In the second of a two-part interview, Azim Premji, who owns more than 80% of Bangalore-based Wipro, India’s third largest software exporter, discusses why India’s IT companies have done better at delivering services than developing products. Speaking with Wharton professor Ravi Aron, he points out that customers are beginning to unbundle prices, with the result that established IT and consulting firms are starting to see premiums disappear. “Customers are trying to optimize value,” Premji says. “The old boys’ club of closed tennis court relationships is on the way out.” A. Laxman Rao, Wipro’s chief operating officer, took part in the discussion. (To read the first part of the interview, please click here.)

Aron: Nasscom [India’s National Association of Software and Services Companies] last year published the results of a survey that concluded that of the $180 billion global software industry, India probably has a 0.2% share. With the exception of I-Flex Solutions, which makes the predominant retail banking software product, there is really no product company that has come out of India. What is your take on this situation? With India’s widespread technology creation capability, why have more companies not created successful software products?

Premji: It’s not such a bad situation. In addition to I-Flex, there is Infosys with its Finacle package, which is as successful as I-Flex. This is software that was originally meant for banks in India, but they have graduated these products to the emerging economies.

One reason why India has focused on services is that products require an intimate, ongoing understanding of the customer. This requires a strong localized presence in countries where these products are going to be used, which has not been India’s global delivery model. Second, most product companies have to invest a lot of resources in brand-building and marketing and you need to have the scale to do this. Many Indian companies could not afford to do this. Third, the service business has provided clear-cut, strong positioning, good profitability and tremendous growth for Indian companies. So these companies chose a path where it was easier to succeed rather than one that was more difficult.

Now the challenge that the large Indian software companies face, as we discussed earlier, is how much can they scale in terms of adding manpower? How can they develop models that will not depend on a linear relationship between revenues, profits and people? I would like to turn this question over to A. Laxman Rao [Wipro’s chief operating officer]. We see interesting opportunities in our technology business that are not linear, and where increasing revenues and profits do not mean simultaneously adding to headcount.

Laxman Rao: In the technology business, we are trying to go beyond our current service model in two ways. The first involves getting our own skin in the game; it is a risk-reward model. We have a joint stake in product development with technology companies. These are companies in industries such as telecommunications, data communications, semiconductors, real-time systems vendors and so on. We have experimented with this model in a couple of engagements that have been fairly successful. We jointly invest in product development and then we share in the product’s success, though we do not own its intellectual property. The customer owns the product. We have an incentive to make the product successful, because it gives us on average three times the multiplier of the normal service business.

The second model involves implementing intellectual property (IP) components. These are not end products, but these are components that are an integral part of a total solution. For example, in the case of wireless LAN [local area networks], we have built some components that could go as a solution to any of the telecom vendors. We have been doing risk-reward engagements as well as building IP — and these models have helped us get higher multipliers than simple linear growth models.   

Aron: In the case of the wireless LAN product you have developed, each time a wireless LAN solution is implemented do you get license fees or service fees? In other words, is this like a product, or do you charge the vendor a one-time service fee and then you’re done with it?

Laxman Rao: We charge the vendor a one-time service fee, but at the same time we also do a lot of customization. Ultimately we implement a solution for the vendor.

Aron: I can see how this plays into the point that Mr. Premji made about scaling up in a non-linear fashion. That happens because you have a revenue multiplier that is three times higher than your service model. However, one issue still remains. In terms of branding the product in the market, it’s still not the Wipro brand that the end consumer sees; it is the technology company’s brand. Nevertheless, I can see why this would help you leverage some non-linear growth, and I can see the benefits of non-linear growth if you want to get to the next level of revenue accretion, given that you have 40,000 employees already.

Mr. Premji, you said that Indian IT companies have been playing to their advantage, which involves leveraging the availability of high quality, skilled IT people. But could this factor, which has been an advantage all along, be a barrier going forward in transitioning towards higher-risk, higher-growth models? Do you think that is possible?

Premji: That does not seem to be happening. The leading companies from India are realizing the necessity to re-engineer themselves. They are investing enough now in terms of non-linear models — though not as much as they should — and building enough sub-assemblies and components in their software so that they can drive 8% to 10% productivity a year, and also 8% to 10% growth. That means we need not scale up in terms of headcount.

We are also adding more specialized or value-added practices such as consulting.  For instance, 7% to 8% of our revenues today come from consulting, and the kind of work we do there is similar to the work that IBM does. That segment of our business is growing twice as fast as our execution business and our systems integration business. I see adequate movement on the other fronts to be able to realize the full value of being a global company. Of course, we could be doing that better and faster.

Laxman Rao: The moment we say we have our own product it would have a direct impact on our service business. Most product vendors don’t see Wipro as a competitor today. Let me give the example of mobile handsets. Today we design almost everything that goes into a mobile handset — the hardware, the software and the application — and we do this not just for one vendor but three or four of them. But if Wipro ever decided to launch its own Wipro-branded handsets, you can imagine the impact it would have on our relationships with these companies.

Aron: Today IBM has some 330,000 people of whom 65,000 are in Asia. It will probably ramp up to 80,000 people in Asia alone by the end of 2006. What IBM has realized is that it has great assets — a company brand and image, very strong relationships with corporate America and corporate Europe and companies in the Asia-Pacific region. What IBM has lacked in the past is your offshore-onshore global delivery model, which gives you the cost advantage that Wipro enjoys. But it’s relatively easier for IBM — and please correct me if you think I’m wrong — to acquire your cost profile by ramping up its Indian operations than it is for you to acquire the brand and relationships that IBM has in the U.S. Given that, how do you plan to compete with the onslaught of IBM, Accenture and other companies that are recruiting equally talented people in your backyard and making them ride on top of their existing customer relationships in the U.S. and in Europe?

Premji: Let us look at the way our business is distributed. About 75% of our people work in India or India-equivalents, by which I mean low-cost centers. In contrast, if IBM has 50,000 or even 80,000 people in Asia, that is just about 20% to 25% of its total employee base. This is a distinct cost advantage that we will continue to enjoy. Even if companies like IBM move to global delivery models, it is unlikely that their employee base in low-cost regions will go beyond 30% to 35% of their total headcount. This is because their execution model — which is primarily based on consulting — does not permit them to do that. The kind of work they do requires a much deeper onsite presence.

Our second area of differentiation will be in the quality of work we can execute. It is our job to ensure that we are two to three years ahead of them in terms of execution thoroughness, quality and methodology. This is why we are investing in the Wipro quality system, which lowers our customer costs.

I agree that our challenge is to learn the tricks of their trade vis-à-vis branding and customer relationships and also to some extent the competence of their consulting skills. It is a huge challenge for us, and this is reflected in the premium they get in their pricing versus the premium we get for what are very often similar jobs. But in my experience, the premium they get for jobs executed as part of the global delivery model is virtually zero the moment the customer unbundles the price. These companies try hard to make the situation non-transparent to the customer and say, “Look, I’m taking a turnkey, fixed-price job.” But the reality is that both Accenture and IBM have a significant component of time and materials in their billing just to have a safety net. As soon as customers realize that time and materials costs are involved, they ask for immediate unbundling…. They want to know, “How much is it in Europe? How much is it in India? How much is it in Eastern Europe? How much is it in China? How much is it in the Philippines?”

Even where there are fixed-price projects, the customers are able to analyze the price and say, “Look, 40% of this project can be executed in a global delivery model, so why should I pay your premium for that?” This kind of price unbundling and analysis — which many customers are now doing — has really frightened the hell out of them. That is why these companies have suddenly woken up to the merits of the global delivery model. Why were they sleeping for so many years? Accenture has built a team of 40,000 to 50,000 in India in less than 18 months. It’s not because Accenture wanted to do this, but because the customers said, “Accenture, either you do this or you give me the pricing for it. Take your choice.”

Aron: You have touched upon a critical issue. In the past 24 to 36 months, the single most important trend in the solutions-delivery business is that customers have begun to disaggregate prices. The customer breaks down the price and says, “Why can’t 60% of this work be done offshore?” That is indeed the reason why Accenture, IBM and other companies are being forced to locate in Eastern Europe, India, China, etc.

One of the fallouts is that these companies are deepening and strengthening their consulting skills. The proposition they make to the customer goes as follows: “We will come in and diagnose the problem,” which is management consulting. “We will find a solution,” which is management and process consulting. “We will design, develop and maintain the solution,” which is technology. And finally, “We will operate the solution,” which is BPO. So the promise to the customer runs the gamut from diagnostics through formulation, design, development, maintenance and operation. These companies are trying to acquire a footprint in all these areas, but they realize the importance of the top two areas. They use consulting as a beachhead to get the customer’s business and hold on to it.

Given all this, what is Wipro’s vision for building a robust consulting arm? You said that 7% to 8% of your revenues come from consulting, but where do you see this business going forward? What is the strategic importance of consulting to Wipro?

Premji:  We have acquired two consulting firms. In 2002, Wipro took over the energy and utilities practice of American Management Systems (AMS), a Washington-based organization with 120-125 consultants. The second was in 2003, when Wipro acquired NerveWire, near Boston, a firm with 70-80 consultants who focused on the securities industry. Again, that brought us front-end consulting skills. We are on the lookout for specialized companies like this, which supplement our consulting skills either through deep domain knowledge or through strong customer relationships or both. The reason why we are focusing on consulting so precisely is because it is, first, a good door-opener. Second, it gets us much higher exposure and mindshare with the top management of our target companies. And third, it helps make us much more proactive in terms of what we can do for the customer, instead of being reactive to requests for quotes. We are also using our BPO operations the same way, so that we can offer the whole chain of operations to our customers.

Aron: You already have a strong footprint in IT design, development, maintenance and operations. Now, as you said, you are trying to deepen your skills at the top — in the consulting area — so that you can be proactive in serving your customers and not just reactive. But the kind of person who goes into consulting — say, my students at Wharton who might join a consulting firm after graduation — is very different in profile, personal style, culture and expectations than someone who might join a technology firm. Do you see a contradiction here? Can you manage a panther and an elephant from the same menagerie?

Premji: Of course this is a challenge, and we have to rise to it. We did this very well in AMS. We did it less well in NerveWire, where we had a higher attrition level. We are learning from this. One good thing we have been able to do in Wipro based on our experience over the years is to have a diverse approach in terms of compensation and policies to diverse pieces of our business. We first started this when we went from consumer care into the IT business; you can’t imagine anything more drastic than that. Before we went into IT, our consumer care business was highly commoditized, though now it is becoming much more sophisticated.

Compared to other software companies in India, which have had more uniformity in their profile of people and the way they have integrated them, given incentives to them and built policy frameworks around them, we have had a culture with a much greater ability to manage diversity.

As for our approach to compensation, we deal with the consumer care business very differently than the IT business. Within the IT business, we approach our overseas employees differently than we do our Indian employees. And even among our overseas employees, we deal differently with our programmers who are abroad on assignment than we do with the careerists there. Our approach in these cases is completely different. I am not saying managing this diversity is not a challenge. It is. But we also have a high degree of comfort in being able to manage this challenge.

Aron: One of the large technology companies I have studied is struggling with a fairly basic human situation. They acquired a consulting firm, and the consultants earn about six to eight times what the technology delivery people do. As a result, they are trying not to have a two-caste system form within the company, where higher-earning, suit-wearing, laptop-toting, airport-hopping consultants lord it over the geeks who write code in C-plus-plus and Java. This is proving to be a much bigger challenge than expected. Your comment?

Premji: The important thing is that they should not make their consultants Crown Princes. People are realistic enough to appreciate what the market values of different people are. The reason why we have tried to take a different approach in our consulting operation and embed it into the vertical is that we have tried to make consulting more mainstream. We are trying to build consulting operations where we give more opportunities to people within the organization rather than hire people from outside. We also try to keep compensation for consultants in line with relevant markets.

Aron: This is a very interesting strategy that you just have outlined. In other words, you mark compensation not to the consulting market but to the vertical market that the consultant is going to serve.

Premji: Let’s say we do a certain amount of consulting in a given year. Of this, about 20% will be pure consulting, while 75% to 80% is embedded in the vertical. In other words, there are embedded consultants for energy and utilities, for product engineering, for financial solutions, for insurance, for retail, for manufacturing, and so on for each vertical. We have found that this model works very well.

Moreover, we are trying now to experiment with a global delivery model in consulting. A lot of companies are getting research for their projects done from India, and they can get it done very cost-effectively. That is going to be the next trend in consulting. I don’t think you will ever see 75% of the total headcount in the consulting business move to India or China or Eastern Europe, but why can’t you drive 25% to 30% of the headcount there to make it a more effective global delivery model? It is a matter of being able to process-break a consulting assignment into what requires a physical presence with the customer and what requires remote support and remote delivery.

Aron: That sounds like the McKinsey knowledge centers in Cambridge and New Delhi, and the New Delhi center supports practices in the U.S. and the U.K.

Premji: Bain is planning to do something similar. It plans to open an office in New Delhi that will operate on a global delivery model.

Aron:  Partnering is a promising trend on the horizon. Say you partner with Bain or the Boston Consulting Group or another consulting firm with whom you don’t compete directly, and that firm is able to identify the value you bring. Isn’t there a danger that tomorrow, when some other company comes up in Eastern Europe or in China, that relationship could shift back because the consulting firm still owns the customer relationship?

Premji: I suppose that could happen, but I don’t think customer relationships are really owned. The customer is a remarkably selfish person: He takes the relationship to where the execution is in his favor. We often have had situations where we have partnered with Accenture and IBM and some where we have not partnered with them. We have sat and quarreled over the terms: Is he my customer or your customer? The simplest conclusion and answer we have been able to come to in such situations is to let the customer decide.

Let the customer decide where he wants IBM to take the lead, with Wipro as the partner, and where he wants Wipro to take the lead, with IBM as the partner. We have seen both kinds of cases. The frequency is more in favor of IBM because of the company’s brand, but those customer relationships are also getting unbundled. Customers are now driven by trying to optimize value. The old boys’ club of closed tennis court relationships is on the way out. I’m not saying it doesn’t play a part in getting new business, but that is increasingly being questioned in terms of the price that you pay for it.

Aron: Your point is that the customer is unbundling different value streams and taking a close look at what each party brings to the table. There are no longer any “captured” customer relationships in this field.  

Premji: That is correct. There may be a few isolated instances, but the trend is in the opposite direction. That is why we cannot take our customers for granted in a global delivery model, because if our competitors offer better value, the customer will move. If another country, like Vietnam, offers better value, the customer will move. That is very important from the point of view of our global delivery model — to ensure that we have a strong presence in the best value-for-money locations in the world.

Aron: Do you see Wipro as an Indian company that is trying to offer global value to its customers or as a global company that happens to be headquartered in Bangalore?

Premji:  We’d like to evolve to the latter. We are trying to morph into being a global company that has a strong presence in India, because India offers the best value for money in terms of the global delivery model. The reality today is that a lot of our managers have their roots in India, but over time we would like to see that change. I would like more non-Indians to be part of Wipro’s top management team.

Aron: You have mentioned several advantages of being based in India, such as the availability of skilled IT professionals, and so on. What are the disadvantages? What are the top two or three things you would change if you could?

Premji: Well, for cultural reasons we don’t push back enough with our customers. When I say push back, I mean we should question the customer. Too often we just follow instructions. If we have a point of view that is different, we should question the customer’s instructions and say, “We think what you are asking us to do is wrong; it would be better to do it another way.” If we have to fight to make ourselves heard, we should do that because customers won’t want product problems to come back three weeks or months or years later.

We need to have more self confidence, and this is one of the key areas that we emphasize in our training programs. We tell people to please push back. If you have convictions, don’t give them up easily.

Aron: Let me ask you a question that I think many Knowledge at Wharton readers will find interesting. You are at the head of one of India’s most successful companies. If you were to put yourself in the shoes of your counterpart at IBM, Samuel Palmisano, what would be two or three things on your agenda that would be very different as the leader of IBM? In other words, what different problems would you tackle if you were the CEO of a large company in the U.S. or in Britain?

Premji: If I were sitting in Sam’s position, one thing that would be very high on my agenda would be how to build a global delivery model. They have tried to do that by addressing market segments that they never did before. The second thing I would seriously look at is how to build a larger global cadre of people in emerging markets, which are prime growth markets. That is where growth will come from in the future — it won’t come from Europe or the U.S. At best these will be static markets.

Aron: Is there anything about organizational culture or management of people that you think is significantly different in eastern and western nations?

Premji:   One thing that is different in the Asia Pacific region — and this trait is fairly uniform across this part of the world — is the high degree of hard work. It’s ingrained in the culture. I know I am making a broad, blanket statement, but I think it is a fact. It is a culture that emphasizes hard work because people have to fight harder to succeed, and most of them have families that understand this reality. I have put my foot in my mouth talking about this, because this is not a view that is popular in America, where people are very sensitive about this. But it is a fact that spouses in Asian cultures are significantly more tolerant of earning members who have to put much more into the company in terms of balance between work and family life.

Aron: I am sure you have been asked this question many times, but what is your view of the relations between India and China? In most ways, China is significantly ahead of India in terms of economic indicators. What is the future of India and China, and what are the strengths and weaknesses of these two large emerging economies?

Premji: India has the legacy of democracy. It is more sustainable in the long term, but it is a huge challenge in the medium term. I would never want to be India’s prime minister. It is the most impossible job in the world. In China, implementation of strategy is so much easier. You really only have to manage a small group of people. It’s like the top management of a private company; you get the management thinking in one direction, and then it just filters down into the system.  The Chinese economy has had a huge advantage. I cannot see that model ever coming to India.

One of the disadvantages that the Chinese economy faces is that India’s transition from rural areas to urban areas has been managed much more smoothly. That is one of the major problems that China faces. Moreover, China faces a challenge in making a transition from manufacturing to services. In India, 55% of GDP already comes from services, but in China that number is around 25%.

Aron: What can India and China learn from each other?

Premji: China has stronger work discipline than India does. That is one thing India can learn from China. China has a lot to learn from India in terms of managerial techniques and being customer centric. The service business is much more customer centric than the product business. In the product business, your customer interfaces are managed by very few people. In the service business, every one of my employees who works for the customer is really an ambassador for us.