What a difference a decade can make. When fiscal 2000 ended, the Indian software industry's exports expanded 57 per cent to Rs 24,350 crore from the previous year, part of the surge fuelled by business fixing a millennium-end glitch in code-running computers. Infosys Technologies had just listed itself on the NASDAQ and with the dotcom boom at its peak, shares of top software vendors were trading in the Rs 10,000-15,000 range.
With the spectacular dotcom bubble burst (the tech-dominated NASDAQ lost more than one-third value in about a month in the spring of 2000), the industry all but crashed with dozens of firms desperately seeking business, VCs running for cover—or going bust themselves— and even high fliers hunkering down for a long winter that eventually consumed names such as Pentafour, International Computers and IMR Global.
A decade later, it is deja vu for the information technology, or IT, industry that sprung back from the travails of 2000 (the slowdown lasted three years). An estimated 7,000-firms strong (companies registered with STPI) sector generates nearly half of all urban incremental employment and is expected to end this fiscal with $70 billion (Rs 3.36 lakh crore) revenues, but finds itself dusting off from an even worse meltdown—a broader recession, the worst since the 1930s, resulting in painful aftershocks for the tech industry.
The fears of becoming roadkill, though, are less this time for software and business process outsourcing (BPO) service firms here. "The Indian (IT) industry has had an incredible run…gaining a poster-boy image and placing the country on the global map," says Som Mittal, President of industry body Nasscom. "What was an $8.2 billion (Rs 39,360 crore) industry in 1999-2000 (including domestic, hardware and software exports), has grown into a $64.1 billion (Rs 3.1 lakh crore) sector in 2008-09, employing over two million people. This has enabled the IT-BPO industry to spur the Indian economy."
With size, linkages with customers have changed. Clients—many of them the world's top corporations—depend strongly on Indiabased tech providers for global businesses. Indian IT firms have grown from suppliers of mere coders (the low-brow body-shopping tag) and low-end services (used to solve a seemingly serious but the simple Y2K bug) into first, a provider of cheap, high-quality IT services and more recently, mission-critical applications and consulting projects.
Companies first expanded delivery capabilities to competing low-cost locations such as the Philippines, Ireland and Latin America and then—as their work became more mission critical—closer to customers in North America and Western Europe, too. Companies bulked up too with the likes of Wipro and TCS making acquisitions to add service capabilities, specialised skills and revenues, while Infosys and others attempted climbing up the value chain with consulting arms.
In return, customers got benefits of scale, cost and quality, feels Girish Paranjpe, Joint Chief Executive Officer of Wipro. In fact, he says, "we are now into the third wave which is all about transformation, which is all about integrated IT-BPO offerings, and services such as system integration solutions." The second wave that gave Indian IT a firm footing in the global outsourced tech landscape in the decade gone by was when the industry demonstrated its strength in lines such as infrastructure management, system integration and BPO.
The climb up the value chain is evident, according to research and advisory firm Gartner. From a wholly low-end technical skills market the industry has moved to "about 20-25 per cent in the higherend ‘enhancement' bucket", including services such as engineering and systems integration says Partha Iyengar, Research Director, Gartner. In a global IT services marketplace of about 100 firms that have revenues of $1 billion or more, India has produced six of them, he adds.
It's not just Wipro (and the likes of TCS and Infosys) that have grown deep roots. As the outsourcing-offshoring model matured, India became the destination for large facilities of global giants such as IBM, Accenture and HP, who in total have over 200,000 employees in India (India's biggest IT firm TCS has some 1,23,000). What's more, the global biggies have big revenues from India operations; for instance, IBM makes $2 billion from its local operations, estimates Mumbai brokerage Edelweiss Securities.
Blue Ocean Beckons
IBM India revenues may be peanuts in the years to come. Of the $1.7 trillion (81.6 lakh crore) in tech spend (across IT and hardware buying) estimated by analysts at IDC, around $500 billion (Rs 2.4 lakh crore) can be outsourced. Today, just $88-90 billion (Rs 4.2 lakh crore to Rs 4.3 lakh crore) is outsourced, including a sizeable offshore component. India's $60 billion (Rs 2.88 lakh crore) revenues account for a small sliver (12 per cent) of the addressable market and an even smaller fraction of overall tech spend.
The future demographics in these markets augur well for Indian IT. There is not only a sharp shortage of qualified tech talent in the West, more and more people are exiting the labour market as the population age there. Nasscom's Perspective 2020 report, for instance, says the number of people aged 60 and above in the US will grow to over 50 million by 2020—nearly one-third more than today. The addressable market for outsourced tech services would then have trebled to $1.5 trillion (Rs 72 lakh crore).
"With the looming talent shortage in the developed world and an increasing imbalance in the global workforce, India's demographic advantage is likely to be a key driver of future growth," says R. Chandrasekaran, President and Managing Director, Global Delivery, Cognizant. The US Census Bureau has projected that of the 90 million people entering the 15 to 29 years age group in the 20 years to 2025, India will contribute nearly 30 million people.
This age skew will likely help India capture large-scale opportunities that can be addressed with relatively inexpensive training and skills. To be sure, such business will likely be of lower profitability but of significant revenues. Nasscom projects that the BPO part of the total tech outsourcing business will grow faster than IT services. BPO exports ($13 billion last fiscal year or less than 30 per cent of total IT exports) are forecast to be larger in dollar terms than IT services by 2020.
"This implies that the BPO pie will grow about 1.5 times as fast as IT services over a sustained period," Viju George and coanalysts at Edelweiss Securities wrote recently. The Big 3 in India (TCS, Infosys and Wipro) will cherry pick from this opportunity, focussing on work around IT-BPO integrated platforms and end-to-end finance & accounting outsourcing, they predict, leaving over 40 per cent of the potential work around "relatively lower-value customer interaction services (call centre, elementary data entry)" to others. Initiatives like IT-BPO platforms (essentially, software built around best practices in a particular business that will allow users to bootstrap efficiency to industry-best levels) also offer compelling value to clients in times of recession. Already companies such as TCS, Infosys and Cognizant have signed on clients like Nielsen, Sanofi-Pasteur and BT on these platforms.
New Ways of Doing the Old
The slowdown also has given the industry a chance to re-examine its business and consider stepping away from what has until now been a linear business model—headcount expansion in perfect tandem with revenue growth—and instead opt for models such as transaction-based pricing to take the pressure away from constantly recruiting people to keep the revenue pipeline flowing. Other elements in this non-linear strategy will be "solution accelerators, business intelligence, analytics and consulting," adds Cognizant's Chandrasekaran. "What clients are really looking for is help to re-architecture their business models."
The need for the tech vendors, too, is immediate: Analysts contend that the companies need to ramp up their non-linear businesses to a level that they add at least 3-4 per cent to operating margins to be able to offset profitability erosion from salary hikes and other cost increases expected in future.
Besides re-inventing its service delivery model, the slowdown also forced the Indian industry to look beyond their core markets of financial services, manufacturing and telecom to emerging opportunities in the public sector, health care, media and utilities, which according to Nasscom's Perspective 2020 report conducted with consultant McKinsey & Co. could be a $190-220 billion (Rs 9.12-10.56 lakh crore) market in a decade. Already, business from these sectors is showing up, says Wipro.
Elsewhere, many companies, including IBM and Wipro are looking beyond large enterprises and to the small and mid-size business market, which the Nassscom-McKinsey study predicts, could be a $230-250 billion (Rs 11-12 lakh crore) opportunity by 2020. "Newer sectors will add to the growth of the industry. Emerging markets such as China, LatAm, APAC hold promise in terms of IT adoption," says Suresh Vaswani, the other Joint CEO of Wipro, referring to the Latin America and Asia-Pacific regions.
The next big market, however, for IT companies could lie at home—India, which next year will overtake Japan to be ranked the third-largest economy in the world in purchasing power terms. The domestic IT and BPO market would force companies to give up the key advantage of cost—and lose the offshore advantage—but the opportunity is one of growth. Tech research firm IDC puts the business potentially at $50 billion (Rs 24,000 crore) by 2012. "India's domestic IT-BPO market is mature and there is increased focus on large transformational deals and the emergence of a robust and growing domestic BPO play. IT spending in India is growing at a pace faster than any other country in the Asia-Pacific region," says Nasscom's Mittal.
Even as the IT industry looks to re-tool itself to face the challenges of the current slowdown, there are a few looming challenges that could spoil its comeback. For one, the strong leverage of a large, high-quality talent pool could actually be its biggest handicap as experienced workers get more and more expensive. And, newer hands, especially in skilled IT positions, are difficult to find as hiring volumes ratchet up. According to Nasscom-McKinsey, there could be an employment shortage of 3.5 million people by 2020, fuelled by the low employability of graduates (just 10-15 per cent of some 2 million who graduate every year possess entry skills that can be honed through training to enter the tech workforce, estimates the industry body) and engineering graduates (slightly better at 26 per cent). Then, experts also argue that rules governing the establishment of new businesses and labour laws governing them are unevenly enforced in different states, causing confusion among companies.
Nasscom believes India could lose up to 11 per cent of its current 51 per cent share in the offshored global IT services market due to these shortcomings. That threat of a missed opportunity should be a sobering thought for an industry and governments in the countries still on a growth high.