by Real Business - Thursday, 30th August 2007

This is the page

They have aggressive plans. Acquisitions are their favoured route to growth. The UK is their launch platform. They are shaking up British business life to the very roots. Meet the new wave of Indian businesses striding out for new markets.

When Narayan Murthy, chief executive of Indian IT services company Infosys, first began pitching for business in the UK a few years ago, his perceived advantage of having cheap IT professionals in India became, in fact, his disadvantage. One after another, UK executives told him that it would be impossible to manage a workforce 5,000 miles away.

Unable to change their minds, Murthy changed his business. Instead of selling a faraway software development team, he brought some of his workforce over to Britain. And he went back to those executives with a different pitch. This time, he sold his battery of UK-based IT talent. It became an instant hit.

Then he put in a caveat: while his customers could talk to and e-mail the programmers, they could not physically meet them.

"It was a question of mindset, not calibre," says Murthy. A few months later, he moved his software team back to India. A lower cost base meant higher margins. And under his stewardship, Infosys become India's first IT services firm to list on the Nasdaq exchange in March, 1999.

In the past few years, outsourcing software development has become more the rule than the exception in the UK. And almost 100 India companies have set up shop to take advantage of that new thinking.

Outsourcing IT became popular as UK companies struggled to fix the millennium bug. Computer programmers based in India provided a cheap and easy solution to the problem. They were also familiar with older languages such as COBOL and FORTRAN, a skill set that was scarce in the UK.

Once entrenched, Indian firms continued to win business, even after the threat of the year 2000 date change passed by. They also perfected a hybrid model of using both an "on-site" team of programmers and project managers that work with a larger, cheaper team of "offshore" developers that carry out the bulk of the work.

The advent of e-commerce led many UK companies to increase their IT budgets to adapt their computer systems for the Internet.

"E-commerce, legacy systems integration and application development replaced what had been a sweatshop activity of Indian software houses," said Srini Raju, former executive director of Satyam Computer Services, one of the top three Indian IT firms (also floated on the US Nasdaq exchange).

The move up the value chain increased revenue and profit for Indian software firms. Bolstered by increasing overseas sales, particularly in the US, Indian software exports totalled $6.5bn last year, making it the world's biggest IT offshore market and way ahead of its nearest rivals.

Investment bank BNP Paribas estimates that $10bn-worth of IT work is outsourced overseas at the moment. Despite its rapid growth in recent years, the Indian software sector still services fewer than one per cent of all the world's IT outsourcing needs.

So those Indian software firms have got hungry. And in recent years, they have been aggressively expanding into the UK, seen as a foothold into a larger European market. And some smaller Indian companies such as Melstar, Datamatics and Mastek have begun to make acquisitions to fast-track that process.

The acquisition process is helped by a war chest of $3bn that Indian companies have amassed over the past few years, in addition to their stock currency. While some software companies have already bought UK companies, others are negotiating for strategic deals.

Mumbai-based Melstar Information Technologies, for example, bought the UK's Linkhand Images, Linkhand Support and the UK business of Germany's ITC Consulting for cash and stock worth £6.5m last year.

The downturn in IT stocks has made the case more persuasive.

"There are many opportunities for Indian businesses with solid revenues and clients to use the current market environment to aggressively hunt for acquisition opportunities," says Jay Patel, a director at New Media Spark, the UK venture capitalist that invested in Indian software firm IMI Software for that purpose. "It's a great use of cash, as there are lots of companies in a mess in Europe."

Invest.UK, a British government investment promotion agency, is touting software and IT services as key sectors for drawing Indian investments in the UK. And even though IT budgets have recently shrunk, spending on software and IT by UK companies will still increase by about 13 per cent compared with 15 per cent for the past two years. The market is expected to grow to $85bn by 2004 from about $60bn this year, according to John Rutherford, regional director, Asia Pacific, at Invest.UK.

The UK has become a top investment destination for Indian companies in Europe. As many as 21 companies, including Wipro Technologies and Sankhya Infotech, invested in the UK during 2000/01.

"We continue to look for good acquisition targets, particularly in software," says Rahul Kanodia, CEO of Datamatics(whose clients include Reed Elsevier). "We want to offer our own products, rather than just servicing others."

The UK accounts for 60 per cent of all investment flowing from India to Europe; the aggregate investment from India so far stands at £240m. The UK now rivals the US as the premier destination for Indian overseas investment. Investors say they are attracted to the UK's pro-business, low-tax environment and position as the gateway to the lucrative European marketplace.

"The empire strikes back" phenomenon is also breeding a new type of UK business. More and more UK entrepreneurs are setting up outsourcing businesses with an Indian twist. Last year, Texuna Technologies and Solitar Systems were set up as UK businesses with software development facilities in India.

Raj Negi quit his job as a banker at HSBC to set up Solitar Systems with his colleague Henry Brun. "When customers deal with us, they feel like they're dealing with a local company that has cheaper operating costs that they can share. Indian companies still have to get past the feel of being a foreign company - often done by expensive acquisitions."

He, too, feels the need to grab market share quickly. In September, Solitar bought Bone-apart Medical Systems (known as BAMS) for an undisclosed sum to expand into the healthcare sector.

For Negi, the Anglo-Indian model brings the best of both worlds: Indian programming and European selling. "Indian companies have traditionally done well in the US, but they have trouble winning customers in Europe," he says.

Customers appreciate Solitar's mixture of Indian offices and a European "front-end culture," says Negi. "The problem with a lot of Indian companies is the different culture of doing business in Europe. It is not just about price, it's about knowing the right people and having long-term relationships. Indians don't have the same network, so it can be hard to crack Europe."

The new "Empire strikes back" phenomenon is just the beginning of a major business change, says Negi. He reckons that there will soon be "no disparity" between India and the UK within the software development industry. "Communications and boundaries are coming down, and there will be no barriers to entry - Indian companies will become more global and it will become an even playing field."

Murthy's law
For Narayana Murthy, the UK sits alongside the US as the world's most open marketplace - with the most potential. "That's where the competition is most serious and corporations believe in using information technology for gaining competitive advantage."

Murthy has no shortage of European acquisition targets. Investment bankers swarm around the Indian software giant, with proposals. Infosys has set European growth estimates of 30 per cent in 2001 (it beat those in the first quarter).

But the acquisition trail is long and hard. Infosys tried unsuccessfully to make acquisitions in the US. "We wanted to acquire very strong companies. But those strong companies didn't want to be acquired. Later, when they didn't do well, they wanted to be a part of us and we weren't interested."

"Acquisition is not an easy exercise," says Murthy. "When it involves two people-based organisations, it's about bringing together two cultures, two identities. One has to move very carefully when you acquire one company. Acquiring five or six together is even more daunting."

What if you don't get it right? "You're left with empty tables and chairs - that you have paid a very high price for."

It wasn't easy being an entrepreneur in eighties India. Murthy recalls 1981, when a small team first started the business: "The idea was to prove to ourselves that we can create wealth legally and ethically."

"I would say that we are very lucky. Hundreds, thousands of people who are much smarter than us are not lucky. They didn't succeed. As somebody once said, 'if God is shy to announce his presence, he comes in the form of luck'."

For the leader of a fast-growing business, Murthy often sounds surprisingly conservative. "Being middle-class, respect was always very important. Honesty was important. Ethics were very important. And succeeding in education and doing well in studies. Also not borrowing - or, if you borrowed from someone, returning that money was very important...

"There were times when we could have been much more aggressive and we were not."

From the other side
Seven years ago, Simon Denison-Smith and Adrian Pritchard left their lucrative careers (in management consultancy and the City) to set up their software development business. The concept was brand spanking new: to win chunky contracts in Europe and then outsource the development to India. "People thought I was a loony," says Denison-Smith.

Today the two men are at the vanguard of the Anglo-Indian IT phenomenon.

"When we started, we had relationships with a number of Indian software companies," says Denison-Smith. Within a year, they were working closely with one: Karnataka Group. That relationship soon became a formal joint venture. In 2000, a merger was agreed (with backing of Anglo-Indian venture capitalist, Antfactory, which put £1.25m into the Indian company). Denison-Smith: "Our relationship has been like a marriage, but we've carried on having sex!"

The London and Mumbai-based firm has 200 employees in India and varying numbers in the UK (depending on how many developers are over from India). It specialises in business applications development (say, re-engineering legacy-based systems into web-based systems). Growth rates have slowed in the past year - from 80 to 50 per cent per annum - but Denison-Smith insists that Rave Technologies is picking up work that would formerly have gone to the likes of Accenture and IBM.

Denison-Smith can only see more Indian companies moving into Europe. But, he says, "it's a risky move as they are trying to convert themselves from services businesses into product companies."

Some industry colleagues have found the Anglo-Indian mix difficult. "The Indian management style is still quite hierarchical compared to here," says Denison-Smith. "It's less nurturing, more task-orientated. Culturally, the Indian companies need to address how they are going to deal with the management of their people here.

"There are little cultural issues," Denison-Smith continues. "If we bring a small team over here for implementation of a project and we decide to rent a flat for them, we can't put an unmarried woman in with an unmarried man."

The Anglo-Indian business model is the best way to deliver complex development projects, says Denison-Smith. The 5,000-mile journey matters not a jot. "The reality is, it's not that difficult to put someone on a plane," he says. "And the problem with proximity is that it leads you into bad practice. With software development, you can't afford bad practice. The distance forces you into a process."

We may only be at the beginning of this very unusual journey.

Indian firms with Euro-ambitions

Rave Technologies
Mumbai and London-based software development and web design services firm, Rave Technologies also has satellite offices in Italy and the US. Fast-growing Rave Technologies India acquired UK-based Karnataka Group in 2000 (the business was valued at £1m) and established Rave Technologies UK. Rave plans to expand into Europe. The Indian business was founded by Anand Jahavri and Saloni Jahavari; the UK arm by Simon Denison-Smith and Adrian Pritchard (see page 89).

IMISoft
On July 11, 2001 Hyderabad-based IMI Software announced that European expansion plans were being supported by a £1.4m investment from UK venture capitalists, New Media Spark. IMI is in the mobile software business. Some 100 employees are based in Delhi, Bombay, Kuala Lumpur, Hyderabad and Europe. IMI plans to establish a Centre of Excellence for Mobile Applications in London. The company plans to be in 100-plus (yes, really) countries within the next five years, mainly in Europe, Asia and the Americas.

Melstar
Another Mumbai-based software services company, Melstar Information Technologies entered the UK in early 1999. In September 2000, it acquired Linkhand (UK) and its two subsidiaries for £4.8m, as well as Zurich-based ITC Consulting for £1m. Melstar is looking to expand into Germany and is in negotiations to acquire a Switzerland-based software company that specialises in banking applications. Melstar counts among its customers Citibank, Intel, HP and KPMG. It's chaired by Suresh Bansal and showed revenues of £545.3m to March 2001.

Blue Star Infotech
Founded in Mumbai, by Sunil Advani, software consultancy Blue Star set up its UK office to oversee its sales and European offsite development work. New offices are planned in Germany and France in the near future. With profits of £4.2m on turnover of £7.8m, it's delivering the profits to expand fast.

Covansys
Covansys used to be known as CBSI. Today the worldwide IT consultancy (it has offices in 40 countries) has plans to expand its business in Europe, particularly in Scandinavian countries and Ireland. Set up in 1995 by Raj Vattikutti, it had turnover of £294m in 2000.

Datamatics
The legendary Dr LS Kanodia founded this software and services business way back in 1975. Kanodia, seen by many as the father of the Indian software industry, has opened offices throughout the world. European centres are in UK, Germany and Switzerland. Datamatics has made major US acquisitions such as the Boston-based Nasdaq-listed knowledge management company, Saztec International. Datamatics' current turnover is £44.5m.

Dhamm Infotech
Dhamm Infotech specialises in workflow and documentation. Established in 1999 by Dhruv Moondhra and Chaitanya Kejriwal, it started with a team of four; Dhamm now employs 40-plus. The company moved into the UK in March 2001 with a sales and technical team and is planning expansion in the UK and Europe.

HCL Infosystems
HCL Infosystems entered the UK market three years ago with its European subsidiary Infosystems Europe. The enterprise software specialist company numbers British Telecom, Sema Group, Rothschild and Alcatel (France) among its clients. As for its expansion plans, it's looking at acquiring a Benelux business. In 2000, HCL turnover was £168.7m, with operating profits of £14.3m.

Niit
Established in India 18 years ago, software services group NIIT has offices in 35 countries. In a £3.2m deal with Channel 4, NIIT is transforming the TV channel's airtime management sales system from a COBOL application to a JAVA application (got that?). The UK CEO is Gopal Chatravarthy and he has aggressive plans.

Sonata Software
In December 2000, Sonata Software took a "strategic stake" in US software business SpinAway for $5m. Founded in India in 1986, Sonata has major European growth plans.

Bips Worldwide
BIPS Worldwide's acquisition plans are well under way. In 2000, Arun Banerjee's software business took a 50 per cent stake in Spectrum Networks Solutions; in 2001 it acquired a 50 per cent stake in BCN Intraview.

Patni Computer Services
Founded by the three Patni brothers and backed by GE Equity (which owns ten per cent) PCS has grown at 50 per cent a year for several years. It employs 3,000-plus people in India. PCS opened an office in Germany as a platform for growth.

Seacom Solutions
Indian-based Seacom Solutions was founded in 1995 by Ajay Aggarwal. It has ventures in Europe and has registered companies in the UK and Germany. Clients include IBM, Lucent Technologies, Macromedia and Macy's.

Relativity Technologies
Relativity Technologies is an interesting variation on the trend. A US-based IT services business founded by Vivek Wadhwa in 1997, Relativity is looking to expand beyond its UK office by creating subsidiaries in other European countries.

Bucking the trend
UK companies that are partnering in India.

Differentis
Differentis is a UK-based IT services business that's flipping the trend. Set up by Ron Mackintosh in 2000, and has struck a partnership with Cognizant in India. The Differentis model is: train its people in the UK; base the development team in Chennai, India.

efunds International
eFunds takes on all sorts of clever technical projects for the financial services sector. It has call centres in Mumbai and Delhi employing 2,000 people doing all the back-office and customer care stuff. Some 130 staff are based in the UK. eFunds is doing an increasing amount of outsourcing business via its Indian operation and is looking for deals in Europe.

E-Bookers
UK based e-bookers is a pan-European internet travel company headed up by Dinesh Dhamija. Since 1999, it's established operations in 11 European countries via a combination of organic growth and acquisition (of the Finnish OY Lloyd Tours and French La Compagnie des Voyages). As part of a recent cost-cutting drive, e-bookers has outsourced a lot of office functions to India. e-bookers is considering acquisitions or partnerships in Europe.

Solitar Systems
UK based Solitar Systems does its software development in New Delhi. It is in the process of acquiring a preferred medical software supplier to the NHS, and has plans to open offices in Germany and Denmark.

Strategic Accounting Systems
UK-based SAS also does its development in India, in a centre it set up in 1989. The business, founded by Satish Sharma, Sushma Sahajpal and Raheel Butt, is using tidy profit margins to expand aggressively into Europe.

the mega-players

Tata Consultancy Services
One of the world's fastest-growing IT consultancies, TCS has 800-plus clients in 50 countries.

Mastek
Mastek UK is the British subsidiary of the Indian software giant and is a major player in the outsourcing market. Mastek has a new Edinburgh office and plans to develop its UK business.

Wipro
US-based Wipro derives over 30 per cent of its revenues from Europe. As a result, over the past three years, European staff numbers have risen 40 per cent per year. Wipro has established "Proximity Centres" in the UK. The company plans to make more investments in Europe and Asia. Wipro is chaired by Azim Premji who was, famously, once the world's second-richest man (behind Bill Gates).

Infosys Technologies
Founded in 1981 by the legendary Narayana Murthy (see main story). Over 9,000 employees in North America, Asia and Europe, Infosys clients include Cisco, Nortel and Microsoft.

Bundeep Singh Rangar is COO and founder of venture capital firm Ariadne Capital and writes about business and technology.

Click here to the data graph (pdf format) for this article

Click here to download Adobe Acrobat

• Add a comment
• Email to a friend
• Printer

Tags: uk, indian, uk business, uk based, uk companies, indian business, indian software companies, indian companies, uk market, uk office, uk businesses, software companies, invest uk, uk base, uk ceo, indian company, uk accounts, uk arm, uk depending, uk entrepreneurs, bought uk companies, indian software firms, trend uk companies, indian software industry, indian software sector, software development business, uk companies struggled, indian software giant, indian software houses, software development, indian offices, anglo indian, indian businesses, indian firms, india, indian companies moving, smaller indian companies, europe, mobile software business, software business spinaway, indian operation, indian programming, indian twist, mastek mastek uk, services business, bookers uk based bookers, acquired linkhand uk, uk venture capitalist, uk venture capitalists, anglo indian business model, uk linkhand images, established rave technologies uk, london based software development, uk executives told, uk sits alongside, outsourcing software development, mumbai based software services company, indian software firm imi software, software development industry, touting software, outsourcing business, solitar systems uk based solitar systems, indian overseas investment, software development facilities, 100 india companies, software team back, arun banerjee software business, indian businesses striding, indian firms continued, indian management style, indian software exports totalled 5bn, business applications development, services business founded, win business, acquire switzerland based software company, drawing indian investments, strategic accounting systems uk based sas, anglo indian venture capitalist, company plans, fast growing rave technologies india acquired uk based karnataka group, anglo indian model brings, strong companies, seacom solutions indian based seacom solutions, 21 companies, anglo indian mix difficult, development team, product companies, registered companies, selling faraway software development team, software services group niit, india companies, mail, narayan murthy, computer programmers, software development team, nasdaq exchange, infosys, workforce, launch, aggressive plans, hybrid model, millennium bug, bug computer, british business, software team, easy solution, new thinking, skill set,