On the outskirts of Mumbai in the suburb of Vikhroli sits a chemical complex that, once upon a time, stood at the heart of India’s soap manufacturing industry. Now in disuse, the site’s chemical drums sit rusting, while the stench of sulphur, unmistakable and overwhelming, lingers in the air. No-one here is too concerned with making soap anymore, and not surprisingly. For on this complex – in two converted factories – sits an offshore outsourcing hub that, during the past decade, has become the beating heart of Europe’s premier IT services provider, Capgemini, instead.
Inside, the scene is eerily tranquil. Cool and cavernous, the building feels like a modern airport on mute, its 1,200 seats occupied by a diligent, noiseless workforce. High above them, posters bearing the questionable claim “The most common thing you’ll see around here is fun unlimited” gaze down on paperless desks on which few, if any, personal effects are visible. These workstations are divided into project-based cubicles in a style peculiarly reminiscent of a 1980s open plan office block. In places, faux silver trophies balance precariously on cubicle partitions, a reward for “project excellence” that is widely regarded, the site manager explains, as “quite an honour”.
Incorporated into the group in 1997, this unlikely facility in Mumbai would become a vital beachhead for what is now Capgemini’s comparatively largescale Indian operation. Since first venturing onto the subcontinent, the French IT services provider has expanded into five further Indian locations in Kolkata, Pune, Hyderabad, Chennai and Bangalore. Bolstered by its February acquisition of Kanbay International, originally a North American centred IT services provider that leveraged India for delivery, Capgemini now has more than 13,000 Indian-based employees on its payroll, representing a chunky 20% of its global workforce.
Without a doubt, the success of that Indian adventure has lifted Capgemini from near-catastrophe to a new high. Fuelled, in large part, by its robust showing on the subcontinent, Capgemini announced in February 2007 that it had doubled its net profits for the year ending December 2006, representing revenue growth of 12.1%. That good news was promptly followed by a reported revenue growth for the fiscal first quarter ending 31 March 2007 of 14.2%. In this quarter especially, the French IT services provider could point to the strong showing of its outsourcing business at 18% growth, a development that has secured the company a mid-ranking position in the global IT service top 10 and the number one position in Europe.
Venture further into the belly of Mumbai’s vast office-scape and another poster, intended to boost both productivity and morale, comes into sight: “Trust yourself to make a difference”, it tells the Indian workforce. This invocation, for all its contrivance, is one that bears special relevance in Capgemini’s case. For the French IT services provider has not always enjoyed such bullish times.
Turn the clock back fewer than two years, and Capgemini’s bottom line looked very different indeed. Having been hard hit by the economic downturn of 2000, the next half decade saw the organisation’s revenues enter a state of near freefall, with its share price diving 53% in 2001 alone. By February 2003, the public fears expressed by Geoff Unwin, the company’s outgoing CEO, that there was “no evidence” that 2002 would grant a reprieve, were confirmed: as the market fell, Capgemini was ahead of the downward curve, posting a 16% revenue drop for 2002 and reporting a net loss of e514 million.
As Dominique Raviart, senior analyst at Ovum’s outsourcing practice, observes, the house was now on fire but worse was still to come. During 2003, Capgemini’s sales fell dramatically for the second year running, dropping by e1.3 billion. Speculation that Europe’s leading IT services provider might lose its crown to Franco-Dutch rival Atos Origin was now widespread. Submerged in red ink, Capgemini went on, in 2005, to sell off its North American healthcare consulting practice to bitter rival Accenture, in a move that would seriously weaken its presence in the US thereafter.
In large part, Capgemini’s troubles were a product of woefully poor timing. During the Y2K rush of 1999, the company had enjoyed the spoils of falsely inflated market demand for services that were then the company’s strongest suits: integration and consultancy. Buoyed by an operating margin of 10.1%, the company went on in 2000 to buy the IT consultancy arm of Ernst & Young for a bloated $11 billion, a move that, at the time, was widely regarded as a masterstroke.
But enthusiasm was short-lived. As the market slowed and IT budgets inevitably retracted, demand for costly, high-end consultancy services began to evaporate. Within two years of the Ernst & Young acquisition, recalls Pierre-Yves Cros, group strategy director for Capgemini, IT services demand among clients had shrunk by a scorching 20%.
For its competitors, however, many of whom boasted strong outsourcing divisions, the climate proved nowhere near as hostile. As IT directors felt the pressure to cut-costs, Western providers such as Accenture and EDS were able to notch up numerous, highly lucrative outsourcing contracts, while Capgemini looked on.
Furthermore, Indian IT services companies – as well as Western companies with a strong offshore delivery base – were offering Capgemini’s customers and prospects deals that it could not match. In many cases pitching at 20%-40% less than any bid Capgemini could muster.
In the meantime, the French IT services provider faced the complex, and what would eventually turn out to be unsuccessful, challenge of integrating its now over-capacitated consultancy arm. Capgemini was, as even Cros will admit, an organisation experiencing something of an existential crisis.
“We got things totally confused. The mistake we made was in trying to embrace a very complex organisational model which had three lines of P&L relating to the sectors on one hand, the 13 various disciplines, and the different geographies,” he explains. Such was the complexity of this structure that, in many instances, adds Cros, employees were not even able to identify their boss.
As conflict and confusion grew, the cost of maintaining this matrix became extremely high, says Cros. “It was impossible to manage. So the first action we had to take was to create some order.”
"We got things totally confused. The mistake we made was in trying to operate a complex organisational model."
Head of global strategy
From 2003 onwards, Capgemini took a series of major decisions to do just this. Chief of these was to dramatically restructure the company and cut the flab.
First, says Cros, was the move to slim-line the organisation from 13 disciplines to four, broadly focused on consulting, technology services, local professional services, and outsourcing. And the second decision was to make the last of these areas its chief concern, says Cros. “In that portfolio, we decided to move from 14% of our revenues in outsourcing to 40%, which was a big shift.” To release the infrastructural costs of the outsourcing business, which according to Ovum’s Raviart was characterised by too many data centres and an inconsistent tool set, the company had to move “massively to an offshore model”, adds Cros.
Between 2004 and 2005, as Capgemini moved to sell off its consultancy arm in the US, back in India the company began to ramp-up its operations with the creation of a further outsourcing centre in Bangalore, and the creation of a third facility in Mumbai. In less than two years, the company was able to expand its Indian operations by more than 600%, shored up by a workforce who, Salil Parekh, chairman of Capgemini India, openly says are paid “well under $10 an hour”.
Speak with such employees, however, and they will rightly stress that – in the story of Capgemini’s ongoing turnaround – they represent more than just cheap labour. This is the ardent view of Suvarra Shirsat, a finance manager at Mumbai who Capgemini poached from an Indian firm.
Presently, she says, the talent tide is turning. Now, the Indian skills set is “much more diverse”, meaning IT services companies are better able, in western business parlance, ‘to add value’ to their far-flung clients. Perhaps not co-incidentally, her sentiments chime with those of her boardroom bosses, who are currently in the process of promoting a ‘next-generation value-based’ global delivery model, structured around ‘strategic partnerships’, for which Capgemini has coined the term ‘rightshoring’.
Six hundred miles to the East, in the fort city of Hyderabad, this model is taking shape. Here, purpose-built offices tower over manicured lawns, located in a mini-IT cluster that, says the site’s manager pointing to a wasteland in the distance, will soon have its own airport. This is the headquarters of Capgemini’s most recent acquisition Kanbay International, the financial services specialist that will play a fundamental role in Capgemini’s continued growth – if Dr Richard Sykes, co-author of the book Global Services: Moving to a Level Playing Field, is to be believed.
Aside from nearly doubling Capgemini’s Indian operation overnight, Kanbay offers what Sykes calls “deep vertical intimacy”, a feature that will prove critical to the growth of all global outsourcing providers going forward. Few providers, with such a strong Indian presence (75% of Kanbay’s operations are in India), can claim as many as 16 years’ experience in financial services outsourcing as Kanbay. This is not lost on the company’s larger-than-life founder and CEO, Raymond Spencer, who sums up the company’s approach as “an inch wide and a mile deep”. With 90% of its clients based in the North America, Kanbay already has deep relationships with many of the globe’s major financial services operators, including banking giant HSBC, for whom the company has been providing services, in one form or another, for more than a decade.
Moving forward, it is HSBC’s “unique hybrid” service model, as delivered by Kanbay in more recent years, which Capgemini aims to make the centrepiece of its offshore offering. Currently, Kanbay works with HSBC to deliver strategic services in a number of areas, including consumer lending, insurance and credit cards. But instead of delivering packaged services to a remote end user, Kanbay works in partnership with HSBC’s integrated account team, of more than 2,000 staff, known as the HSBC Global Technology Centre (GLT) which it set up in India in 2002.
In this model, says Ignacio Vera, CEO of HSBC Global Technologies, Kanbay “is not really competing on cost”, although he, concedes, the bank does happen to make a “very, very good saving” by using an India-centric partner.
Rather, he says, it is the “human relationship” or what Capgemini call its ‘strategic partnership’ approach, which has made the arrangement successful, and has helped HSBC – which now has 50% of its software development capacity located in India – to grow. “The processes are evolving a lot, and the engagement dynamic has changed a lot,” Vera observes. Now, Kanbay works with HSBC to jointly execute projects across several technology areas, including legacy, web services and best practices, spanning more than 80 platforms globally. HSBC regularly makes use of Kanbay’s vast recruitment machinery too, notes Vera, in a model that essentially co-delivers functionally rich services globally, through a long-term, strategic sourcing contract.
Kanbay’s operation with HSBC is what Cros describes as the “best of both worlds”: in theory, the cosiness and quality of a traditional onshore provider-client relationship, but in a low-cost offshore environment. And it is the best of both worlds that Capgemini aims to deliver through its so-called ‘rightshore’ programme, in which the company will leverage a range of locations – offshore, nearshore and onshore – to provide a broader spectrum of services, including infrastructure management, application management and BPO.
In this ‘blended’ delivery model, India will evolve higher quality offerings, says Cros. “India will be involved from day one, designing, selling and configuring remotely, as well as performing application development and maintenance, while our Western onshore employees will work the configuration and systems integration, which requires being closer to the customers.”
While the company will need to leverage its strategic offshore and nearshore centres elsewhere, chiefly in China, Australia and Poland, it is India that will remain the heart of this model. To this end, Capgemini is now in the middle of a major push to grow its 13,000 Indian employees to 40,000 within the next three years, a period that the company is calling its ‘industrialisation’, explains Parekh. “The Indian market is going to be dominated by big Indian and US companies operating a double market model,” he continues. “If you’re not playing on that level, you’re not going to survive.”
Even so, Capgemini, whose brand is still comparatively weak in India, and whose IT services business is still a fifth of the size of IBM’s – the largest IT services player – will have its work cut out. Ensuring it has more to offer its employees and its customers than any of its India-centric counterparts will be crucial. But with its strong European presence and impressive delivery capability, Capgemini might well have the chance, as Cros hopes, “to alter the entire operational outsourcing model” for good.