India's domestic IT poised for
growth By Indrajit Basu
KOLKATA - That information-technology
services is India's most famous success story,
with a trailblazing impact on global IT service
markets, is well known. But there is more to
Indian IT than simply exports: the surge in the
domestic economy has meant that demand for IT
services within India itself is booming and
becoming a money-spinner for local companies as
well as multinationals such as IBM and
Hewlett-Packard.
That's the new trend,
says the National Association of Software and
Services Companies (NASSCOM), the local IT lobby,
and IDC
India,
the Indian branch of the worldwide research and
advisory major International Data Corp - in their
first-ever "Study on the Domestic Services
(IT-ITES) Market Opportunity". (ITES, or
IT-enabled services, refers to specialized
outsourcing services in industries such as
banking, insurance, medical-records transcription,
etc.)
"The ITES-BPO space has been
associated only with export, but there is a huge
opportunity waiting to be tapped as globalization
demands higher efficiencies and competitiveness
from Indian businesses," said Kapil Dev Singh,
country manager of IDC India (BPO is business
process outsourcing). "Domestic demand for IT in
India is witnessing a gradual transformation from
being predominantly hardware-driven towards a
solutions-oriented approach resulting in a growing
emphasis on services."
According to the
study, revenue growth in the services segment has
been faster than that for the overall domestic IT
market (including hardware,
software and services) over the past few years.
Indeed, through the last decade, India's IT
services sector has thrived primarily on exports.
Unlike China, which has a burgeoning domestic IT
market but few exports of IT services, the
domestic IT services market was hardly a story
worth mentioning in India. Out of the US$36
billion Indian IT industry (2005-06), just about
$6 billion (including hardware) comes from the
domestic market, versus China's $35 billion
(excluding hardware) domestic market. Small
wonder, then, that companies have overwhelmingly
been focused on exports.
But that's
changing. "Outsourcing as a business model [was
not] very widely accepted until a few years back.
But a few high-profile domestic outsourcing deals
over the last two years suggest that the awareness
[of] outsourcing [within] India has begun to take
shape," said Rajdeep Sahrawat, the newly appointed
vice president of NASSCOM, tasked with developing
the domestic IT market. "The customers are now
open to [talking] about the benefits they are
likely to get out of outsourcing."
For
instance, in March 2004 Bharti Televentures, a
mobile-phone operator, created quite a stir when
it outsourced the transformation and management of
its IT infrastructure to IBM in a $250 million
deal entered for five years. The next outsourcing
deal in the local domain came with SBI, the
country's largest bank, roping in TCS Ltd, India's
top-ranked IT services company - this was the
first-ever instance of an Indian bank outsourcing
a part of its core-banking IT function. These two
deals were followed by domestic appliance maker
Whirlpool outsourcing a range of customer
interaction services and outsourcing deals by the
Bank of Baroda with Hewlett Packard and Dabur with
Accenture.
"Clearly, India has already
started riding the wave of outsourcing," said
Sahrawat. According to the study, liberalization
of Indian economic policy, deregulation of key
sectors and progressive moves toward further
integrating India with the global economy has been
a key driver of increased IT adoption in the
country. "Indian companies are now [asking:] 'Am I
going to run an IT company or my business?'" he
said.
The study has projected that over
the next five years, domestic spending on
outsourced IT services will more than double, from
about $2 billion in 2005 to more than $5 billion
in 2009. This number might seem unimpressive given
that by 2009, exports of services by the Indian IT
sector will touch $60 billion.
"Yet it is
not an opportunity to scoff at," said Kapil Dev of
IDC. "The most important aspect of the study is
that for the first time we have been able to
estimate the latent potential of the domestic IT
market, which uncovers quite a few interesting
facts."
For instance, a significant
portion of domestic corporate IT spending still
lies in-house, predominantly because Indian IT
services aren't yet oriented toward the domestic
market.
"The common perception is that
there is [an] absence of value in domestic
outsourcing," said Dev. "It is estimated that
in-house spending on IT services (including
training costs, salaries of in-house IT staff and
associated overheads) still accounts for more than
half of the corporate IT spend in India, while the
outsourced/vendor-addressed spends account for
just 45% of the total."
IDC says that
during its research it found out that Indian IT
service vendors - famous for serving global
clients - rarely offer Indian customers the kind
of commitment and expertise that they provide
their larger (and necessarily more lucrative)
global customers.
"This is why you will
find that the local IT services market is served
mainly by three multinational companies (IBM, HP
and Accenture), and they are expected to continue
with their domination of the local market until
Indian IT services vendors are able to assist
Indian CIOs [chief information officers] to focus
on generating business value from IT investments,
by offering total solutions and end-to-end
services," said Dev, adding that "very few Indian
companies offer that kind of service in the
domestic market" now.
According to Dev, as
the level of IT investment increases, there will
be a change in the perceived role of IT in the
sense that Indian companies will increasingly have
to start looking at it as an enabler of
competitive advantage rather than IT as just a
support function. "There is increasing pressure on
the CIO(s) to justify the IT investment by
demonstrating the value delivered from IT
investments," the study said, which why Dev feels
that opportunity exists for both domestic
companies and multinational corporations.
Nevertheless, there are a few "lingering
issues that need to be addressed". And the biggest
challenge, according to Dev, is in terms of
persuading Indian CIOs to outsource.
"Willingness to move from an in-house
captive sourcing model to outsourcing is very
low," the study said. "Satisfaction with existing
systems, lack of trust in outsourced service
providers, [the] high cost of services,
unavailability of suitable vendors and lack of
skilled personnel (with vendors) being the most
commonly cited reasons for not looking at
outsourcing."
Then there's another
problem: "a lack of [a] favorable policy
environment to achieve [domestic outsourcing's]
potential", said Kiran Karnik, NASSCOM president.
For instance, the imposition of the 8% excise duty
on software and services in the fiscal budget
announced on February 28 "could puncture growth",
Karnik fears.
Yet over the past 12-18
months, domestic outsourcing has witnessed an
increase in interest and activity on the part of
customer organizations as well as service
providers. And now, says the study, all IT
services vendors need to do to capitalize on this
huge opportunity is a "demonstrated focus on
serving the domestic market and showcased examples
of successful engagements with domestic
customers".
"The creation of an
environment which facilitates domestic businesses,
coupled with the right services, will lead to
heightened interest in this small but high-growth
market segment," said Karnik.
Indrajit Basu is a Kolkata-based
equity analyst turned journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2006 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing
.)
(including hardware,
software and services) over the past few years.
Indeed, through the last decade, India's IT
services sector has thrived primarily on exports.
Unlike China, which has a burgeoning domestic IT
market but few exports of IT services, the
domestic IT services market was hardly a story
worth mentioning in India. Out of the US$36
billion Indian IT industry (2005-06), just about
$6 billion (including hardware) comes from the
domestic market, versus China's $35 billion
(excluding hardware) domestic market. Small
wonder, then, that companies have overwhelmingly
been focused on exports. 
