Sunday, January 06, 2008

Reliance in IT

This is the ADAG groups latest move. In a field that is crowded, so to say, with the Infosyses, Wipros, Satyams and Cognizants not to mention captives, is this a good move? Actually, there are pros and cons, as always.

Setting up an IT company is not easy today. It used to be and still is, in certain niche areas, but not for a generic one. Reliance probably has a good chunk of IT work being done for its Rcom division, and if it is being used only for telecom networks, it is probably a good idea. But if this is being done with the intent of offering an "umbrella" service line, it may not be such a good idea.

For one, Reliance has no brand name in IT services beyond infrastructure management - which really is their core. Since most IT work is done abroad, even the big 3 are barely known in the US and it has taken them significant work to get to where they are today. To attract employees, Reliance will end up paying a premium since they have to work in a firm that has virtually no history in this industry. Yes, surely the big 3 also started off as nobodies, but that was nearly 15 years ago. Today they are the whos who of Indian IT.

When you start off with a high employee cost, the margin goes down. As it is companies are experimenting with various methods to keep costs down. And the market today is no longer fancied with IT companies. The stock prices of some of these companies are slowly but surely skidding. (Mindtree is trading below its listing price today - Infy is near a 52 week low).

Also land prices are at a high, though it must be mentioned that the industry is going through slightly lean times, which makes it difficult to find jobs - Reliance might end up striking good bargains. Reliance surely has cheap bandwidth available, presence in multiple countries using FLAG and Yipes. And some expertise in terms of its communication business. Time to leverage it? Sure.

But perhaps it is a better idea to work on it as a niche service provider rather than try to become what the other IT services are today.

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