IT Exports: On a Roll, Once Again!

As the global economy shows signs of revival and discretionary spending by enterprises goes up, is the Indian IT exports industry back on the growth track?

Over the years, the Indian IT industry has been a power to reckon with in the global services space. Today it’s worth over hundred billion dollars and exports hold the lion’s share in it. These numbers say a lot. Out of the mammoth $118 bn Indian IT-BPM industry, exports constitute over 70%, which is $86 bn. Out of this, BPM exports is worth $20 bn. The remaining segment, collectively called IT services exports, thus, comes out to be around $66 bn. That is indeed huge.

The global economy has been down, and subsequently organizations’ IT budgets have been shrinking. The extreme cost pressures have forced enterprise buyers to demand more for less from their IT service providers. Additionally, new IT sourcing destinations have emerged on the global arena, which boast of cultural affinity and certain amount of scalability to compete with India’s cost competitiveness. To add to that, concerns over immigration bill and rupee fluctuations. No doubt that the Indian IT exports industry has been through a lot in the recent past and the struggle continues. Yet there is one thing that remains undisputed. It still holds some power that makes it stand out.

If we go by the performance of the Indian IT companies in FY14, then we can be hopeful of a strong comeback. After facing some turbulent times, the IT services exports industry registered its biggest growth in the last two years. On an average, the market grew by around 14% backed by signs of recovery in North America and Europe, the largest markets for India’s IT services exports. Global IT spending was said to be up by around 4.5% in 2013.

As discretionary spending goes up and companies look at technology led transformations, the momentum is expected to continue in the near future. Cloud-based delivery models and automated technologies are acting as key drivers for IT services. The growing adoption of SMAC is also playing a prominent role in driving growth. SMAC technologies are driving IT investments in start ups and this is set to create a massive opportunity for technology service providers. Trends like smart computing and anything-as-a-service are also expected to drive demand. Technology enablement in the emerging markets and small and medium enterprise space will further accelerate growth opportunities for IT service providers.

Rise in discretionary spending is expected to further drive exports in this fiscal.

ADM Leads the Pack

According to Nasscom’s IT industry review 2014, infrastructure services outsourcing and testing segments are growing at a much faster rate than the total IT services. While IT services exports were estimated to have grown by around 14%, growth in infrastructure services was 18.5% and for software testing it was 18%.

Infrastructure services segment is seeing high traction led by the growing popularity of cloud-based as-a-service infrastructure offerings. Service providers are hence investing in innovative cloud infrastructures to stay ahead in the race. The vendor landscape is also evolving and extending to hardware vendors, telecom and hosting service providers, etc.

In the software testing segment, mobility and cloud-based testing will be creating interesting opportunities. According to a study by outsourcing analyst firm, Nelson Hall, factors driving global testing spending include buyers focusing on professionalizing their testing activities, largely through centralization of their testing function and adoption of factory-based delivery, with India being the core delivery element.

Application development and maintenance (ADM) continues to be the bread and butter for Indian IT services companies accounting for over 50% of the IT revenues. Growing demand of consumers for digital applications will be driving growth in the space. Gartner points out that CRM will be at the heart of organizations’ digital business initiatives and service providers will be competing hard to shorten time from lead to purchase and to provide service visibility.

Nasscom points out that demand for services around SMAC, vertical specific expertise, and datacenter transformation will be the key drivers for IT consulting services.

India has also established itself as an attractive destination for Engineering and Research and Development (ER&D) services. Moving beyond low and medium complex works, the industry is now capable of offering highly-skilled and complex ER&D services. Nasscom estimates that the market for ER&D and design will reach $40-45 bn by 2020. India is expected to hold a significant share in global ER&D offshoring pie.

Players in the Lead

It is an interesting phase for India’s IT services companies to demonstrate value to their clients who are increasingly seeking strategic engagements and are viewing IT as an enabler for business transformation. IT companies are on an expansion mode and continue to invest in technology capabilities across domains.

Diversification is the key as service providers enter new markets and geographies. There is more focus on building an onshore presence and most companies are opening their delivery centers onshore to serve their clients better. Also, there is more focus on attaining non-linear growth through platforms, products, and automation.

Indian IT service providers saw a revival of fortunes posting double-digit growth in fiscal 2014. The top five players TCS, Cognizant, Infosys, Wipro, and HCL saw a surge in IT services revenues and bagged some multi-year deals from large players in Europe and North America.

Looking at company specific developments, TCS has led the race in FY14. It continued to be the largest IT services exporter in India growing consistently despite the falling economy. Its growth has been multi-dimensional across geographies, services, and verticals. Across geographies, Europe led the growth. The company’s acquisition of Alti SA, the leading system integrator in France also aided to its growth. It was also the leading recruiter in the industry adding more than 60,000 employees globally.

Although the company has surpassed its competitors in tough times, it will be interesting to see how it manages to continue the reign. Sundaraman Vishwanathan, Manager, Consulting, Zinnov, points out that the company is more focused on application development and maintenance and it needs to be seen if the growth is sustainable in the long run.

Cognizant has posted impressive growth in the last few years and it has been successful in carving a niche in IT outsourcing space. Vishwanathan points out, “Cognizant has been a significant beneficiary from the loss of the likes of Infosys. The company is going to grow another $100 mn from the last year.” It is making significant investments in SMAC technologies.

Infosys holds the third slot. Over the last couple of years, the company was losing out to its Indian counterparts in the IT services battlefield. Things seem to be picking up as the company posted double-digit growth in FY14 and bagged many multi-year, multi-million deals. Analysts point out that its growth is not going to go down from where it is now. The company’s 3.0 strategy seems to be working out well and its Lodestone acquisition is also paying off. Vishwanathan adds, “It is investing in the right places.”

Wipro managed to put up a better performance over the last year in terms of overall growth rate and deal wins. It witnessed strong growth across all geographies, the momentum being led by Europe. The company added 174 new clients in its IT services business in FY2014.

For HCL, the growth was largely led by Infrastructure services which accounts for a major part of its revenues. The company signed some large deals in FY2014 most of which were in the infrastructure space. It has also been focusing more on the developing markets. HCL’s partnership with rival CSC to deliver application modernization services was a significant move. The company is looking at expanding offerings across service lines. Industry analysts point out that its high focus on infrastructure services will be a cause of worry going ahead.

SMAC in FOCUS

According to Avasant’s Sourcing Trends 2014 report, Travel, Tourism and Transportation sector will see an increase in outsourcing spend especially for innovative solutions in the areas of cloud and analytics. It adds that in the developed markets where the telecom customer base is saturated, SMAC will enable innovation through digital technologies and diminish the silos powered by enterprise mobility and enterprise social media.

Global surveys have underlined that enterprises across domains will invest a significant part of their IT services budgets on emerging technologies like mobility and cloud. Reportedly, IT research firm Offshore Insights predicted that India will be exporting SMAC software and services worth $15 bn in fiscal 2017. Big data and analytics, and cloud services will lead IT spending in SMAC technologies globally.

The disruptive forces of social, mobile, analytics and cloud are set to change the game for IT service providers. Players who are foreseeing the technology disruptions and investing in the right places are likely to benefit in the coming years. Industry experts point out that with SMAC gaining favor, IT companies will be able to achieve non-linear growth and will be able to deliver more value to their clients. It is evident that SMAC technologies are capturing focus of the large Indian IT companies.

Currently, SMAC forms just about 5-10% of the Indian IT revenues, but the share is expected to go up significantly in the coming years. The SMAC investments in FY2014 by top Indian IT players is indicative of the developments on that front.

HCL reportedly has set a goal of $1 bn revenue from SMAC in the next five years and it will be leveraging its big data capabilities to achieve it. Rivals Wipro and Infosys are not left far behind. Wipro has strengthened its presence in the SMAC space with its acquisitions of big data company Opera Solutions and cloud computing company Axeda. Infosys is also known to be investing significantly in social media and analytics space.

Outlook for FY15

With its talent quality, scalability, and cost competitiveness India still remains the most favored IT services destination in the world. According to Outsourcing Advisory firm Tholons’ 2014 Top 100 Outsourcing Destinations report, India’s role as a global outsourcing player should continue to increase in the near term. The development of tier-2 and -3 locations within the country will strengthen its service delivery capability and also the growth of Indian IT companies will increase the influence of Indian IT industry in the global outsourcing arena.

In a highly competitive IT services landscape marked by changing business conditions and technology disruptions, service providers are attempting to redefine business models. The Avasant report states that effectiveness of sourcing relationships is now increasingly measured by its impact on overall business related outcomes and not just on cost and efficiency improvements. According to it, service providers are leveraging their domain expertise and use of tools and technologies to move from FTE or transaction-based delivery models to that of a Managed Services Model (MSM). Innovative ways of pricing and service delivery are also being attempted as enterprise buyers seek more flexibility and value from outsourcing relationships.

As traditional markets mature, emerging markets and new technologies need to be leveraged to accelerate growth. The ability to transform from service providers to strategic partners will also play a vital role for Indian IT service providers in staying ahead of their global competitors. Nishchal Khorana, Head - Consulting, ICT Practice, Frost & Sullivan had shared with Global Services that going forward, increasing operational costs will continue to negatively impact large and emerging Indian players. Ensuring competitiveness will be critical while contending with global players. “The industry is expected to witness increased collaboration to drive business growth. IT players will need to form alliances and partnerships to augment existing capabilities with new technologies and adapt to the IT as a service model,” he wrote.

Additionally, Vishwanathan points out that sticking to traditional business models and doing more of the same is not going to work for IT companies. Ability to offer end-to-end services, developing the expertise for working with start ups and investments in emerging technologies will make the difference.

With new technologies, new pricing models, new geographies and new service lines and segments, it will be a new playing ground altogether for the Indian IT companies.