Sunday, 20 July 2008

The Indians suffer IT services slowdown too

It looks as if the great Indian IT offshoring machine is starting to suffer from the economic downturn. Both Wipro and Satyam last week put out warnings. See The Times 18th July 08 – Wipro and Satyam warn on sales. Growth seems to have slumped to the ‘low single-digit’ level. Now most IT services companies have learned to live with such growth for years now. But it must come as quite a shock to companies used to 30%+ pa growth.

Indian IT services companies are particularly dependent on the US (and to a smaller extent the UK) markets – both of which are suffering. In addition, off-shoring has been embraced particularly by the financial services sector – again badly effect by the downturn.


geo said...

Hi Richard,

Don't know whether you saw my comment on this Indians... hitting the tough times may in fact make them stronger in the long-run, don't you think?

Western IT firms beware: Indian competitors are cleaning up their act
By Georgina O'Toole

This week, NASSCOM, India’s National Association of Software and Services Companies, released its analysis of the FY08 (to end March) revenue performance of the Indian IT software and services sectors based on the findings of its annual survey. It also announced its forecast for 2009.

The survey results reveal that the Indian IT-BPO industry achieved sustained revenue growth of 28% (adjusted currency) with combined revenues of $52 billion in FY07-08. Beneath the headline figures, the software and services export segment, which accounted for more than three-quarters of the total, grew by 29% (in US dollars). Meanwhile, the domestic segment grew by 26% in Indian rupees (or by 30% in US dollars).

However, in 2009, the Indian IT and BPO services companies expect to be more heavily affected by the US slowdown. NASSCOM’s survey projects that overall software and services revenues will grow by between 21% and 24% in FY09. The US accounts for more than 60% of Indian software and services exports and, as a result, the export growth rate will lower by between 5% and 6% next year.

The survey findings tally with recent results from the top three Indian IT software and services exporters, namely TCS (revenues up 22% in its last financial year); Infosys (revenues up 35% in its last financial year) and Wipro (revenues up 23% in its last financial year). In the year to 31 March 2008, the biggest negative impact on these companies was the appreciation of the rupee against the dollar; TCS, for example, would have achieved top-line growth of 39% excluding the impact of currency effects. However, looking ahead, all of these players have highlighted concerns about the impact of the tightening economic situation in their biggest export market, the US.

With caution being exercised by these Indian players, we are witnessing a number of changes in behaviour, which will have a long-term impact on the Indian IT services industry. The Indian firms are:

diversifying into new markets and services. Indian IT software and services firms are looking to diversify away from US markets. EMEA has always been a focus for these companies (Europe currently accounts for 30% of Indian IT exports) but the desire to speed up penetration of these markets has amplified as a result of the credit crunch. In addition, the domestic Indian market is proving increasingly attractive as demand booms due to increasing urban digitalisation and rural connectivity

focusing on demonstrating value-add. As major US clients experience cost pressures, they will be looking to rationalise their supplier base. That means that Indian companies will have to work increasingly hard to prove that they are not just about ‘cost arbitrage’. They will also have to demonstrate they can add value; this will result in increased investment in training and research & development, and on higher value services such as consulting. Various reports of a significant uptick in acquisitions of US companies by Indian IT companies in the first two months of 2008 highlight the importance being placed on having a top-quality onshore presence

tightening recruitment and training policies. The lndian companies have been growing quickly over the last few years to keep up with strong increases in demand; TCS, for example, has added around 10,000 employees per quarter to its payroll. As a result, offshore companies have been forced to pay a premium for top talent. However, a US slowdown will provide a bit of breathing space and will allow the Indian companies to tighten their recruitment policies, be a bit more selective about who they take on, and clear out any non-performers from the workforce. The other good news for the Indians is the domestic growth story (combined with US slowdown): a boom in demand in India is attracting Indian-born professionals back to their home territory. The result is a bigger talent pool to scour for new recruits

increasing offshore leverage. Most Indian companies have been focusing on diversifying into services that are less reliant on staffing volume for successful delivery (non-linear growth) in order to tackle margins. However, in addition, the likes of TCS, Wipro, Infosys and Satyam, are placing a greater emphasis on leveraging their offshore resources on projects in order to improve profitability

investing in the productisation of their services. All services companies, not just the Indian companies, are interested in breaking the train-track economics where revenue and cost grow in parallel. To combat this they are looking to develop repeatable services and IP-based assets that can be delivered without increasing the staff base radically. This is needed so that margins can be sustained and the goal of non-linear growth can be targeted.
This will ultimately make the Indian companies a bigger threat to the Western IT services firms. In the medium to long term, the paralysis in decision-making within US clients (and indeed, UK clients) will begin to ease. When it does, the added pressure felt as a result of the economic slowdown will result in clients taking a fresh look at the possibility of lowering their cost base via increased offshoring. When that time comes, the Indian firms will be better placed than ever to compete for business: good news for clients; bad news for their Western competitors.

Footnote: We would like to draw your attention to Intellect’s Outsourcing and Offshore Group’s Offshore Futures Survey. The survey is designed to gauge the views of Intellect’s members and other key stakeholders on the development of offshoring in the coming decade. The results of the survey will generate a white paper on the future of offshoring and its impact on the UK IT industry. To complete the survey (by 31 July 2008), please follow this link.

Richard Holway said...

Anytime you want to post a comment, please feel free. You know I greatly respect your work.
But I guess as one of my earliest recruits to 'Holway' "I would say that wouldn't I?"