'Stabilized but Cautious': The State of Indian IT: India Knowledge@Wharton (http://knowledge.wharton.upenn.edu/india/article.cfm?

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'Stabilized but Cautious': The State of Indian IT

With the global financial crisis seemingly over, the annual India Leadership Forum of the National Association of Software and Service Companies (Nasscom) -- which took place in Mumbai earlier this month -- 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 US$50 billion export target. "It's a historic moment for the Indian IT-BPO industry as it touches the US$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 US$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 US$56.57 billion. On the domestic front, growth in 2009-2010 will be much higher, at 12% -- with revenues expected to reach US$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

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'Stabilized but Cautious': The State of Indian IT: India Knowledge@Wharton (http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4452)

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."
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"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."
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