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The market for outsourced IT services in the Nordic countries has grown dramatically in the past 20 years, but some suppliers have taken much larger slices of that market growth than others.
Perhaps surprisingly, it’s not the local European service providers that have been performing the best, but the globally distributed ones that are making use of India for skills and labour.
It surely makes sense that local organisations should have the advantage when it comes to exploiting growing local markets. They know the culture, the language, they have people on the ground and they can benefit from existing networks of contacts. They should know when and how to grow to meet increasing demand. They can’t really lose, can they?
For a while in the Nordic countries, this was true. Even in the early 2000s, it was the European IT services organisations that held sway over the region. Today, however, the picture is very different.
The growth of Indian companies has significantly outstripped that of European ones, and this is true in the Nordic countries just as much as elsewhere in Europe.
To single out two companies in particular, Tieto, which 10 years ago was the largest listed Nordic IT services company, had almost four times the European revenue of India-based company Cognizant.
However, in 2017 Cognizant had almost 50% more European revenue than Tieto. It’s not as though Tieto is an outlier in this respect. Many, if not most, of the European firms have been left behind in relative terms by Indian companies over the past decade, even on their own turf.
For the European companies, this may not appear to be an immediate problem, as most of them haven’t suffered significant losses – on the contrary, many of them have gained revenue in absolute terms. Despite this, they haven’t gained as much as the Indian companies have.
This disparity potentially leaves the European firms at risk of taking a smaller slice of a larger pie, being locked into niche markets, and of stagnation and decline.
Differences in thinking
But how has this state of affairs come about? The answer comes down to strategic issues and ways of thinking, as Peter Schumacher of Value Leadership Group, explains.
A decade ago, Swedish investment bank Handeslbanken Capital Markets asked Schumacher’s company to bring an understanding of the global services paradigm to the Nordic region. His company presented a vision of the future so different to the existing situation that it was hard, if not impossible, for the assembled executives to accept it.
“They got it so wrong, they just couldn’t understand the new competitive paradigm,” Schumacher said. “They’d say, ‘Surely it’s just cheap labour, just a procurement situation?’. We told them no, it’s more than that. Moving to a globally distributed model means everything changes – culture, HR [human resources], processes, customers, incentives and recruitment. The entire value proposition will change.”
Few, if any, of the European companies present at Schumacher’s presentation could accept this. “They said I had it all wrong. They thought they could get Indian staff up and running within six months, but a globally integrated organisation is much harder to put together,” said Schumacher.
Cognizant, however, got it right, as did some of the other large firms capable of making full use of the resources available in India. The difference in strategic approach and thinking is demonstrated by the varied approaches taken by some of the European incumbents compared with Cognizant.
Tieto’s growth story, for example, has been one of acquisition. The company has been buying and selling smaller companies for 20 years. There’s nothing necessarily wrong with this approach, but it requires a lot of effort, management, deduplication of roles and departments, and redundancy, for example.
Restructuring has been a major ongoing cost for Tieto, as it is for most firms with such an acquisition strategy. By contrast, the Indian companies have largely eschewed acquisitions for organic growth. This can be slower to produce results, but it’s generally more efficient in the long run.
Peter Schumacher, Value Leadership Group
European companies have tended to be focused on the cost of labour. As Schumacher said: “They asked me, ‘Are you sure the labour rate is €15 per hour in India? Can we get it down to €12?’ I told them that they were missing the picture – it’s not about the hourly labour rate, but the market cap.
“You’re talking about how to build a roadmap to make you and your investors billions, not shave money off the hour. But they were focused on the fact that Romania was cheaper than India.”
Denial has been strong in European companies, with many of them believing that decades of building business relationships meant that they were unassailable.
Perception has changed. Feedback from customers has shown that Indian companies such as TCS tend to be ranked highly in terms of customer satisfaction, in part because they’ve put in the groundwork.
For example, TCS placed a country head in each Nordic country – someone mature, with experience – building networks and talking to local customers. The customers appreciated this commitment, which TCS applied to every European country.
By contrast, some of the European IT companies have suffered reputational issues for reasons including lack of local commitment and problems around mergers and acquisitions.
The landscape has widened and customers now have more choice. Not only that, but the pricing is more complex. Some 10 years ago, IT services companies bidding for a contract in Stockholm all knew who the other bidders were. Now, many of the bidding companies are from Bangalore and there’s much less transparency. This affects competitive dynamics and makes life harder than it used to be for the European firms.
Finally, there’s what might be termed a cultural difference, although it’s more fundamental than that. As Schumacher put it: “There’s just no substitute for the kind of hunger the Indian firms have. Europeans just don’t have it.”
All of this adds up to a positive situation for Indian IT services companies and a rather more negative-looking one for the Europeans.
In short, the Indian companies have moved up the value curve faster than the European companies could move down the cost curve. In the Nordic countries at least, that situation doesn’t look like it’ll be changing in the foreseeable future.
Read more about IT services in the Nordic countries
- Norway’s biggest bank has outsourced IT operations to Indian service provider HCL in a seven-year deal worth $400m.
- Wipro, one of India’s big four IT services providers, is to expand its workforce in Scandinavia and has appointed a local executive to lead its operations in the region.
- HCL has established a team in the Nordic region, one to cover Germany, Austria and Germany, another for France, a team to look after the Benelux, as well as an Italian outfit.