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.

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%

growth.

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