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Indian IT gets
smarter
The global
information technology (IT) services market was
estimated to be worth around US$570 billion in
2003, as per Gartner's estimates. India's market
share, with estimated exports of US$12.2 billion,
stood at a mere 3.3%. As such, the growth
potential for the sector continues to be immense.
The strength of this Indian sector is
indicated by the fact that the Indian software and
services exports have managed to grow by around
26%-28% over the past few years despite the
economic downturn that swept worldwide markets.
But while cost leadership has been the competitive
edge of the Indian software sector over the years,
this seems to be threatened now by multinationals
replicating the Indian outsourcing model and
setting up bases in their countries. The advantage
of low employee costs could also evaporate
eventually: India now has competition from the
likes of China and Southeast Asia as other
outsourcing destinations that offer equally low
costs.
Increasing competition and pressure
on billing rates are among the key reasons forcing
the Indian software industry to make a fast move
up the software value chain, thereby providing
high-value services to its clients. With
competition for talent intensifying, the need to
retain key employees has gained weight.
While the average attrition rate in the
Indian software industry continues to be high, for
software majors it has declined over the past year
owing to better human resources practices, and
improvement in work culture. In terms of software
services delivery, the sector is witnessing a move
toward offshoring. This segment now contributes
around 62% to India's IT export revenues, while
the share from the onsite segment is down to 38%,
from 56% in financial year (FY) 2001.
Compared to the 41% compound annual growth
rate (CAGR) for India's software and services
exports during the period 1996-97 to 2003-04,
growth in the domestic IT market has been
relatively staid at 16%. The domestic Indian
market thus promises huge potential for the sector
in light of the burgeoning IT budgets of corporate
India.
In FY04, India's IT software and
services exports grew by 30.2% to reach $12.5
billion. Of this, IT services and products grew by
25% to clock revenues of $8.9 billion, while the
ITES (IT enabled services) segment grew by around
46% to reach $3.6 billion. The domestic market
grew by 22% to reach $3.4 billion. Growth in this
market was characterized by a higher volume growth
in the face of falling billing rates.
While application development and
maintenance (ADM) continued to be a major source
of revenues, software companies concentrated on
high-end services like package implementation, IT
consulting and systems integration for growth.
This was in line with the Indian software
industry's rapid movement up the software value
chain.
While billing rates stabilized
during the second half of FY04, growth was mainly
volume-based. To improve volume growth, the
companies not only improved utilization levels and
concentrated on a host of new service offerings
but also tried to expand their presence in
less-penetrated areas like Europe and
Asia-Pacific.
With around 80% of Fortune
500 companies evaluating the offshoring option,
Indian business process outsourcing (BPO)
companies added new and diversified services to
their portfolio. These included, among others,
engineering services and equity research. While
lower attrition rates came as a positive surprise,
there still remained bottlenecks in the form of
poor infrastructure and inconsistency in the
government's taxation policy toward the segment.
The global software services market was
expected to grow by around 7% in FY04. Also,
NASSCOM projected that IT services (including
ITES) would grow by 30%-32% in FY05 to reach
revenues of $16.3 billion. Of this, IT services
are likely to grow by 26%-28% to reach revenues of
over $11.2 billion, while the ITES segment is
expected to grow by 40% to reach revenues of $5.1
billion.
With global technology spending
still to show signs of sustainable growth, the
future of the Indian software industry hangs in
the balance. As such, Indian software companies
will continue to delink their revenues from this
market and concentrate on increasing their
presence in the European and Asia-Pacific regions.
As global players replicate the Indian outsourcing
model, competition for Indian software companies
is likely to increase. This would require a great
effort on the latter's part to improve upon their
systems and move toward providing higher-end
services (IT consulting, package implementation,
etc) to their clients.
However,
application development and maintenance would
continue to be the bread-and-butter business. The
initiative of moving higher up the value chain
would see Indian software companies invest
significantly in their human resource and selling
and marketing infrastructure. This would make
their processes suitable to meet anticipated
higher demand in the future. Also, these companies
would gain from the scale benefits of investments
that they are making now.
The existing
pressure (though marginal) on billing rates is
unlikely to ease in the next year, especially for
smaller companies. But for Indian software majors,
this stabilization in billing rates is likely to
continue. However, the imperative for them is to
compensate for this pricing pressure by continuing
to grow on the volume front. The Indian BPO
industry, which was estimated to be around $1.4
billion in revenue in 2002, is expected to grow to
$21-24 billion by 2008. To achieve this target,
Indian companies would be building up on their
domain and delivery competencies and would strive
to garner large-size contracts.
Export revenue ranking
(2003-04)
| Rank |
Company |
Export revenue (US$
million) |
|
1 |
Tata Consultancy Svcs |
1198.9 |
|
2 |
Infosys Technologies
Ltd |
1026 |
|
3 |
Wipro Technologies |
854.1 |
|
4 |
Satyam Computer Svcs
Ltd |
538.6 |
|
5 |
HCL Technologies Ltd |
412.9 |
|
6 |
Patni Computer Systems
Ltd |
266.4 |
|
7 |
iFlex Solutions |
168.4 |
|
8 |
Mahindra British
Telecom |
158.5 |
|
9 |
Polaris Software |
126.1 |
|
10 |
Perot Systems TSI |
118.6 |
Source:
Nasscom
(Asia
Pulse) |
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