A Shakeout Looms for Indian Software Shops

On October 2, three weeks after the World Trade Center attacks, India’s

National Association of Software & Service Companies took out a full-page ad

in The New York Times. The ad mourned the loss of American lives and looked

"forward to helping continue to be competitive." A

nice gesture, but one with a clear business purpose. These software companies

have thrived writing cheap code in India for US clients. Now, they want to

assure US companies, which are suddenly jittery about their foreign exposure,

that it is still safe to contract work out to India.

Blue chip clients

The ad may have helped a little. "I think it took away the paranoia

about outsourcing to foreigners," says Jerry Rao, chief executive of

MphasiS, a Los Angeles- and Bangalore-based software maker. His clients did not

desert him. In fact, the top tier of India’s software companies–Tata

Consultancy Services, Wipro and Infosys Technologies–all reported strong

quarters ended on September 30. "We even acquired new business from our

American clients after September 11," says Arup Gupta, president of TCS

America, which generates some 70% of its parent company’s $700 million in

revenues from work with blue-chip clients such as General Electric and JP Morgan

Chase. Gupta says TCS is on track to boost US revenues by 50% this year, even

after 9.11...

The top Indian software shops are probably pretty much shock-proof at this

point. They have moved beyond writing simple code and snagged major assignments

that take years to complete, such as developing software for securities trading

or maintaining call centers. Customers are unlikely to shut these assignments

down even in times of stress. And just in case US clients do fret about sourcing

sensitive work overseas in a time of strife, India’s top software makers have

already established major centers in the US to supplement operations back in

Bangalore and Hyderabad.

And yet Gupta thinks the Indian IT sector is in for a rough stretch. "It

will take two years for our industry to recover," he says. And a swarm of

smaller Indian companies and startups will not fare as well as the industry

leaders. S Sriniwasan, co-head of investment-banking services for Kotak Mahindra

in Mumbai, which has many clients from the IT industry, figures revenues for all

of India’s software shops will grow 25% next year. But the average growth rate

for the $8.5-billion industry was 50% just a year ago–a rate that only a top

performer such as TCS or Wipro can hope to achieve now.

The US expansion is what allowed small fry to get by. Thus, even a

deceleration to 25% growth could trigger a shakeout. Marginal players are

especially exposed now that US firms are reviewing their consultant contracts to

focus on only the most essential projects. Adding to the pressure is a glut of

workers as Indian software engineers return home after being laid off by

companies in the US.

The heavy lifting has to begin now, says Kiran Karnik, president of Nasscom.

For starters, survival for many Indian companies depends on moving up the value

chain in building products instead of treating the software code they write as a

commodity, "like a sack of potatoes". And, adds Karnik, to supplement

US work, Indian companies must develop more local customers back home.

That’s what TCS and Wipro are doing. About 10% of TCS’ revenue, for

example, comes from massive contracts with India’s state-owned banks and

governments of states such as Andhra Pradesh, which are computerizing decades of

government records. It’s wise to lock in big clients like the government

because even if they don’t pay much, they do have taxpayers’ money to

invest.

Of course, for some smaller companies, opportunities lurk even in the

recession. Rajesh Hukku, president of i-Flex Solutions, a New Jersey- and Mumbai-based

company, expects sales of Flexcube, his popular banking back-office processing

software, to increase as his US clients in the banking industry obsess about

wringing new savings out of operations. But the days of easy growth are gone.

Now, Bangalore has to show its staying power.

By Manjeet Kripalani in Mumbai in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc