With the global financial crisis seemingly over, the annual India
Leadership Forum of the National Association of Software and Service Companies
(Nasscom) in Mumbai in February was positioned as an occasion for celebration.
In the lead up to the event, officials were cheering about how the industry had
triumphed over troubled times and reached its $50 billion export target. “It’s
a historic moment for the Indian IT-BPO industry as it touches the $50 billion landmark,”
said Nasscom president Som Mittal.
Unfortunately, the historic moment is yet to come. India’s software
exports for the year ending in March are estimated to total $49.7 billion —
nearly there, but slightly short. Export growth in 2009-2010 is only expected
to be 5.5%. Yet according to Nasscom chairman Pramod Bhasin, “The performance
of the industry this year is far stronger than what is reflected (in) the
growth numbers.” As for next year, the association reports, software and
services export revenues should be up 12% to 15% to around $56.57 billion. On
the domestic front, growth in 2009-2010 will be much higher, at 12% — with
revenues expected to reach $13 billion — and rising 15% to 17% next year.
The real story of the Indian IT sector, however, is how it has coped
with the crisis, changed strategies and prepared for the future. The global
recession has affected big and small players differently. “The impact of the
economic slowdown was relatively (bigger) on small and medium companies
compared to their larger counterparts,” said Rajan Kohli, chief marketing
officer at Wipro Technologies. Size differences aside, he adds, “it is how well
the business is run which determines the health of (a company). While the
larger businesses have the advantage of management depth, their ability to
change quickly is hampered by (their) size.”
Smaller companies will take more time to recover, industry experts
predict, with some being forced into consolidation. But is the crisis mostly
over? “The Indian IT industry has definitely started to show signs of
recovery,” said Praveen Bhadada, engagement manager at Zinnov Management
Consulting. Some of the indicators: fresh hiring and the Nasscom growth
projections. “Companies like TCS (Tata Consultancy Services), Infosys and Patni
are looking for global acquisitions to augment capabilities in markets not
penetrated earlier,” Bhadada noted.
“The recovery has not been as dramatic as it was after the 2002
recession which followed the dotcom bust, but it is now gathering momentum,”
said Ashok Soota, chairman of Bangalore-based MindTree. “The India story is
still very strong.”
“The Indian IT industry seems to have stabilized but we are still
cautious,” said Kris Gopalakrishnan, CEO & managing director of Infosys
Technologies. “In the last quarter, Infosys saw revenues from the U.S. and the
financial services sector increase. While we expect to see flat client budgets
in 2010, this is better than the 6% to 8% drop we saw in 2009. In light of
this, we expect to see an increase in clients’ offshore allocation. There has
been a comeback of slightly larger sized deals and a continuing build up of
traction in strategic transformation deals. We have also seen a rise in
discretionary spending across some sectors as companies start investing in
their future growth. At the same time there are concerns of possible setbacks
to growth, so we remain cautious in our outlook.”
Hiring for the Future
One visible measure of the changed environment is recruitment.
According to Nasscom estimates, Indian IT companies will be adding 150,000
employees to their payrolls in 2010-2011. The 2009-2010 estimates foresee an
increase of 90,000, or 4%, taking the direct employment in the sector to 2.3
million and indirect employment to 8.2 million.
India’s largest IT company, TCS, is getting larger, at least in terms
of people. CEO N. Chandrasekharan told the media at the Nasscom meeting that
30,000 employees would be added next year to its existing roster of 150,000.
This would be not just in India, but also in Latin America, the U.S., Australia
and Europe. In 2003, TCS had less than 100 people outside India; today it has
more than 11,000.
The increase in these numbers reflects TCS’s strategy for the future.
It wants to move to new geographies like Japan, which is more insular than most
markets. Second, it wants to make that quantum leap from major player in the
outsourcing arena to consultant. “Consulting (means) being close to customers
and (having) great listening skills, all in one,” Chandrasekharan told business
daily The Economic Times. “From my point of view, we are getting there, but it
will take time. It’s a marathon because you can build skills, but (changing)
perception takes a very long time. What happens is that IBM or Accenture will
bid (along with TCS) for the same deal and do offshoring, too, but they will be
known as something else. We have got to work on the brand and facilitation
skills. We need to get more consulting persons in multiple markets.”
Infosys invested in talent during the crisis, too. While others were
handing out pink slips, Infosys honored its hiring commitments. According to
Gopalakrishnan, there was greater communication with clients, partners and
employees so that everybody was on the same page during the crisis.
Discretionary spending was reduced and unnecessary expenses were eliminated.
The company also leveraged its new engagement model, which gave clients the
flexibility to pay at a unit of work level or based on the outcome.
Kohli of Wipro spoke of a different approach, though several features
are similar to those announced by others. Wipro’s approach includes a balanced
emphasis on global and emerging markets; an increased focus on new growth
industries which brought in additional business; customized offerings;
attention to costs; and “reinvention.” Said Kohli: “Traditional IT services are
getting commoditized or automated. The IT Product is giving way to ‘Service
Ubiquity.’ Wipro has attempted to rise above the challenge by putting more skin
in the game and offering outcome-based business models.” For one of its telecom
service provider customers, for example, Wipro’s payments are linked to the
profitability per subscriber. Also, “there were industry-specific solutions
that enabled cost cutting and reduction in capital expenditure. Wipro has made
great strides in this arena by following what we preach. We have launched a
private cloud for internal use. There has been a dramatic reduction in
procurement time, costs as well as energy. The private cloud serves as a
prototype for customers.”
Mid-tier Trauma
During the crisis, mid-tier companies faced problems as the bigger
players — who would look at only million dollar deals earlier — started picking
up whatever business they could. “The larger companies and global MNCs enhanced
their focus on scouring the market for all deals – irrespective of the size of
the deal,” said Atul Nishar, founder and chairman of mid-tier firm Hexaware
Technologies. “Some companies resorted to predatory pricing in order to secure
more business.”
To address that issue, Hexaware focused on a set of target accounts in
select verticals. “We have become very proactive in providing solutions to
existing customers,” said Nishar. “We were constantly in touch with existing
clients and further strengthened our relationship with them, meeting them,
understanding their pain points and accordingly addressing them. We leveraged
the slowdown period to enhance and upgrade the skills of our employees. We were
in touch with our employees, meeting them in small and large groups (and)
constantly reassuring them and communicating with them. We also furthered our
(intellectual property)-led growth strategy.”
In general, companies tried to cash in on their strengths. “Specific
firms looked at specific strategies,” said Ganesh Natarajan, CEO of mid-tier
company Zensar. “Zensar launched an Impact sourcing service to provide a risk
and reward sharing solution to clients and started an IP discovery initiative
within its project groups to add reusable knowledge artifacts to its repository
and reduce time to market for new client solutions.”
“The strategies to weather the slowdown covered a wide range from
growth-oriented initiatives to cost containment,” said Soota of MindTree. “The
revenue expansion approaches included new markets, new business models and
growth through M&A.” MindTree, for instance, acquired Kyocera Wireless
India. The company took a new business approach and moved into analytics,
wireless IP and the products business. Among the products are a video
surveillance system and others in the area of telemedicine. These “white-label”
wares will be licensed to original equipment manufacturers who can then market
them under their own brand names.
“In this recession, larger businesses mostly resorted to cost and
process optimization,” Kohli said. “It was a time for them to identify and
invest in their big bets for future. For smaller companies, it was an
opportunity to identify their niches, as customers look for vendors with the
best skills for the job.”
A Paradigm Shift
According to Nishar, the efficiencies forced on the IT sector during
the downturn will continue even as the economic climate improves. “From a
client perspective, vendors had dropped prices and offered several savings
models to ensure closure of deals and prompt starts. Despite the upturn in the
economy, some of the commercial terms (strongly in favor of the clients) may
not be easily changed. The pricing regime may have seen a paradigm shift for
some time to come.”
Wipro sees sustainability, climate change, green IT and healthcare as
the fields to be tapped over the next few years. New and emerging economies
will be key geographies. “We have increased focus on globalizing our footprint.
In the past two years, Wipro has opened centers in the U.S., Brazil, the Philippines,
and China with a clear mandate of localizing our presence in these markets,”
Kohli noted.
Bhadada of Zinnov added that, having come through the fire, the IT
industry is much better positioned to handle future obstacles. “Companies will
be willing to absorb more risk going forward. “Models such as risk-reward,
revenue (sharing) or outcome-based revenue … will become mainstream.”
“Historically, it has been observed that a slowdown accelerates the
changes that are underway,” said Soota. “This slowdown (accomplished that). For
example, new technology models like (software as a service)-based offerings and
cloud offerings are getting into the mainstream. Similarly, business models
like outcome-based pricing are getting more attention. Going forward, all these
will have a permanent impact on the way companies operate and compete.” Adds
Kohli of Wipro: “Downturns are opportunities in disguise; how companies (big or
small) react to these downturns differentiates them over the long run.”
The specter of last year’s Satyam scandal was looming over the Nasscom
gathering as well. “One of the big (lessons) for companies in this slowdown has
been the need to develop the ethics of corporate governance, values and
transparency within their organizations,” said Gopalakrishnan of Infosys. “The
slowdown has, in a way, been a breakdown of trust for people, and as companies
work towards investing in their future growth, it is essential that they lay
emphasis on this aspect as well.”
