2001: The Year That Was

While some may choose to call it ‘a year best forgotten’, 2001 had its
share of highs and lows. And while it shattered the myth that the IT industry
was indestructible, 2001 helped lay out the ground rules that will see the
sector emerge stronger in the long run. We present together some of the year’s
top events from our archives…

Nishan:
No bull’s eye here…
Creating a database of a billion people and keeping it up and running does
not involve rocket fuel or nuclear science, but it sure requires political will
and action. But inaction has been the only word that describes what the home
ministry did on this front in 2001. Incidentally, this was also the year when
terrorists managed to breach the security and launch an attack on Parliament
House itself. And while the country debated on hi-tech security gizmos, the
lowest form of citizen identification–a physical ID card with a citizen number
that would have helped in authenticating the identity of any Indian–got no
closer to becoming a reality. A feasibility report submitted by Tata Consultancy
Services (TCS) to the Union home ministry in March 2000 advised that the
government enact legislation through a Bill in Parliament towards creating a
national database of all citizens. A second step was to create a national
registration authority to implement and sustain the system. The report suggested
a five-layer network for a National Identity System Home Affairs Network (Nishan),
to be further sub-divided on the basis of functionality. According to the
proposal, 15,000 franchisees would form the base of this pyramid network. Data
captured by these franchisees would be transferred to 462 distribution centers
located in each district having good optic fiber connectivity. Data from these
distribution nodes would be forwarded to 43 access nodes, all of which would be
located at major urban centers on the DoT’s STM rings. Finally, data from the
backbone layer would be transferred to a central database for the purpose of
verification, PIN and card issuance and storage. The result–zilch. The project
gathered dust for well over a year before being shelved unceremoniously.
Death of an icon

One of India’s best-known software lobbyists, Dewang
Mehta, who was the
head of the National Association of Software and Service Companies (Nasscom)
died of heart attack on April 12 in a Sydney hotel. He was 38. Dewang was part
of a high-profile delegation of experts from the field of information technology
led by Pramod Mahajan, minister of information technology and
telecommunications, to Australia. He was slated to catch the morning flight for
home but was found dead by hotel staff when they went to look for him in his
room after being told that he had missed the flight. A qualified chartered
accountant and cost and management accountant, Dewang joined Nasscom in 1991 and
went on to lead the organization to change the face of the Indian IT industry.
Under his guidance, Nasscom hired global management audit firm McKinsey & Co
to draw out a roadmap for the Indian software and services sector for the next
decade. In May 1998, Dewang was appointed member and spokesman of the
high-powered National IT Task Force set up by the Prime Minister to draft the
National Informatics Policy. In 1997, Dewang was awarded the ‘IT Man of the
Year’ Award by Dataquest. He was also awarded the ‘Entrepreneur of the Year
2000’ award by Ernst & Young and selected as one of the 100 Global Leaders
of Tomorrow by the Geneva-based World Economic Forum in October 2000.

Slowdown blues

The party is long over, and good news seems distant. In fact, it seems that
heads are still rolling thanks to continued pressure from the slowdown. Even
towards its fag end, Year 2001 showed no signs of respite from the hangover…the
slowdown was the common theme for Y2K1. For software exporters, over-dependence
on the US market took a heavy toll. According to DQ estimates for 2000-01, 63%
of overall software exports came from services undertaken for US companies. And
this story is the same for all software exporters in the country–even today, a
major chunk of their business comes from the US market. With the US slowdown–worsened
further by the attacks on the World Trade Center and the Pentagon–showing
little signs of immediate turnaround, happy days are far away. One contrary view
running through market circles is that Indian software companies will benefit in
terms of the US slowdown, thanks to increased outsourcing by US companies. Till
the end of 2001, though, that didn’t really happen. The latter part of the
year, therefore, was spent in scouring the horizons for new markets, with a view
to expand the “egg” base. The frontrunners in the new market segment
are the European and APAC markets. If tapped right, Indian software companies
can sing away their slowdown blues in Y2K2.

Dot-coms and last gasps…

VCs zipped up their wallets and investors began losing faith in fledging
investments… As dot-com dreams got shattered and reality set in, the euphoria
was taken over by a struggle to survive. Though it is difficult to put an exact
number to the dot-coms that crashed, worldwide estimates indicate that dot-com
layoffs in the second half of 2000 increased by 600% in comparison to the first
half. Dot-coms, a.k.a. ‘the shortest route to success’, were replaced by an
urgency to sustain. It was time to go back to business basics. No room for
short-cuts, please. Plush hi-tech offices, slick managers paid astronomical
salaries, and not to mention ESOPs… everything seemed in place. But no one was
quite sure where the revenues would flow in from. So, the inadvertent, the
inevitable had to happen. After all, how long could you endlessly spend
investors’ funds over extravagant ad campaigns and those so-called creative
pursuits? Money that was spent less on value creation and more on keeping pace
with the hype had to run out some day. As most dot-coms realized the
significance of profitability to sustain their businesses, their focus began
shifting towards a ‘strong revenue model.’ However, there were some sites
that managed to buck the slowdown trend and last out the storm, at least for the
moment. Among them were rediff.com, which utlized its first-mover advantage to
the full, as also leveraged on branding to attract funds. Another was
indiamart.com, which, pegging its strategy on service partnerships, prudent
financial management and revenue strategy, stayed away from extensive
advertising and media hype. It is still around and going strong. A third was
apnaloan.com, which focussed on a niche service with a clear advantage on offer.
The prior experience of its promoters in financial services helped create an
offline presence that supplemented business well and ensured longevity. And then
we have naukri.com, which also used its first-mover advantage to the full, apart
from a brand image with mass appeal and sold its large database of Indian jobs
well. And who can forget the tehelka.com episodes–match-fixing and murky
defence deals–that brought in funds for Tarun Tejpal’s company even as other
sites found little in the way of VC funding. Finally, clickforsteel.com and
bazee.com, the first backed by three steel majors–Essar, Mukand and Uttam
Steel–and the other capitalizing on strong management that managed to attract
funds through the year.

The ISP shakeout

Accustomed to growing at a rate of more than 200% since their introduction in
1995, Internet services have had to witness a major setback this year. During
the April—June (AMJ) quarter, the Internet subscriber base grew by only about
400,000 in spite of free accounts and discounts. This means the growth reduced
by less than half compared to the previous year. Although the overall Internet
subscriber base has crossed the 3-million mark, the declining health of
operators and the slackening subscriber growth has dampened the spirits. VSNL no
longer remains the largest ISP in the country. Satyam Infoway and Caltiger
romped home with the honors in the paid and free ISP categories respectively. As
on 30 June 2001, Satyam Infoway had an enviable subscriber base of 500,894 while
Caltiger had an even bigger subscriber base of 682,565. VSNL, the largest ISP
till 31 March 2001, saw a decline in subscriber base, from 630,970 then to
485,730 by June-end, thus getting relegated to the third spot. With falling
bandwidth prices and diminishing margins from dial-ups, ISPs have begun looking
at value-added services as alternate sources of revenues. This includes services
such as VPN, Web hosting, Web designing, ASP, and network integration and
management.

Stock markets

It might have been a topsy-turvy year for most of us, but for the stock
market, this is a year that would best be forgotten in its entirety, and never
mind the late-December rush. Through the year, there’s been one setback after
another, leaving scrips frothing at the mouth and pulling them back just when
they appeared to be on the verge of pulling back. If it was Ketan Parekh and his
chosen stocks that led the slide in the initial period of the year, taking down
UTI and killing its US 64 scheme once again, it was the worldwide tech-led
slowdown made the going horrible for IT scrips, once the market darlings. And
when that showed some signs of relenting, we had the 9.11 shocker in New York,
which sent the world and the stock market, the barometer of international
economies and business, into a tailspin. And when that showed some signs of
pulling through, we had the US demanding Osama Bin Laden’s head, and taking
punitive military action against an uncooperative Taliban. And when that showed
some signs of rolling over, we have had the December 13 attack on the Indian
Parliament and the subsequent souring of relationships between India and
Pakistan. And the more the talk of war gathers heat, the more markets are losing
steam… But the one saving grace amid all the gloom–things are beginning to
look up. Importantly, business, stricken by sagging sentiment for long, seems to
have finally decided that enough’s enough, and is moving ahead regardless of
extraneous forces. Amen.

The media’s bleeding too…

While the slowdown has been bad for the IT industry, it has been dramatic for
the IT publishing segment. When the IT industry was going boom in Y2K, the party
played host to a plethora of new IT publications hitting the stands–Computer
Gaming World, Smart Computing and the like. As the slowdown set in, cost-cutting
and austerity measures adopted by vendors set the problem ball rolling for the
IT media houses. The first one to go in early 2001 was Media TransAsia Group’s
IT department, taking Computer World, Communications World and PC World out of
circulation. The stage was set for others to follow, and by the end of the year,
a total of nine IT magazines were sapped of life. These included Jasubhai
Digital Media publications like Chip (later re-launched as Digit), Tele.com and
Computer Gaming World. Also, the much-awaited Information Week was shelved
before it was launched. And finally, Living Media’s Computer Today decreased
frequency from fortnightly to monthly. The same scenario was witnessed by
various IT portals and the players in this segment, who had been calling the
shots barely a year back players– IT Space, IT Nation, Net Pilgrim–cut short
their IT vision. The only IT that has managed to keep all its publications
intact is Cyber Media, the publishers of Dataquest. Even CMIL, though, has had
to tighten belts and rues the loss of the competition that has goaded it to
newer heights…

IT
training: Feeling the heat

The
slowdown has made life dull life for IT training institutes. The impact is
evident from the sharp drop in the number of inquires and registrations.
Obviously, when the IT sector as an employment destination takes a beating,
training facilities for those same jobs would find few takers. And that’s
ensured that in May and September–usually peak season for IT training
institutes–the half-yearly figures of most of the players show flat growth.
The training business took its toll on the bottomline of the top player–NIIT–which
closed its books with total training revenues of Rs 509 crore, a drop of 18.6%
from the previous year. Aptech’s training revenues too suffered a 39% drop in
the April-June quarter, compared to the JFM period, while SSI saw a fall in Q1
revenues. And while the giants worked hard to notch up numbers, 2001 saw smaller
players downing shutters.

VCs target late-stage funding

The perception of VCs has changed, sure, but their funding capability remains
undiminished. The ability to execute and deliver in the longer run is the key
factor that venture capitalists are looking at now. From being portrayed as
evangelists to being touted as hawks now, the perception of VCs has undergone a
sea-change through the year gone by. The dot-com bust, coupled with the
slowdown, led to many a start-up struggle for its next round of funding,
especially as revenue streams dried up and VCs started demanding proof of P2P–path
to profitability. Gone are the days when announcements about a dozen new
start-ups were being funded every week were commonplace. The mood has been
replaced by one of caution, but the availability of funds is strong as ever. VCs
still have bulging pockets but the catchword now is viability. Funding saw a
definite shift from first round to later-stage funding. While VCs earlier sought
the quick exit option, cashing in on the hype over unreasonable valuation,
market conditions have forced a change of thinking. With the stock market down,
the quick exit option has vanished, and so have non-serious players. Venture
capitalists have a new middle-name now–‘long term players’. And the reason
for that is that safety’s more important now that quick returns.

Virus attacks on the rise

2001 was a year that system administrators will never forget. Viruses, worms
and insects (!) of every caste and creed played their nasty games with computers
if every kind, size and nationality. Whether it be blamed on shoddy coding, or
whether on basic unpreparedness, or on simple ‘taken by surprise’, 2001 was
the Year of the Worm. Nimda, Code Red, Badtrans, Anna Kournikova, the list was
long and endless, alongside the list of millions of infected systems. Most of
the year’s early worms were mail-based, exploiting settings in Microsoft’s
Outlook e-mail program, which made it the preferred propagation tool for virus
writers worldwide. Later though, most of the new worms turned to the Web, taking
advantage of software security breaches to break into Web servers and launch
attacks. Firewalls and catchwords were little protection from them, and across
the world, billions were lost through the year in damaged/destroyed data,
projects delays and the like. On the other side, increased security measures and
patches saw many more billions being spent. Microsoft software was at
centerstage when the bugs struck, with Nimda and Code Red attacking the megalith’s
IIS Web server. As the year wound to a close, a future in which worms would
spread through multiple methods–such as e-mail, the Web and chat applications–was
beginning to come into sharp focus, much as virus researchers had said it would.
If predictions for such so-called “blended threats” came true in 2001,
many were left wondering whether 2002 would see the advent of another prediction–of
newer worms, ones that can update themselves automatically to avoid detection by
anti-virus software. And that would be a tall order to meet for most of the
bug-busters.

Nasscom’s new face

All that the dapper and unassuming Kiran Karnik wanted to do when he was
young was to grow up and become an engine driver. He past two decades tell us,
of course, that he has already achieved far more–guiding DD and Discovery to
newer heights, working with the Atomic Energy Commission, and creating a special
place for himself in the world of communications. The year 2001 saw Karnik face
perhaps his toughest challenge yet–that of filling up the slot vacated by
Dewang Mehta, the man synonymous with Indian IT. On September 15, Karnik took
over as Nasscom president, and his immediate charter is to maintain the
organization’s position as the software and services segment’s guiding force
and soothsayer. And much as the doubters have had a field day, Karnik has let
his actions do all the talking. Nasscom successfully organized the Asocio meet
in December, with IT and telecom minister Pramod Mahajan walking away with the
honors–the Asocio IT Award for 2001. Next in line for Karnik is a dream to
take IT to the masses–he wants Nasscom to lead the way in the emergence of
NGOs as a strong force in propagating the use of information technology. As he
says, “What is IT but what it can do to improve the common man’s
life?” How true…

DQ CIO series
With enterprises across industries embracing IT, the scope of the IT industry
has widened to encompass issues related to other fields as well. On this front,
Dataquest, while retaining its position as the country’s leading magazine on
the IT industry, got IT-enabled businesses into its fold. As rapid IT enablement
had led to the emergence of the new corporate entity–the CIO–DQ took upon
itself the task of identifying what drove the CIO, and how his needs could be
addressed better. A step towards this–the launch of the DQ CIO Series in March
2001. Renewed focus on SCM, worries about info-storage or the transformation of
the CIO’s role itself, and rumblings on the enterprise front were reflected in
the CIO meets every month. CIOs from top enterprises across top Indian cities
were brought together. And partnering Dataquest in this unique venture was
Citrix. The meets comprised an hour-long discussion by prominent CIOs on
pre-decided topics. The discussion would be followed by an interactive session,
subsequently covered in issues of DQ. The final tally–10 meets in the first
year. The final result–a new niche created by DQ, with top CIOs and the
magazine working hand in hand.
Cellular boom

The Indian PC industry took all of 20 years to cross the 5-million mark, but
it’s taken the cellular base only six years to breach that figure. In October
2001, the country’s user base crossed the 5-million mark. Right from June
onwards, just half of the calendar year, each month has been a record in itself.
According to figures made available by the COAI (Cellular Operators’
Association of India), the month of August saw a record 2.5 lakh users being
added. This preceded other record-making months–June and July, which saw 2.11
lakh and 2.06 lakh users being added, respectively. The cellular base stood at
4.5 million at the end of August. The 5-million mark was breached in October
2001 and was indeed a significant milestone. Considering that the PC base
reached this mark barely a year ago, in December 2000, the mobile market has
been far faster in lapping up the miles. And despite the slowdown and fears of a
recession, there seems to be no speed-breakers ahead for the mobile user
industry. In fact, with Bharti leading the way and announcing NLD plans, mobile
operators have already announced sharp cuts in mobile-to-mobile STD rates,
effective from January 26, 2002–this can only fuel demand further. Also,
factors such as falling airtime rates and cheaper handsets are fanning the
go-mobile fire. Indian mobile shipments overtook PC shipments in fiscal 2001 (at
2.5 million, compared to 2 million PC shipments). At current rates, the cellular
base should overtake PC numbers by April 2002.

Mother merger

The mother of all mergers is facing birth pangs. A couple of months after
Hewlett-Packard chairman and CEO Carly Fiorina sent shock waves around the world
by announcing her company’s intention to buy out Compaq Computers in a
$25-billion deal, the merger continues to be shrouded in controversy. What’s
more, the Hewlett and Packard families, each holding between 5% and 7% of the
equity, have been openly vocal in their criticism of the deal, and by extension,
of Fiorina. And while the industry debates the pluses and minuses of the merger,
Fiorina herself faces tough times ahead, for quite surely, in the merger now
rests her own future at Hewlett-Packard. Clearly, one of the main reasons behind
the merger is that the acquisition would, in a shot, catapult the merged entity
close to the world’s number one IT company–IBM. Size would definitely help
the new company in negotiating better rates with suppliers but is the increase
in size alone sufficient is the question that everyone’s been asking? Also,
complimentary strengths have been hard to identify, one of the failings that
have seen most stake-holders rubbishing the proposal. One view has been that the
new entity lacks both the depth and the width of IBM, which is far strongly
positioned be it technology, software or services. For the moment, therefore, it’s
a nervous Christmas and a worrisome New Year for backers of the new HP, but at
the end of the day, Fiorina’s would have been a bold step, regardless of the
outcome. Creating a giant of the magnitude of the new HP is no small task or
endeavor, and has taken a lot of doing in just its thinking.

Of 9.11 and 12.13

As if the tech-led slowdown that was making the IT industry bleed was not bad
enough, the terrorist attacks on 9.11 were another slap across the face. The
picture of hijacked passenger aircraft slamming into the Pentagon and the twin
towers of the World Trade Center in Manhattan horrified the world and crippled
any hopes of revival for some time. And with the explosions of the crashing
aircraft also came the realization that terrorism in its worst form had finally
reached the United States as well. 9.11 caused stock markets to crash and the
NYSE and Nasdaq suspended operations for five days. The attacks highlighted the
need for disaster recovery and business contingency planning. The businesses
that had such plans in place were able to bounce back into action soon after the
attack. But even apart from 9.11, terror and strife were in the news throughout
the last quarter of 2001. The war on Afghanistan resulted from the attacks on
the US, leading finally to a sketchy conclusion–with the Taliban being ousted
and a makeshift regime being put in place. A failed peace process in West Asia
and rising tensions between the Israelis and the Palestinians added to the
climate of uncertainity. More recently, the attacks on the Indian Parliament on
December 13 reaffirmed the terrorist threats that India has been facing. With
India now taking stern measures against what it believes is the “Pakistani
hand” in the attack, there is talk of war. Is the worst still to come?

Tata-CMC marriage

On October 5, exactly a month after HP and Compaq declared their merger
plans, India’s disinvestment minister Arun Shourie announced the government’s
decision to sell off 51% of its stake in computer software and maintenance firm
CMC and that Tata Sons was the chosen suitor. The acquisition of CMC is
considered a key business decision by the Tata Group to consolidate its
leadership in the IT services business in India. Its strategy–to leverage CMC’s
inherent technological and domain expertise. While the deal was sealed at Rs 152
crore–with Tata Sons purchasing 77,26,500 equity shares of the company at Rs
197 per share–it also announced an open offer to acquire an additional 16.69%
stake at Rs 281.26 per share. The total value of the open offer–Rs 72 crore.
According to a shareholders’ agreement on October 16, 2001, the CMC board was
also reconstituted, with S Ramadorai being elected chairman, and S S Ghosh the
managing director and CEO. The new board of directors will now consist of ten
members–four Tata Sons’ nominee directors, four independent directors and
two government nominee directors. R Ramanan, who heads TCS’ operations in
Bangalore, also finds a place on the CMC board.

The new hot cakes

Y2K1 saw the strong emergence of the IT-enabled services dream unabated, and
the glamour boy in this business was the call center business. In today’s days
of pink slips and downsizing, call centers are among the only companies still
recruiting. Apart from generating employment, they are also topping the charts
for venture capitalist funding and in creating new revenue avenues for Indian
software companies. Wipro pumped in about $10 million in Spectramind to hold 17%
of the equity capital, while HCL Technologies picked up a hefty stake in Apollo.
Contact centers are also becoming an important component for the software
companies. While the likes of Wipro and HCL Technologies bought into contact
centers, other IT majors were busy setting up the same. TCS, for instance,
signed up with HDFC to set up Intelenet, while iFlex set up a subsidiary–iServ
International–and Mphasis put up MSourcE. Also entering the fray were
international call center majors like Conversys, Sitel and West, all of which
rapidly expanded their base in India. So while other segments of the ITES are
growing at healthy rates, it is the call centers that are hogging the limelight
and newsprint, keeping the great Indian ITES dream alive.

CEO survival trick
10-point CEO mantra
  • Focus
  • Adventure planning
  • The customer is still king
  • De-risking business strategies
  • Alternate geographies
  • Ready to implement software solutions
  • Cost cutters
  • Stay lean for the long run
  • Try Outsourcing
  • Take care of your people

Unfortunately for the IT industry, the night of struggle is not over. Dawn,
some predict, is just a spasm away and it’s been a while since we saw the
worst. Others say it’s far from over. When DQ asked for a cure earlier this
year–with top CEOs being urged to list out their tricks to last out the storm–a
best practices list emerged. We list some of those wise words here: “Focus
on your core strengths, do not lose out on other opportunities that raise their
heads in the market.” “If this means making sizeable investments in
uncharted territory, do an accurate cost-benefit analysis before you make
it.” “Earmark some funds and resources for diversification and
decisions–but such ventures should be backed by a proper study. Beat back the
competition by reaching out to the customer.” “Cost-cutting makes
business sense, but not when it comes to the customer. If better customer care
means implementing a more effective CRM solution that you’d rather avoid, bite
your lip and take the plunge. If, in fact, it means additional expenses that
will wash away the pain points at the customer end, do not hesitate–this will
pay off in the long run.” And finally, the global view–”We are
dealing with the world the way it is, not the way we wish it were.” And so
on…

Megaspenders
Enterprise IT Spend*
  This
Year
Next
Year
Overall Industry 23%t 56%s
Auto Industry 1%t 69%s
Manufacturing 12%t 66%s
IT Companies 30%t 14%t
Finance 3%s 42%s
Services 28%s 189%s
Insurance 73%t 161%s
*Sample of 97 from Top 1,000 Indian Enterprises

The billion dollar question and the answer to the do mestic IT industry’s
growth–"Are enterprises and their CIOs still spending on IT?" The
answer came from the DQ-IDC India survey of top Indian enterprises, aimed at
putting a finger on actual investments today and getting a feel of IT spend in
the coming year. The chief trend–some disappointment over today, and the
proverbial light at the end of the tunnel, thanks to projections of stronger IT
spend next year. Year 2001-02 witnessed a downtrend, with a fall in IT spend of
23% over the same period in the previous year (with three months of the FY still
to go). But there was a silver lining–enterprises projected IT spend to grow
by 56% in the next fiscal, 2002-03. And the key growth areas–finance,
including banking and insurance, services, auto and manufacturing. The only
disappointment, and this trend continuing well into the next fiscal–IT
companies themselves. Admittedly, even in the current slowdown, CIOs are really
not worried about lower IT budgets, thanks to cut-throat vendor pricing. Despite
budget cuts, therefore, CIOs have been rolling out projects and meeting their IT
needs with limited outlays. Also, most investments now are directed at hardware,
but DQ expects services and software to move up the requirement chain in the
coming year. In segments like finance, such a trend is already discernible, with
services spend estimated to move up from 19% of the total IT spend to 35% next
year.

Back to business

The war is over. Stocks are up. Consumers are buying again. IT spend is back on track Finally, by the end of December 2001,
B2B spelt "Back to Business", world over and in India as well. And the
indicators were aplenty. The bond market caught up with stocks in terms of
anticipated economic recovery. Most sectors also bet on growth, but utilities,
energy, and consumer staples continued to lag. Recent economic data showed signs
of stabilization and suggested that major stock indices should be able to move
higher. There was news of fresh orders for the software majors in recent days,
strengthening the belief of a V-shaped recovery for the sector. There were other
indicators too. One, the thrust on short- and long-term investment, rather than
random spending by customers. Second, the mature percentages of topline growth,
coupled with a stable bottomline revision. Third, a continuous shift towards
making technology and its other elements an enabler, not an economy by itself.
Fourth, the increasing trend of merging the divide between Old Economy and New
Economy in terms of demonstrable results, profits on actual growth rather than
P/Es and focus on customer needs, rather than shareholder growth. What’s more,
Zenith Optimedia Group predicted single-digit positive growth by next year. The
report forecast that the trend would level off in Q2 2002 and move towards
complete recovery Q3 onwards. Last but not the least, the US-led war on
terrorism reached its fag end, with a new government in place in Afghanistan.
Not to miss the fact that despite the war, oil prices touched a two-year low.
Things, clearly, began to look up…

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