Poised for full Flight

The first year of the new millennium was a turning point for India’s
software and service industry. After many years of phenomenal growth, the
industry was challenged by the slowdown in the US economy, which led to the
biggest market cutting back on IT investments. This was further compounded by
the terrorist attack on September 11, which numbed the entire business community
– deferring decision-making and deployment of IT projects. Subsequent events,
including the recent tension between India and Pakistan and the ‘travel
advisories’ issued by some countries have led to reluctance amongst some
overseas companies to travel to India to finalize deals.

Despite these setbacks, the strong fundamentals and the core value
proposition of the Indian software and service industry has lead to it
outperforming all other sectors in the country. The industry is expected to
clock a growth of 30% this year, which is no mean achievement in the present
context. It now accounts for 16% of the country’s overall exports, for 500,000
jobs and over $1.5 billion in investments. The industry continues to be on track
to achieve $77 billion of revenues by 2008. The industry is also expected to
generate a total employment of 4 million people, account for 7% of India’s GDP
and 30% of India’s foreign exchange inflows by 2008.

“Indian IT vendors should work towards building a front-end that is strong on domain knowledge”

Kiran Karnik

There is strong reason to believe that the present strong momentum will
continue to drive the growth of this industry. Amongst the growth drivers is the
fact that a large mass of untapped potential blockbuster customers are set to
take off. Furthermore, India has now achieved familiarity and experience with
off-shoring and this is dramatically increasing the breadth of service lines.
Significant under-penetrated segments exist at the levels of both the country
and industry, indicating great potential. At the same time, there is pressure on
global majors to move a significant portion of their work to India, in view of
the tremendous value proposition.

Tapping new geographies
Ever since demand from the US market began slowing down, Indian IT companies
have started looking for opportunities in Europe, Latin America and the Asia
Pacific region. While established markets such as the US and UK have yet been
tapped only to a marginal extent (below 3%), large non-English speaking markets
in Japan and Western Europe remain almost un-penetrated by Indian IT companies.
These two markets alone offer the Indian industry over $5-6 billion in export
potential. Countries like Germany have the potential to emerge as a high-growth
geography for Indian companies in the next 2-3 years, followed by France, Italy
and Japan. But there are challenges in terms of awareness, cultural openness to
off-shoring, the conduciveness of the regulatory environment and language
barriers that Indian companies need to overcome.

Forging new paths
Indian companies have done some excellent work and developed a strong
foothold in three key verticals (financial services, telecom and manufacturing)
that account for nearly 45% of the industry’s revenues today. Indian companies
now need to aggressively target under- penetrated verticals for the next wave of
growth. Verticals like retail, telecom service providers and healthcare are
likely to offer the next wave of opportunities for the industry. Indian IT
vendors should also work towards building a front-end that is strong on domain
knowledge and vertical-specific skills in key industry applications.

The Indian IT services industry has so far tapped only two service lines to
any significant extent: application development and application outsourcing. As
the off-shoring models become more mainstream, Indian IT companies are expected
to penetrate new service lines such as packaged software support and
installation, IT consulting, network infrastructure management, systems
integration, IS outsourcing, IT training and education, hardware support and
installation as well as network consulting and integration.

ITeS rides high
This has been the year of ITeS, with this sector having emerged as the key
growth driver and revenue generator contributing to the Indian IT success story.
ITeS has moved beyond being a real-estate business and cost-saving option to a
value-added revenue generating model for organizations. This sector is projected
to be the next big revenue and employment generator for the Indian IT industry,
as it continues to outperform earlier projections and zoom along at over 60%

Today, India and Ireland surpass all other competitors in terms of
employment, number of companies sourcing ITeS and the spectrum of verticals and
service lines they offer. The ITeS industry is also expected to account for 37%
of the total IT software and services export market in India by 2008.

Off-shoring opportunities for Indian ITeS players exist both across a wide
range of processes as well as across multiple verticals. Banking and insurance
are likely to provide the maximum opportunity. In addition, other verticals —
telecom, retailing, utilities, automotive and pharmaceuticals, also offer
immense growth potential.

Although the industry has been witnessing tremendous growth, this sector will
face a new set of challenges ahead. Without a clear perspective, the industry
faces the risk of over-capacity, commoditisation and dependence on
intermediaries to access customers, resulting in reduced profitability.

Building a domestic market
India currently spends only 1.1% of its GDP on IT when compared to the US,
which spends 5% of its GDP on IT. While India has been lagging behind in
developing a vibrant domestic market, this market will become significant,
particularly for smaller players who will need to tap this market to build
scale. The domestic market can act as a test bed for innovation and new services
and attract high quality human power back to the Indian Diaspora.

The government needs to accelerate the deregulation of key sectors of the
economy, so as to create a demand for IT. With key product markets like
financial services, telecom, manufacturing and utilities still strongly
regulated or yet in the process of deregulation, corporate imperatives to use IT
are likely to take some time to emerge. The slow e-governance implementation by
most state governments is also a deterrent.

There is also currently inadequate focus on the domestic market by industry
players and the development of customized solutions for domestic business needs
must be increased. There is need for companies to build capabilities in systems
integration, IT outsourcing and hardware and software support for specific
domestic market needs.

Given these steps, and the more detailed strategic imperatives for different
players spelt out in the Nasscom-McKinsey 2002 report, the growth prospects for
this sector seems very positive. New geographies, verticals, service areas and a
huge market in remote processing together will fuel this growth. Exciting
opportunities in areas like bioinformatics, embedded software, chip design,
animation and special effects, and e-games will create a base for further and
sustained growth. All in all, the India IT software and services sector is
poised to not only take on new challenges, but to sustain the growth momentum of
the past decade.

The author is
president, Nasscom

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