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The dark side of India's software sector
By Indrajit Basu
KOLKATA - The Indian IT software
and services sector saw yet another year of healthy
growth in 2002, despite the gloomy global economic
scenario that was marked by soft quarters, pink slips
and slashes in IT spending, according to a new study by
the National Association of Software and Services
Companies (NASSCOM) - India's software industry lobby.
But behind the figures, all is not as rosy as it
might appear.
Ever since 2000, when the global
IT sector suddenly reversed its almost decade-long trend
of scorching growth, NASSCOM and the country's industry
pundits have been steadfast in maintaining that no
matter what, India's software sector would continue with
its high growth to touch US$100 billion in revenues
(currently running at about $12 billion a year) by year
2008. It's another matter, however, that growth has
slipped from its heady pre-2000 rates of 60 percent to
70 percent a year to about 45 percent in 2000, setting a
downward trend thereafter to touch the current rate of
about 28 percent.
Often the numbers that the top
Indian software companies churn out each quarter are
stunning; the announcements usually feature impressive
revenue growth numbers, increased hiring, increasing
margins, and almost always, the impressive number of new
clients they acquire every quarter.
But what
Indian software services companies hardly discuss at the
end of each quarter are the less positive developments.
For instance, they rarely highlight the threat that
foreign software services and consulting companies pose
to Indian companies by shifting operations to India; or
the fact that the changing nature of global IT spending
and continued uncertainty could throw their revenue and
profit projections well off analysts' expectations; or
for that matter, the number of clients they lose for
each new client they acquire.
Infosys
Technologies, the Indian software industry's poster boy,
is a good example. According to its quarterly releases,
it added 93 clients in the last four quarters and ended
up losing 77 in the same period. Satyam Computer,
another Indian software heavyweight, added 98 customers
in the same period but lost 73 customers. Wipro
Technologies, tops in the sector in terms of market
capitalization, added the highest number of customers,
105, but ended up losing 76. In other words, for every
100 customers that a company like Infosys adds, it ends
up losing 82 of them. Thus, for every 100 customers it
adds every year, it retains only 18. For Wipro, the
ratios are slightly better - it loses 72 customers for
every 100 it adds annually. Some analysts believe that
the story is not radically different at Tata Consultancy
Services (TCS), India's (and Asia's) largest software
company. But it's difficult to figure out the quarterly
client churn of TCS because it has not started divulging
that information yet.
According to analysts,
Indian software companies have started facing the
long-feared and grim reality of customer "churn", which
is common globally. They add that as organizations
started slashing IT spending, Indian software companies
embarked on an aggressive customer acquisition spree.
"Most of the top-tier Indian software companies went in
for tactical account acquisitions," said industry
analysts. "Tactical accounts help a company shore up its
topline growth, but they never scale up to more than a
couple of hundred thousand dollars a year."
Wipro, for instance, had a huge exposure to the
battered telecom industry and had to make up for revenue
numbers by going in for smaller projects - in the couple
of 100,000 dollars range - to make up for the steep fall
in telecom revenues. And after six months, say company
sources, smaller projects still show up as clients but
are no longer active.
According to Rita
Terdiman, an analyst with international IT data
monitoring firm Gartner, while the strategy of grabbing
tactical clients makes sense for shoring up revenues in
the short term, the churn phenomenon indicates that
Indian software companies are not putting adequate
efforts into adding strategic clients. Strategic clients
typically have an annual run rate between $5 million and
$40 million.
"Business models that rely on
strategic customer acquisitions and long-term
partnerships help in penetrating accounts and growing
them into multi-million dollar accounts," said Terdiman.
Strategic clients are also driven by offshore programs
and provide company executives with strong incentives to
achieve cost savings. "This means that they tend to stay
on longer as the commitment to outsourcing work is
stronger," said Terdiman.
There's yet another
cause of worry for the major players in the country's
software services. A recent Merrill Lynch report said
that amid depressed world economies and shrinking IT
corporate budgets, multinational software companies are
increasingly moving their operations to countries like
India, the Philippines and China for leveraging the
advantage of lower costs in such countries, just what
Wipro, Infosys and TCS have been doing over the past
decade in India. Global software services and consulting
firm Accenture, for instance, is all set to increase its
offshore headcount to about 20,000 in next four years
from the current level of 7,000 in offshore destinations
across the world. A large chunk of this, as expected by
Merrill Lynch, could move into India.
"While
this is great news for the country's IT professionals,
Indian companies need to worry," said the report,
adding, "Foreign software companies could grab a
significant share of the Indian pie." NASSCOM numbers
reveal that multinational software exports from India
surged by a huge 131 percent - from less than $1 billion
in 2000-2001 to over $2 billion in 2001-2002 -
reinforcing Merrill Lynch's fears. Other major
multinational software service providers that are
following Accenture's footsteps include EDS, Cap Gemini
and IBM Global.
And analysts like JP Morgan's
Dirk Godsey say that these big fish have also developed
an appetite for smaller ones. According to Godsey, big
American IT services companies have decided that since
offshore companies, including Indian IT majors, could
only impact a small portion of their core business, they
can afford to attack offshore companies and destroy
their margins, while protecting their own core
businesses. "They can only affect 1 percent of my
business, whereas I can destroy 99 percent of theirs,"
is what an executive of a large US-based IT services
reportedly said about competitions from Indian software
companies.
Instances of Indian software companies
making assuring revenue projections in one quarter and
then going back on the statement in the following
quarter have also started emerging. Infosys, for
example, during its second quarter results July to
September, announced that it had reached price stability
but withdrew the statement in the following quarter
(ending December 2002).
Satyam Computers is
another instance where previous projections were
unfulfilled. Satyam revenues for the quarter ending
December 2002 fell short by over 3 percent, forcing it
to reduce its revenue guidance for the full year.
"Clearly, the changing nature of the customers' IT
spending and continued uncertainty in the markets has
brought in some unpredictability to our forecasts," said
Ramalinga Raju, Satyam's chief. These have had one
positive impact though; watching Satyam and Infosys
struggling with their projections, HCL Technologies, one
of the top 10 in the sector, stopped giving any.
A sense of realism seems to have finally dawned
on the country's software industry. NASSCOM president
Kiran Karnik recently conceded that Indian software
companies would have to take a beating in revenue and
profit growth expectations. But analysts say that Indian
software companies will have to continue chasing
tactical customers: for the time being, that is.
(©2003 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication
policies.)
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