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