Those Sticky Numbers

It was time for stocktaking. Two years ago, Nasscom and McKinsey had set out

the agenda for the Indian IT services industry at a strategy summit and made

several projections—chief among them—the Indian IT and IT enabled services

industry would grow to be $87 billion by 2008.

Two years and a slowdown later—the two have chosen to stick by those

projections. They tinkered around with the numbers—$10 billion of e-business

revenues got wiped out of the data, IT-enabled services took a bigger pie, the

domestic industry size was shaved down a bit and the absolute $87 billion has

now become a band of $70 to $80 billion. But the big numbers still look pretty

much the same.

According to Nasscom president Kiran Karnik, "The earlier projection of

$77 billion (excluding e-business revenues) was premised on a compound aggregate

growth rate of 38% till 2008. So far the industry has done better than that.

Despite the downturn, in the last three years software exports have grown at a

CAGR of 43% per annum." Ergo–the numbers projected two years ago still

hold. McKinsey Principal Pramath Sinha says that short-term issues like the

Gujarat riots and intermittent war clouds do not affect the long-term outlook.

The bullishness aside however, there are significant trends that have emerged

during the slowdown of the last twelve months.

According to the Nasscom report, "there has been a great deal of

variance in the performance of various sectors of the industry. IT Services, for

example, has witnessed a pronounced decline. The growth rate is down to 29% and

is likely to be only marginally better this year." Additionally, the

slowdown has created a sharp polarization between different players. "While

MNCs and scale players have continued to experience growth rates upwards of 30%,

many Tier-2 and smaller players have had negligible or even negative

growth."

All of this has led to what Karnik called, "minor course

corrections." As of now, India’s presence in the global IT services

market is largely restricted to two of 10 service lines — application

outsourcing and custom application development. While Nasscom expects these

service lines to stay and in fact grow to $50 billion (in terms of spend) by

2008, it expects that they will constitute less than 10% of the market by that

time. Package implementation and support and Systems Integration it believes

will be among the major areas of growth in the coming years.

According to Nasscom chairman Arun Kumar, there will be greater focus on

under-penetrated service categories like network infrastructure management, IS

outsourcing, network consulting and management and software product exports.

According to the latest Nasscom report, ITES will grow beyond call centers to

higher value added services and will alone account for over $20 billion in

revenues by 2008. Of the two-day summit in Hyderabad, one entire day was devoted

to ITES strategies. According to Nasscom, the ITES sector registered a growth of

77% against a targeted 47% growth rate and will continue to grow at pretty much

the same rate next year. This has been a bit of turnaround for Nasscom which has

so far focused on "moving up the value chain" as being the key

differentiator for the Indian software industry. As Jerry Rao, chairman of

Mphasis BFL put it, "Businesses require paperwork. Paperwork requires paper

workers. And Indians are the master paper workers of the world." The

question however is: is that really what the Indian IT industry wants to aspire

to?

Sarita Rani in Hyderabad