INFORMATION TECHNOLOGY

FICCI's ICT Strategy Paper for International Business Development - GERMANY

INTRODUCTION

In the present climate of global economic sluggishness, Indian IT companies should be looking to diversify their geographic coverage as a "hedge" against further decline in a singular market and position themselves for when the spending in other markets leaps forward again.

Looking into Germany from business potential point of view we find it to be rewarding market. Germany is the third largest economy in the world and according to a study by Frost and Sullivan. It is also Europe's largest economy, and represents a strong future opportunity for well-positioned services offerings. IT outsourcing across Europe will boom from $40.0 billion in 1999 to $174.6 billion in 2006. The IT services sector in Germany is expected to grow from $25.9 billion in 2000 to reach $33.5 billion in 2005. Its renowned core of heavy industry and manufacturing is a major consumer of IT and IT services. There also exists good opportunities in sectors like financial services, insurance, media and government.

Germany presents a compelling market because of the following conditions:

• Its location at the geographic heart of Europe.
  
• Its position as an economic engine of the European Union and the common euro currency.
  
• Its potential as a springboard into former communist-bloc Central and Eastern European markets.
  
• It is ripe for "new ideas"-most companies are only used to working with indigenous players.
  
• Its vast "Mittelstand" or midmarket companies are attractive to vendors that have perfected value proposition geared to smaller and medium enterprises.
  
• There was an abysmal growth rates in 2002 so the "gap year" of 2002 may be an opportune moment for Indian ICT organization to strengthen their position in Germany.
  Project-based services like consulting, integration and development are currently the most popular engagement model for services among German IT users.
  

But German companies generally don't hire foreign firms as readily as other European enterprises and its social, legal and statutory constraints on employee transfers in outsourcing deals are legendary. Some of the issues of the German market are:

• Skepticism about and lack of familiarity with outsourcing is a major obstacle.
  
• German organizations have not adopted the concept of end-to-end strategic outsourcing as readily as their North American or U.K. counterparts.
  
• The unions and workers' councils are notoriously skeptical of any undertaking that results in the transfer of employees and their employment status.
  
• Germans like to use their native language despite confirmations that English will be "no problem". This is particularly true for long term ICT projects involving different layers of employees.
  
• Language means more than knowing how to speak German - it also means knowing how to think like a German and understand the fear, uncertainty and doubt they will have.
  

Therefore, success requires Indian IT players to think hard about how important it is for them to become dealmakers in Germany - they must assess these challenges as a cost of doing business and plan their investments accordingly.

REGIONAL DIFFERENCES WITHIN GERMANY

• A defining characteristic of the services market is its regionalization. Unlike London in the United Kingdom or Paris in France, there is no singular & central hub of buying activity in Germany but several decentralized commercial centers around major cities.
  
• Employee regulations in eastern part of Germany are less restrictive than in the western parts as many firms have opted out of Germany's collective wage-bargaining system.
  
• Higher unemployment in the east (17.3% than in west at 7.4%) could provide vendors with an ideal location from which to create shared service centers.
  
• East that are starved for inward investment but with freedom to offer "sweetheart deals" under Germany's federal structure, would also makes prime locations for in-country data centers.
  
• The southern businesspeople tend not to be as strict and prefer to keep dealings open, if slightly indirect.
  
• The greater Stuttgart area features a "Swabian" style of negotiation (which is a shrewd, cost-conscious approach).
  
• In the north, business practices are much stricter - ergo, business needs to be conducted to the "letter" of what has been negotiated.
  
• But Munich in the south has seen a major influx of northerners in recent times, and a "northern negotiation style" may be encountered.
  

VERTICAL INDUSTRIES

Germany's large-market enterprises and Mittelstand are grappling with industry-specific issues that have resulted in opportunities for Indian ICT service providers. Mergers, low stock prices, the bursting of the dot-com bubble and the introduction of the euro have all played a role in shaping the current vertical landscape for Germany. Some of the lucrative verticals are:

1) Financial Services
The financial services sector presents one of the most important IT services opportunities in Germany. Private pensions were introduced in Germany in January 2002, banks and insurance companies have crafted a variety of new offerings in response. Consolidation has also been a driver in this market like the Dresdner Bank's merger with Allianz. Such consolidation presents a variety of opportunities for IT service companies both in project engagements and outsourcing services as large banking organizations attempt to integrate their operations, processes and systems. However Indian service providers should note that unlike other countries such as Italy and Switzerland, German banks are not value-added tax (VAT) exempted. So any outsourcing deal would be 16 percent more expensive just on the basis of the VAT allocations.

2) Government
The government is a prime consumer of IT services in Germany. Federal government bodies, many of which are located in Berlin, are important in setting policies around the requirements for e-government as well as in contracting for services to support such initiatives. However state and local government in Germany can vary significantly between regions because of the government's diverse structure. The regional governments tend to be more flexible than those at the federal level. The cities and towns level bodies tend to operate like an enterprise with budget-driven approach to contracting for services rather with rigid annual planning cycles.

Local German service companies have the strongest presence in this sector with Siemens Business Services and T-Systems playing dominant roles, and, to a lesser extent, EDS with the state government of Baden-Württemberg and CSC Ploenzke in the defense sector.

3) Manufacturing
Manufacturing is one of the largest vertical industries in Germany and a very important source of demand for IT services. Requirements for enterprise resource planning (ERP), logistics management, supply chain integration and related systems have provided opportunities for project services and outsourcing.

Indian IT players have to face established competitors in the German services market from German service companies that have been successful in this sector. Their problem will increase as offshore application services have yet to really take off in Germany at large but German manufacturers may lead the way. Also competition will be from organizations operating from Central and Eastern Europe and already T-Systems has leveraged an offshore capability from Russia.

4) Media
The German media industry is one of the largest in the world outside the United States, and its RTL-branded channels belong to a holding company that is Europe's largest broadcaster. IT services providers with references from other larger European broadcasters should consider Germany as a possible market for expansion, especially in Munich. Opportunities will also come from domestic companies as well as from the acquisition of domestic companies by foreign players.

5) "New Economy"
Much like the rest of the world, Germany experienced its own version of the dot-com bubble bursting when share prices on the Neuer Markt, the high-tech German stock market equivalent of the NASDAQ index, declined dramatically in 2001, dropping 87 percent of its value by 2001. It is believed that the extreme low growth of project-based IT services especially e-business in 2002 are on the "back burner" for the near future in Germany.

PRESENCE OF INDIAN ORGANIZATIONS IN GERMANY

There are around 35 Indian IT companies in Frankfurt. According to go2Bavaria, there are already 12 Indian companies operating in the state of Bavaria, Germany's largest federal state by area and the second largest state by population. Other than the IT majors like TCS, Wipro, Infosys, Satyam, HCL, NIIT, Polaris, L&T Infotech etc, there are lesser known ICT organizations playing active role in German market like Aftek Infosys acquired Arexera in March this year, Key Management Group acquires 76% stake in Chavan Software of Germany, Kerala based IVL India ties up with imc GmbH for Internet applications etc.

The offshore application development (AD) model, promoted by organizations such as Tata Consultancy Services, Wipro and Infosys Technologies has already proven its viability in the USA and UK. Factors driving the success include language affinity, cost savings, the quality of service provided by Indian engineers and the shortage of IT skills experienced by these markets. The recent negative economic conditions have emphasized the need to achieve cost savings.

IT user organizations driven by the current economic downturn are turning to Indian offshore providers as a way of optimizing their shrinking IT budget. Cost is currently the biggest decision driver for offshore services. This has created a fertile environment for Indian offshore providers to promote their products and services.

To successfully establish new operations in Germany Indian organizations must:

• Invest adequately at the start. This may involve mergers or acquisitions to ensure a deep local marketplace focus and knowledge.
  
• Acquire local project management, sales and marketing skills. This will allow them to quickly compete with indigenous providers to win contracts with local organizations.
  
• Identify the relevant vertical sectors that are in need of offshore application development services like financial services and manufacturing in Germany or distribution and logistics in neighboring Netherlands.
  
• Ensure that local hiring concentrates on targeting individuals with a strong vertical sector and business relationship experience.
  
• Understand potential cultural barriers (including language) and work to minimize them.
  
• Determine where breadth of service offerings (such as system integration and consulting) and new skills like project management, business development and sourcing relationship management are important.
  
• Concentrate on a "fast start." Presenting a list of satisfied clients and case studies (in the prospect geography and industry vertical) is the most powerful marketing tool of all.

Conclusions and Recommendations

Because German buying behaviors are so different from other European countries, a Germany-specific business development plan will be required. Once operating in Germany, a sound understanding of regional differences in industry, size of market, business regulations and competitors will be of paramount importance. The small and medium sector is a difficult market to tap, where personal relationships are important. Indian companies will have to initially invest in marketing.

The Green Card Initiative launched sometime back attracted huge interest from the Indian business community accounting for 30 percent of the 5,000 visas issued under that scheme. The German Government is contemplating another scheme for special visas promoting business relations soon. The size of Indo-German trade relations would be in the region of five billion Eurasia.