firms into four types a) multinational challengers b) global exporters and importers c) Original equipment manufacture (OEM)/Original design manufacture (ODM) technology leaders and followers, and d) regional exporters and importers (Tsai and Einsingerich, 2010). They argue that overseas expansion of firms from emerging economies can be driven by their search for resources and other critical assets, such as technological know-how, R&D capability, managerial skills, and global brands to compete with their peers from developed markets. SWITCH companies today have reached the scale of multinational challengers though they started as global exporters. They are acquiring companies globally to expand their geographical spread and skill base. Turnbull and Doherty-Wilson (1990) point to mergers and acquisitions as one way of rapidly acquiring a global footprint (Turnbull Peter & Doherty-Wilson, 1990). However, acquisitions do not always work well (Porter, 1987). Rankine (2001), pp. 256 identifies flawed integration management as one of the important reasons for the failure of acquisitions (Rankine, 2001, pp. 256). Among SWITCH companies Infosys has been relatively cautious in its acquisitions while the others have been more aggressive. However, most SWITCH company acquisitions have been small companies that add incrementally to revenue and

headcount. SWITCH companies have also not made hostile acquisitions. Their acquisitions have generally been niche companies that give them geographical reach and domain footprint.

Conclusion

SWITCH companies appear to be pursuing incremental strategies more than disruptive ones. That is possibly because they do not want to upset the steady growth they have experienced in the last decade and a half. If they do succeed in their strategies they can end up as strong competitors, not just to end-to-end IT firms but also pure play consultancies. This will give them another decade of growth or more. Disruptive initiatives however need courage and commitment. If they are successful in their new initiatives (incremental and disruptive) they can define a new business layer between IT and consulting by delivering it in their unique way.

The Cognizant experience: In conversation with R Chandrasekaran, President and MD, global delivery, Cognizant

R Chandrasekaran has over 25 years of experience in the global IT industry. He has been with Cognizant since its inception in 1994, propelling its growth into a global delivery organisation, spearheading new solutions and championing crucial process initiatives. As an Executive Officer at Cognizant, he drives delivery management, capacity growth, and process initiatives, proactively nurturing key alliances and leveraging business partnerships. In addition, he focuses on emerging markets such as India, Asia-Pacific, and the Middle East, among others. Prior to joining Cognizant, Chandrasekaran worked in various delivery and business development roles with Tata Consultancy Services. In 2008, he received the 'Distinguished Alumni Award' from the National Institute of Technology (formerly the Regional Engineering College) in Trichy, where he earned his Bachelor's degree in mechanical engineering. He holds an M.B.A. from the Indian Institute of Management, Bangalore. Source: www.cognizant.com

YLRM: Sir, congratulations first on the spectacular results Cognizant has shown in the last year. It is generally felt that Indian IT outsourcing companies have been showing fairly high earnings before interest, tax and amortisation (EBITA). But Cognizant, if I am not mistaken, was showing a few percent points less than that. They were ploughing back a lot of their money into front end, sales and business building activities. And now, in the last two or three years, after several years of investing, they are reaping the results, showing up as one of the top performers. Is that correct?

RC: When we took the company public in 1998, we made the decision to keep our non-GAAP operating margins lower

than our peer set but stable, and take those dollars and reinvest them for long term growth, industry leadership and deep differentiation. What we said to our shareholders is that in return for that privilege of having a lower margin, our goal and our commitment is to grow faster on an organic basis than our peers in the market. The reinvestment strategy has worked consistently and delivered results.

YLRM: What are the other things you did on front end spending?

RC: It was not just the front end; there were several other initiatives. We had to sustain our unique operating model. We needed the investments to take care of our customer relationships and also to evolve as an organisation to keep up the delivery engine.

YLRM: What is the model? How are you different from others?

RC: This is now a very well talked about model - the Two-in-a Box (TIB) operating model. From the beginning, since we started as an offshore captive, we did not have to focus too much on sales. We had to focus on developing deep relationships with all divisions of the client organisation and then exceed their expectations in terms of delivery. We started as a delivery organisation and then extended to relationship management. So that became our unique operating model. It's not a sales-oriented approach. It is more relationship-oriented. We wanted to be the long term trusted partner for our customers. Nobody else had that model back in 1996-97.

We go by two or three key operating principles. One is, as an organisation, we will be customer-centred. We will do whatever it takes to ensure that the customer is happy. As an organisation, even as you continue to grow, there are a lot of conflicts you need to take care of, such as the geographies, the verticals, horizontals, etc. However, our axis of alignment is actually the customer. If you have an axis of alignment, everybody congregates around that axis and the conflicts in the organisation get resolved to some extent. Everybody is focused on doing the right things for the customers. That's the key operating principle, a customer-centric approach.

The second thing is the Two-in-the-Box operating model. In this model, at every level in a client engagement, two people (one onsite and another offshore) are made jointly responsible. All the pairs have joint accountability and their performances are assessed based on the same metrics. In this model, the centre of gravity is not geographic, but vested in a group of people. Each one individually and jointly feels accountable, empowered and responsible for the success of the engagement. They together define the success of the client along the same terms. Customers see the Two-in-a-Box model as superior to the pass-the-baton or the throw-it-over-the-wall model because there is no opportunity for loss or dilution anywhere in this model. This is more of a relationship model and the execution is good because all stakeholders are aligned from the start. The 'Two-in-a-Box' philosophy of the onsite and offshore teams working together makes it a more fulfilling experience for the customers.

We have to see that we are always doing the right thing for the customer, ensure that we have the delivery capability to exceed their expectations, make investments into both front end as well as the back end in terms of

enhancing the capability and ensure that we deliver well. And the TIB model has the checks and balances that you need to run the business. If you have a sales-oriented approach, you tend to over-commit. If you have a delivery-oriented approach, you become very conservative. Our philosophy is always 'under promise, over deliver'. That makes the customer very happy. In the TIB operating model, the delivery team and the client relationship team are joined at the hip in terms of their goals. That way a relationship person cannot be successful if the delivery team is not supportive and the delivery team cannot be successful if the business is not growing. It really speeds teamwork within the organisation and that reduces conflicts.

Thirdly, we have always been business-focused and we have differentiated ourselves right from the beginning by saying, we are here to solve the customers' business problems and that we will provide solutions to business problems leveraging technology, rather than mere technical capability. However, unless you understand the customer's business issues, you will not be there for the long haul in maintaining the relationship. So when we organised ourselves, we aligned along industry verticals. We were the first organisation to do so. Some organisations aligned themselves along technology and geography. Technology keeps changing every few years and as a technology company, you need to keep yourself up-to-date. What takes a long time to understand, however, is the business issue. Unless you focus on the business issue, you will never be able to get long term results.

With these three key operating principles, we are able to differentiate ourselves significantly in the market place and our customers say they can feel the difference in the air. An offshoot of the business perspective that we bring is the tremendous success within the organisation of the MBA programme. We started hiring MBA students from campuses in 1997 and have been continuing to do so since then. We have one MBA for every 25 software professionals; that's perhaps the highest share of MBAs in our industry. We have been able to deliver projects to customers seamlessly, because our team is able to translate the business problem into a technology problem and then the delivery team can take over and manage. Some of the MBAs manage client relationships, some have moved to consulting. This provides a new dimension and we are able to service our customers' needs well.

YLRM: There are some companies in India, for example IT outsourcing companies, who feel that non-linear growth is also important. But they fundamentally grow linearly. What is your way of looking at this?

RC: I think it is a natural process of evolution and it is important to have some non-linear component in your revenue mix. However, today, 98—99% of the income of most Indian IT outsourcing companies is linear and that will continue to be the case.

YLRM: Do you have any objectives in specifying linear and non-linear numbers?

RC: It is very difficult to put a goal, but definitely we have certain ambitions. We are making a lot of investments and Cognizant, as an organisation, is ready to take on and better the competition in terms of growth, thought leadership and non-linear revenue model.

YLRM: What are the typical non-linear initiatives you have?

RC: We have service oriented architecture (SOA), which has been there for quite some time and we have reusable components that we can use across multiple applications. More recently, we have been making a lot of investments in cloud architecture. Again, we are not restricting ourselves to the business-side or the technology-side of cloud architecture. We are looking at end-to-end business process on a cloud. So that means, if we have to offer financial and accounting (F&A) services to our customers, we will have the core, the rules engine platform, which will run on Cognizant cloud. This can interface eventually even with the back-end systems of the customers. We can manage the business process as well as the underlying technology to design the rules. This helps the customer know how we are charging. It is a shared services concept and the customers will pay for the transactions or the outcome.

YLRM: Are the other Indian IT companies doing something similar to this?

RC: Everybody is making some investments in this area. We are making a difference with the end-to-end business processes that don't stop with technology.

YLRM: Look at a typical product company like SAP. They have been saying for a very long time, put so much money on the table and take a diskette (because SAP is a premium product). Now with the competition coming from online companies like Sales Force and so on, SAP is also migrating online. But one of the problems with going to cloud is that the margins drop. Is that a concern?

RC:No; I consider it as a win-win situation because we are able to operate on a shared services model. And if you have the right tools, platforms and processes, you can gain a lot of scale efficiencies. That will help improve the margins. From a customer's point of view, they do not have to incur big capital expenditure. They are only paying for the services.

YLRM: Like many other Indian IT companies, Cognizant has also been making acquisitions in different parts of the world. There are some interesting similarities in the acquisitions being made by Indian IT companies. Very few of their acquisitions are hostile. Most of the target companies are small companies - around $20 million and sometimes less than $5 million. Are there any contrasts in terms of how Cognizant seeks acquisitions?

RC: Our philosophy has always been to go for 'tuck-under' acquisitions. There are several reasons for that. We make acquisitions primarily to venture into newer areas where we do not have any expertise—it can be in a domain, a geography or to fill a certain gap in the service line. Our acquisition is always aimed at filling this gap. We don't need to do a large scale acquisition to fill the gaps. Our strategy is to acquire for 'capability' and not capacity. At over 111,000 employees end of March 2011, we believe that Cognizant can deliver to almost any client need at scale. Additionally, through our proven recruitment and talent management programmes, we believe that Cognizant can grow faster organically (and with higher quality and lower risk) than through scale acquisitions. But to jumpstart some of the newer initiatives, it is good to have some external expertise coming in to the organisation.

YLRM: But these numbers are small, Will they make an overall difference to the way Cognizant operates? And if

that doesn't happen then will the non-linear initiative really take-off? Is that a concern?

RC: 'Small' is relative. Ten years ago when we did an acquisition, the acquired companies used to be worth $2-3 million. When we think about the size of Cognizant today and we think about what a tuck-under acquisition means, our sweet spot really is probably in the $20 million to $80 million range, maybe going up to $200 million in target company revenue, but really $20 million to $80 million is our sweet spot of revenue for an acquisition. We have the ability to integrate such companies well into the organisation.

YLRM: Globally, acquisitions have had assimilation problems. Has this been something of a concern?

RC: There have been a lot more successes than failures in mergers and acquisitions (M&A) in the industry. In Cognizant, we feel we should go in for small tuck-under type of acquisitions mainly because we feel that integration will be a lot smoother. We are very keen to protect the culture and the DNA of our organisation. If you merge with another 40-thousand member company, then the culture is going to be disturbed. And we don't know what will happen to the organisation. Our customers continue to work with us because they like the culture, the team and the approach. If their experience is going to be any different that will send the wrong signals for our growth.

YLRM: Can you share with us one acquisition which has gone very well and one where there has been scope for improvement?

RC: All our acquisitions have worked well. We acquired a company called AimNet, a managed infrastructure and professional services firm. This transaction provided Cognizant with a state-of-the-art US-based Network Operations Centre (NOC), a world-class patent-pending, proprietary infrastructure management software platform, an installed base of over 80 direct and indirect customers and partners, and high-end network and infrastructure consulting capabilities in areas such as network architecture, planning, design and infrastructure security solutions. We have been able to successfully leverage AimNet's expertise to grow our infrastructure management business significantly in the last four-five years. It has provided the jumpstart that we needed for scaling business. Further, in terms of business potential, it has helped unlock great potential for future growth.

Another successful acquisition has been that of a company called Strategic Vision Consulting based in California, a leading management and technology consulting firm serving the media and entertainment industry. The advantage was that the company had relationships with major studios in the area. And by leveraging the relationship, we can look at downstream project opportunities and opportunities for cross selling. That was a different type of acquisition where the focus was on consulting and leveraging it to identify downstream opportunities.

YLRM: For marketRx you paid something like thrice the revenue but only two thirds for Ygyan. Is there any benchmark price for acquisitions?

RC: It depends on the revenue model and the value. As a high-end consulting and analytics services provider with a platform to deliver those services. marketRx had a fantastic revenue model. So it is significantly at the

higher-end of the value chain. Ygyan was a good acquisition because it gave us the SAP jumpstart.

YLRM: Any acquisition that hasn't really happened as you wanted?

RC: Frankly no, because most of these are small acquisitions. We have been able to put them into our fold and grow them.

YLRM: Now Indian outsourcing companies want to do what is typically called business-IT consulting. Cognizant has been a little more successful than others in this. What exactly do the Indian IT outsourcing companies want to do?

RC: One of the reasons our consulting practice has been extremely successful is because it is an integral part of Cognizant. We call it Cognizant Business Consulting (CBC). These ventures are very well interwoven with the rest of the organisation. They are able to draw upon the expertise that they may need for providing consulting services. Most of the other companies have kept their consulting arms as separate divisions. That model was not successful. (Now they too have integrated like we did.) Right from the beginning we have kept consulting as an integral part of the core Cognizant offering. The second thing that gives our consultancies a lot of credibility is that they are not restricted to consulting engagements but taken up to implementation. Thirdly, because of our recruitment of MBAs, which we have been doing for the last 13—14 years, there is a lot more business orientation. We have over 2600 consultants globally across various industry verticals. They are able to bring to the vertical, deep ability to understand the customers, business issues and also provide the requisite thought leadership to address those issues.

YLRM: What percentage of the money comes from consulting?

RC: We don't really measure consulting based on the revenue. While the consulting revenue is quite significant, we don't measure it separately. But it is a door-opener. There are various measures we look at, including the size of the downstream opportunity generated. It is not about quantity. It is about quality and how we are able to deepen the relationship with the customer. Consulting creates the stickiness we need in actually estimating the depth of our relationship with customers. Customers who have been working with us for five or ten years ask us to tell them what else to do, over and above the original brief; they ask us to lead them from the front rather than take orders. So that's where consulting really helps us to take the lead and move up the value chain.

YLRM: One of the other initiatives is the product IP. But the problem is that IP usually rests with the client. Do you actually have a product?

RC: No, we don't have a product. We don't think of a product which will sell to thousands of customers. We have business knowledge encapsulated in a framework which will address 40—50% of any client's business requirements; the remaining 40—50% we will customise and offer as part of our services (reusable component). It not only brings reusable components, it also brings residual knowledge that you get by servicing multiple customers. We have the best practices encapsulated and we are also able to take care of the unique needs of a particular customer. So that way we are protecting the IP of the

customer but we are also able to bring in the industry's best practices.

YLRM: Have any patents been filed so far?

RC: We have a platform called Cognizant 2.0, which is a seamless global delivery platform. That's how it started but now it's more than that. Now it is really able to network people across the globe.

YLRM: Cognizant's footprint in the US has been much more than that of other Indian IT companies. And the reason is the way it was structured right from the beginning. You were head quartered there as you wanted to be very close to the customers. With the recent downturn there must have been concern that you have to spread your geographical access. Probably the acquisitions you're making in Europe have been partly because of that. Is there any objective in terms of how to spread geographically?

RC: We did not have too many acquisitions in Europe. Moreover, I don't think acquisition is the only route that we are taking to expand into other geographies, though it's one of the ways. What we have been able to do successfully is, even when the economic situation all over the world was pretty weak, we have been able to consolidate our position in the US with our customers. We actually made more investments during the downturn with existing customers. And it helped in strengthening the partnership with the customer since we were perceived as a company that was not opportunistic, as a company that was there irrespective of whether the times were good or bad. That actually helped in earning the trusted adviser/partner status.

YLRM: Is there some kind of de-risking of the geography?

RC: Five years ago, our US revenue was probably over 90%, now it has come down to 78%. There was no objective; it is a natural progression. Whether the times are good or bad, the business goes on. The Cognizant credo is, don't do multiple things at the same time; you will not be successful in anything that you do. Pick up one thing and put your heart and soul into it and you will be extremely successful; then, go to the next thing. When we started expanding customers outside of Dun and Bradstreet, we focused on the US in the first 6—8 years, moving gradually into the UK and in the last four years into Continental Europe. Now the focus is on emerging markets, including India, which contribute a material 3—4% of our revenues. So we definitely but gradually expanded over a period of time.

YLRM: Whether it is called services or consulting, a lot of your revenues comes from Banking, Financial Services and Insurance (BFSI) and 60% of your revenues comes from the US. Given this, is there a limit to how far you can de-risk/diversify?

RC: It will happen over a period of time. You keep making investments and keep moving so that you know over a period of time you have spread your business everywhere without losing focus on the existing customers.

YLRM: Different companies have been focussing on different verticals. The maximum share of your revenue has been coming from the BFSI vertical, with pharma coming second. Are you looking at expanding into any particular verticals?

RC: We are constantly looking to expand our presence. While BFSI brings in the maximum revenue, we have also been able to differentiate ourselves through our healthcare expertise and grow the healthcare business. The newer verticals we are venturing into are information, media and

entertainment, which is a fast growing segment; energy and utilities where we are gradually growing our presence; communications, which is growing nicely despite our being late entrants in the segment. We are looking at convergent space between communications, technology, and media and entertainment. There is a lot of synergy and we are looking at opportunities in cross-border areas across those domains.

Consulting is a very important aspect of growth. As of now, our focus is on the interface between business and technology.

YLRM: Coming to consulting, how do you see the other IT outsourcing companies, especially the other SWITCH companies?

RC: Everybody has their own strengths and axes; as long as everybody sticks to their core principles and as long as they have the right strategy, everyone will be successful.

YLRM: While the global Indian companies are ramping up on one side a similar thing is being done by companies like IBM and Accenture. While you want to go up the food chain they are probably coming down the food chain. A question that may be asked is, what is it that the Indian companies are doing that an IBM cannot?

RC: I don't think we should be viewed as an 'Indian' company. We have global aspirations. In the near future, there will be four or five global consulting firms who will have access to the global markets and global talent pool. And Cognizant will be one among them.

YLRM: Coming again to MNC IT companies and globalising Indian IT companies — the net profit levels of Indian companies is high but revenue per employee is low while it is just the reverse for MNCs. Is there an inherent contradiction between the two?

RC: Over a period of time everyone will converge to the same figure, somewhere in the 19—20% range. In 1998, when we went public, most of the other offshore firms had a margin of 28—32%. Accenture was in the region of 11—12% give or take a few percentage points. In the last few years, the operating margins of the Indian companies have come down, right now they are in 26—28% range, while Accen-ture's operating margins are going up. Soon everyone will converge in the 19—20% range, the Cognizant range.

YLRM: You have been with Cognizant for 25 years. What are the challenges you see for the company in the future?

RC: First, we have to prove that we are really a global company. We crossed the 100,000-employee mark in December 2010, but 75,000 of them are based in India. We have to tap the talent pool outside India, bring global skills into every client engagement and get them to work seamlessly. The earlier we do it, the better we would do as an organisation. We are making progress there. Second, the scale has reached very high proportions, so the sooner the non-linear revenue model kicks in, the better we can manage the scale. And coming out of the scale is the third challenge — preserving the culture of the organisation, despite growth. We don't want to lose the basic fabric of the organisation. The three are not mutually exclusive, they dovetail into each other.

YLRM: Lastly, what is your advice to MBAs who are graduating?

RC: Patience and perseverance are important. You have to set realistic expectations. Don't put too much pressure on yourself. Further, don't chase success, let success follow you.

YLRM: Thank you very much Sir, for your time and your

inputs!

RC: Thank you.

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