The technology meltdown and the attacks of Sept. 11 have dealt a twin blow to India’s IT sector, and by extension to the already limping Indian economy.

The highest IT spenders — banks, financial services companies and insurance firms — will face a rough period as a result of the attacks, and spending on IT services will be cut. Trouble in these marquee U.S. industries will have a substantial immediate impact on companies like Infosys, Satyam and Silverline, which see a significant portion of their revenues come from these segments. In truth just about every major IT services player will be affected.

How prepared are they to react and adjust?

Onsite Blow

For Indian IT firms, the United States has been the biggest market, accounting for well over 70 percent of the business. The industry will face delayed growth but will ramp up. “I guess there will be a greater shift toward offshore projects,” says Azim Premji. This hypothesis has long been touted as India’s answer to the global slowdown. Since onsite revenues are dipping, offshore revenue as a percentage could appear high. But it’s not clear that offshore business is counteracting a loss in onsite revenues, and India’s IT firms still face a tough market.

N. Krishna Kumar, executive vice-chairman and president of MindTree Consulting, which recently secured $14.4 million in second-round funding under less dire market conditions, says, “Most outsourcing models depend on the basis that initially you work at the client site, understand the system and then move work offshore. If you consider revenues, still it could be a 50-50 share between offshore and onsite. But as companies are not taking decisions, onsite consulting will be hit badly. Further, people will tend to become more security conscious, and they may not like outsiders to get into their organizations.”

This means lower growth for top companies and disastrous consequences for smaller players.

Impact on H1 B Visas

Another major concern of the industry (and one that will especially cripple smaller body shopping outfits) is the fact that the terrorist perpetrators are believed to have been in the United States on H1 visas. The U.S. government will start looking at each visa application with suspicion, which will further delay the process of initial visas. According to Ashank Desai, chairman of Mastek, “U.S. companies are likely to insist on a higher level of security check on individuals coming on assignment to the United States.”

TCS is processing 750 visas for software engineers who will be required to travel to the United States shortly. The company has 4,852 employees posted in the United States on onsite projects. Right now, explains Col. Vijay Kumar, director of the Software Technology Parks of India (Hyderabad), there is no cause for anxiety. But in the new situation, where everybody’s confidence has eroded, there is going to be some concern.

Revenues Nosedive

Most executives interviewed believe that the level of trust that India enjoys with corporate America will also come under microscopic scrutiny.

But what kind of dent will this make in company revenues? “As of now, it is difficult to say if there will be any significant impact on the full year’s figures, but the quarter-on-quarter growth will definitely suffer due to business coming to a complete standstill in the wake of attacks,” predicts Kiran Karnik, president of NASSCOM. His assessment is generous.

New Markets
Most Indian IT chief executives say that overdependence on the U.S. network has resulted in this difficult situation. But Kohli counters this assertion, saying, “There is no reason for us to be less reliant on U.S. corporate work. A large percentage of the global IT infrastructure is in the United States. How can you create artificial markets elsewhere? Over the years we have been trying to diversify more to Europe and Japan.”

For the first time, Indian CEOs are wondering: “Why can’t we develop the domestic market?”

“If people are coming from the United States, it is a good sign, since we can use their strengths and experiences and create a market of our own. We need to bring in a lot of computerization and deliver services,” says Ajay Sawhney, IT secretary to the government of Andhra Pradesh. Does that mean Indian firms should look “inwards?”

“It is not inward looking. It is forward looking. TCS has always kept in mind Indian business. I train my people here. I need to run a business here. I can’t train my people in the Silicon Valley,” says Kohli.

Some CEOs are optimistic that the recent attacks will open up new opportunities for Indian companies in security — data security as well as security of physical infrastructure. B. Ramaraju, managing director of Satyam Computer Services, says companies across the globe will now spend increasingly on security products and the focus will be on technology to provide that added safeety net. But these kinds of thoughts don’t hide the broader picture.

Is there any alternative strategy in a fluid scenario? Ramaraju says, “We have taken a number of steps to reduce the dependence on the United States. Europe is a focus area for the company and we are looking at significantly increasing the contribution of Europe to our revenues. Some of the major wins in the recent times have been from the European region. Our solution centers in the Middle East, Singapore and Australia will also act as buffers in the event of any future shocks.”

“It is easier to do business with U.S. companies than in Europe. But now a majority of Indian companies are correcting themselves,” says Azim Premji.

Preparing For The Future

“One of the lessons we can learn is in the future we have got to be self-prepared for some ups and downs, here and there,” says Kiran Karnik. What he means by “self-prepared” is that Indian IT should diversify to other countries, build a more robust domestic market, think ahead and plan. So the next time this situation arises, firms will know how to handle it. It still remains to be seen, however, how much of a blow the current trouble will inflict. si