In response to Infosys' cost advantage, both IBM and Accenture - among others - have been feverishly building up offshoring skills by setting up base in India and ramping up headcounts.

Five years ago, Infosys Technologies' market value was higher than Accenture's. Its net profits were higher than that of the US-based business consulting and IT services firm despite being much smaller in revenues - about a sixth.

The talk at that time was whether Infosys could use its market value as currency to buy up consulting firms like Accenture in the US and move up the so-called 'value chain'.

It's an opportunity missed, thanks to Infosys' love for hoarding cash, general risk-aversion and over-cautious approach to inorganic growth through acquisitions.

Result: today, Infosys' market value is $36 billion and Accenture's $44 billion. Tata Consultancy Services (TCS), once reckoned to be the slow-coach among the big three of infotech that included Infosys and Wipro, has now been consistently outperforming the Bangalore-based IT icon.

Infosys has probably missed the bus.

The debate five years ago was about three types of IT business models converging. Consulting firms like Accenture and Capgemini were offering end-to-end solutions to businesses. The second was about hardware companies like Hewlett Packard and IBM gaining consultancy strengths to offer similar solutions. The third was about Indian IT services companies moving up the value chain to offer consulting services and improve revenues per employee.

As things stand today, elephants like IBM and Accenture have learnt to dance. They have successfully acquired the capability to offer end-to-end solutions to customers. Over the past few years, they have been making acquisitions to grow revenue. There is no let up in the revenue growth momentum if one looks at numbers announced by Accenture last Friday. Accenture shares are up 45%.

In response to Infosys' cost advantage, both IBM and Accenture - among others - have been feverishly building up offshoring skills by setting up base in India and ramping up headcounts.

Here are some reasons why this has happened:

• Over the past few years, Accenture has worked on improving efficiencies. The company now has a majority of its employees in India. IT services is a people business and they are really the core assets of these companies. The utilisation of employees is the key to efficiencies. Accenture's net profit per employee stands at $ 11,670. Infosys net profit per employee hovers around the same range and is now marginally less than Accenture's at $ 11,590. The stock market knows this and has given Accenture more value. (Accenture is listed in the US while is listed in India and US).

• The five-year average return on equity of Accenture is 62.7%. Infosys reported a return on equity of only 30.9%. Return on equity is the efficiency with which a company generates a return on its equity and reserves - which are shareholder funds. A sector analyst points out that Accenture has been deploying capital aggressively through acquisitions and turning it around to produce these numbers. Infosys is sitting on a cash pile of close to $ 4bn that does not really add value to the return on equity. Infosys' performance is clearly driven by the need to protect cash rather than take risks and grow the business dramatically.

• Accenture has succeeded in acquiring capability to deliver end-to-end solution to businesses. The company's focus was on growing volumes and offering everything from high-end business consulting to business processes outsourcing (BPO) solutions and hardware maintenance. Infosys, on the other hand, made an effort to move up the value chain to acquire high-end consulting skills. The consulting business now accounts for 26% of the total revenue.

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IBM too has leveraged its consulting strengths and has managed to seize large contracts not just from Fortune 500 companies but also from small companies like India Infoline. IBM realised early that hardware was a commodity and transformed itself into a large IT services group. Over the past one year, IBM shares are up 30%.

Hewlett-Packard, or HP, continues to be seen as a hardware company. The onset of tablet computers appears to have hurt the hardware business at HP as shares have lost 24% of the market value over the past one year.

Indian IT services players like Infosys and Wipro - both cash hoarders - have seen their shares remain flat over the past one year. TCS, on the other hand, has intensified efforts to grow volume and that has helped the company outperform the peer group. It's five-year return on equity is 40% - suggesting that it is using its cash better than Infosys and Wipro. However, it has yet to make a mark while competing with elephants in the global IT services business.

The big failure of Indian IT is in the consulting business - which is crucial to higher revenues. When you approach a client as a consultant, you can charge a higher fee than if you approach them only as a software vendor. As a consultant, you can advice them on business transformation, recommend hardware, and develop software. As a service vendor, your costs move in tandem with revenues - and hence there is little scope for better margins in a competitive scenario.

"The problem has got to do with brand India more than these companies," says a former CEO of an Indian IT company. "Accenture and IBM have demonstrated a capability to tell CEOs things that they need to tell their respective boards," he said. He points out that CEOs can justify any IT spend if firms like Accenture and IBM suggest it.

Experts like this former CEO feel that Indian companies have not developed that level of faith. They have yet to convince CEOs in India yet, he points out, let alone those in the US and Europe.

'Our solutions today transcend technology, and it's only befitting that our name does too,' said Infosys when it changed the name of its consulting business earlier this month. According to a presentation to investors, the company said that the consulting business accounted for 26% of the total revenue for the year ended March 2011.

But clearly, Indian IT has not been able to scale up to challenge the big boys. Pramod Haque, a renowned venture capitalist, pointed out recently to Firstpost that while the global outsourcing market is over $ 1 trillion, Indian outsourcing firms are servicing less than a tenth of that.

With its 29% operating profit margin, Infosys has piled up close to $ 4 bn in cash over the years. It has acquired small niche companies that have hardly had any transformational impact on revenue or profitability.

By no means is it being suggest that the company should give it away. The argument here is that the pile of $ 4bn cash is evidence that it is more keen on guarding it that investing it. Mohandas Pai, the former HR director and CFO of the company, has said that the company is risk averse when it comes to acquisitions.

But Infosys cannot hope to retain its dominance in IT services since its rivals are now challenging it even here. Both Accenture and IBM have learnt to dance and are taking away business from under its nose.

Recently, India Infoline, a stockbroking company, handed out a Rs 300 crore contract to IBM. A source close to the situation pointed out that it was a simple maintainence contract that could have easily gone to an Indian company. "Companies continue to prefer foreign names as they see more than just IT services in the likes of IBM and Accenture," the source said.

Infosys needs to either acquire a consulting practice of an established player in the US or create a new brand altogether, according to an industry source.

Wipro, too, has witnessed a similar situation. Although the company made significant noise about the importance of consulting capabilities, it has not succeeded in achieving traction. Wipro was more aggressive than Infosys in terms of M&A. Its acquisitions in BPO and consulting space were far bigger than Infosys.

Five years ago, rumours were agog about the company was looking to acquire a large consultancy firm and then backed out. If that was true, it may have been a strategic mistake.

The former CEO points out that the ownership structure makes Wipro inconsistent in its strategy and hence risk-averse. Pundits have argued about the rejig made in the top deck regularly by Azim Premji. The company also continues to hoard over $ 2bn in cash and, like Infosys, has no pressure to utilise it.

The story at TCS appears to be a bit different. The company is not able to hoard cash despite generating it briskly. This is because over the years, the Tata Group has utilised the cash for expanding other businesses. TCS has managed to grow volume significantly over the past 12 months. It is perhaps possible that the global presence of the Tata brand has helped the company grab more volume-based business.

"TCS developed a railway management system for Indian Railways. This is perhaps one of the most complex systems as it involved the one of the largest railway networks in the world. Infosys and Wipro may have to do something similar in India to demonstrate their capability," the industry source added.

What lies ahead then?

Venture capitalist Haque believes that there was very little innovation that Indian IT companies adopted. He believes that ERP implementation is no longer a high growth space as most of the Fortune 2000 companies have implemented those systems. Hence, Indian IT companies have to think out of the box and acquire new skills through intellectual property creation in services.

According to Haque, data analytics is a significant area of opportunity for Indian companies.

Increasingly, businesses are also adopting technologies such as cloud computing five times faster than IT operations, according to a report released by PriceWaterhouse Coopers with CII on Tuesday. Adoption of cloud computing across the Asia-Pacific region, excluding Japan, will spike in 2010, according to International Data Corporation, with spending on IT cloud services growing almost three-fold and reaching $42 billion by 2012.

While TCS is doing fine for now, it needs to grow out of the image of Indian IT - that it is all about labour cost arbitrage. The higher market value given to Accenture is a clear indicator that profits and margins are not everything. Size and stature matter.