Source: www.afp.com

India’s top technology and outsourcing body said it is confident it can ride out the challenge of a stronger rupee and a global economic slowdown as it wrapped up its annual meeting here.

India’s flagship outsourcing industry is grappling with a rupee that rose 12 percent last year — lowering the local equivalent of every dollar earned — and a potential recession in its main market, the United States.

“The demand we still feel is strong,” NASSCOM president Som Mittal said Friday in the nation’s financial capital Mumbai, where the three-day meeting drew IT players from India and around the world.

The sector expects to meet or even exceed its software export target of 60 billion dollars and overall software and services revenue goal of 73-75 billion dollars by 2010, Mittal said in an interview.

India’s IT sector with its skilled, low-cost work force that has planted the country on the global business map, is keeping its fingers crossed that the international slowdown will turn out to be a blessing.

It is hoping the financial turmoil in the US and elsewhere could drive businesses to farm out more work to cheaper Indian firms even as they pare overall technology budgets.

Mittal said past slowdowns had led companies to outsource more due to cost pressures.

He said the rupee’s rapid appreciation against the dollar and pressure on talent availability — a fierce war for talent has driven up wages and staff turnover — had opt pressure on margins.

However, India’s IT’s sector, which accounts for 5.5 percent of gross domestic product, up from just 1.2 a decade ago, has shown sustained ability to take out costs, Mittal said.

And an ageing population in the West is creating new demands for outsourcing services which will continue to drive demand even in a slowdown, he added.

The industry has been seeking to diversify its markets to offset its reliance on the US, which remains the largest outlet for India’s software, sector taking 61 percent of its exports.

Europe-bound exports, however, have climbed 55 percent since 2004.

Britain now accounts for 18 percent of India’s software services market and continental Europe takes 12 percent.

The IT sector is also looking at India’s burgeoning domestic market fuelled by economic growth of around nine percent.

Revenues from the domestic IT market, including hardware, are estimated to reach 23.2 billion dollars in the year ending March 31, 2008, up 43 percent from the previous year.

Indian IT and business process outsourcing (BPO) revenues are seen growing by over 33 percent to reach 64 billion dollars in the current financial year.

“We always looked outward — now there are also many domestic opportunities,” said Mittal.

The sector is also eyeing remote infrastructure management services “as the next big opportunity” after the success of BPO, he said.

By managing infrastructure from a remote location, companies can cut costs by 40 to 60 percent, said a new report by Nasscom and McKinsey, which estimated potential annual revenues from such activities at 524 billion dollars.

So far, companies in low-cost locations like India have captured just six to seven billion dollars of this market, the report said.

India is “well positioned to capture a disproportionate share of this growth by 2013 — that is about 13 to 15 billion (dollars),” said McKinsey partner Vivek Pandit.

Source: economictimes.indiatimes.com

As per the Nasscom estimates, total revenue of the IT-IT enabled services (ITES) industry is expected to be $47.8 billion this year up from $37.4 billion last year. Software and services export continues to grow at around 30% and has reached $31.4 billion. The contribution of IT-ITES industry to country’s GDP grew to 5.4% from 4.7% of last year, thus providing employment to more than 1.6 million of our youth.

However, the US credit crisis and appreciating rupee are posing strong challenges to the Indian IT industry. The once darling of investors, the IT companies have lost their sheen in the stock market. Is the Indian IT industry at the inflexion point of decreasing growth rate? We point out below four major transitions that are reshaping the Indian IT-ITES landscape.

First is the growth in domestic demand for IT-ITES services which has increased to $5.4 billion. While traditionally Indian IT bigwigs such as Infosys, Wipro and TCS have concentrated on the US and European market for their businesses, the multinationals, notably IBM has made significant inroads in the domestic market.

IBM today has one-fifth of its workforce in India accounting for the largest employee base next only to the US. Not only has IBM increased headcount, but also received large multi-million dollar orders from domestic clients. Though most of the organisations in India still keep their IT operations in-house, the advantages of outsourcing to service providers are being actively considered. Bharti and Vodafone alone have reverse outsourced the IT operations to IBM for more than $2.5 billion.

Even the government contracts such as the prestigious IT infrastructure modernisation project of the income-tax department went to IBM. This has prompted Indian IT companies to tap the domestic market.

Recently Wipro won a nine-year business transformation contract from Aircel. In tune with this trend in IT services, the domestic ITES/BPO sector has also shown an impressive growth, reaching about $1.6 billion and is expected to reach $11 billion by 2012. Companies such as Bharti Airtel, Dish TV, Barclays and State Bank of India have all outsourced their business process management and call centre operations locally.

Hence the time has come for the Indian companies to actively look at domestic IT-ITES industry, not only to hedge against the global risk, but also to fuel demand for more services in the years to come.

Secondly, the global delivery models perfected by the Indian IT giants for software services export that have resulted in significant shift of operations from onsite to offshore is being challenged. Portion of offshore revenue has increased from 43% in 1999-2000, to more than 75% currently, with a corresponding decrease in onsite revenue.

However, security issues, legal requirements, clients’ demand for end-to-end services combined with the reduced cost arbitrage due to increasing domestic salaries of IT professionals and appreciating rupee are forcing IT companies to increase their on-site or near-shore presence.

For example, Wipro plans to open a near-shore centre at Atlanta in the US while others such as Infosys, TCS and Satyam already have development centres outside India in places such as Hungary, Romania, China and Canada.

To better serve customers Indian companies have also acquired businesses near customer locations such as Botnia Hightech Oy in Finland by Sasken Communication Technologies, Infocrossing in the US by Wipro, and Answer Call Direct in Irleland by HCL Technologies. The above trend is likely to continue.

Thirdly, an analysis of revenue of the Indian IT sector shows a clear positive correlation between the strength of the workforce and revenue. With more than 50% of the 750,000 graduating IT and engineering students being not directly employable, the IT industry is taking its own steps to grow talent than banking on government institutions such as AICTE.

TCS has accredited more than 400 technical colleges while Wipro also is following its footsteps. Infosys has started “campus connect” programs to participate actively in curriculum design, course material preparation and mentoring of faculty and students in select institutions to hone the students skills and knowledge levels for a better fit in the industry.

Fourthly, with the objective of providing full life cycle management and increasing billing rates, companies such as Infosys and TCS started their consulting practices a couple of years back. SETLabs at Infosys undertakes technology research relevant to its businesses.

Though the revenue from R&D and products contribute to just about 13% of the IT industry revenue and consulting practices of IT companies contribute to a mere 3% of their respective revenue, companies need to invest their resources in these high value-added activities to compete effectively with multinationals such as IBM, EDS, and Accenture.

Emphasis on domestic market, having an optimal mix of onsite-nearshore-offshore presence, active collaboration with educational institutions, and investment in R&D, products and consulting, will see our IT industry tide over the challenging times ahead.