The Fight to Survival Ensues
Date: Wednesday , March 02, 2011
When being pulled down by a crisis and it is almost impossible to move forward, the easiest thing to do is to give up and surrender. It takes more than just courage to stand up and say we are not giving up that easily. This is exactly what Indian IT Services industry did, they stood up and said something similar to the famous dialogue in the movie Independence Day, “We will not go quietly into the night! We will not vanish without a fight! We’re going to live on! We’re going to survive!” and they did survive. One can say it is the fighting spirit in these companies that kept them going.
Indian IT Service industry, which depended mostly on U.S. and UK, is amongst the industries that suffered most during the recent financial recession. The recession is mostly over and the industry is in its rejigging phase now. There is no point in surviving a crisis if one has not learned something from it; this is true in terms of industries as well. As this stands, another peril in store for Indian IT services industry seems to be from Brazil and other Latin American counterparts, which are slowly and steadily eating into our market and the industry experts are predicting they might be in for a feast. For an industry just surviving from a major setback, losing market hold spells disaster. Learning and adapting is a very important part of survival. What the industry has learned from its ordeal, how it is equipping itself for a similar scenario and to cement its foot hold in the industry is what we are looking into here.
Aftermath of Recession
U.S. and UK are among the countries worst hit by the recession and the companies there immediately cut down their budget, including IT budget, in order to stay afloat. This had huge impact on the Indian IT services industry and the companies had to strip themselves to bare minimum to survive. In the wake of the crisis, the industry is all set to shift its target market from giants like U.S. and UK to newbie like Ireland, Mexico, and Netherlands.
A vertical that was almost victimized by the recession is BFSI. The recovery rate of BFSI sector is comparatively low, but this turned out to be a blessing in disguise to Indian IT services companies as in an attempt to cut the budget short, more and more U.S. banks have now begun outsourcing. Large U.S. banks including Citigroup, JP Morgan and Bank of America have decided to outsource IT and back office projects worth nearly $5 billion this year to India. Furthermore now the Indian IT Services companies are also looking into other less financial recession affected verticals like government, healthcare, retail and utilities. These verticals are comparatively smaller in terms of IT spending but patterns are showing that this is about to change.
Apart from this, state governments in the U.S. are now trying to lower their cost by outsourcing their noncore works. The Indian outsourcing Industry is eyeing for a major chunk of this $100 billion opportunity. ITeS majors like HCL have already tasted the fruit of this market with their contract with the State of Virginia, which recently got extended. According to Ovum’s ICT Opportunity Profiler, IT services contracts worth well over $150 billion are due for renewal in 2011 out of which over 60 percent of the contracts are in the private sector. This suggests the great opportunities the Indian IT services companies can look into in 2011. “The Indian IT Services providers including majors like Tata Consultancy Services, Infosys Technologies, Wipro and Tech Mahindra-Satyam are well established and poised to win some significant deals in the year 2011. Existing and new companies are increasingly looking at outsourcing their Information Technology functions to IT Services vendors to decrease costs and also improve their operational efficiencies,” says Siddharth Maheshwari, Research & Analysis (R&A) Director, Ovum India.
The U.S. healthcare industry is a large one. In 2010 this industry represented about 12 percent of the U.S. GDP and 15 percent growth is expected by 2017-18. Though the U.S. healthcare industry’s IT spends is only two percent of its revenues still the fact that this is by comparison a recession proof industry makes it a much sensible sector for the Indian IT services players to be in. Furthermore healthcare reforms announced in the U.S. by the Obama administration have arguably made this industry one of the most opportunistic business areas that Indian services industry can look into.
A study by NASSCOM says that while exports continue to be the mainstay of the Indian IT-BPO industry with revenue of $59 billion, the domestic market grew 16 percent to an aggregate of $17.4 billion. As per NASSCOM, by 2020 the domestic sector will account for $50 billion in earnings, this further underlines the opportunity in the domestic market. Kishor Patil, CEO and Managing Director of KPIT Cummins says, “The sector is presently looking good. In terms of markets, U.S. seems to be picking up pace and Asia is continuing its growth as before. Only Europe is lagging behind as of now.” The report by NASSCOM also supports this, according to which the Indian IT-BPO industry (excluding hardware) witnessed a quick rebound in growth and is estimated to grow by 19 percent, aggregating revenues of $76 billion during the 2011 fiscal.
The Latin American Threat
The emergence of a Latin American outsourcing boom can turn out to be a threat to the Indian players. A study by IDC Latin America states that the Latin American IT Services market is expected to grow 9.2 percent and reach $21.3 billion in 2011; a growth of 11.5 percent is expected in the outsourcing market alone. The main Latin American countries in the space turn are Brazil, Mexico, Chile, Colombia, Costa Rica and Peru. Apart from building and strengthening their own empire, now the Indian companies have to defend their territories from these new players.
But most of the Indian IT service companies do not consider this to be an immediate threat. “There are several reasons why India can continue to hold its ground as the preferred IT destination for a few more years. The primary reason is cost advantage, India’s cost advantage will continue for some more time, secondly the sheer size of IT Talent pool and that too English speaking, thirdly operational excellence in IT services delivery, process maturity, quality of infrastructure, vendor maturity and customer focused work force, and finally political stability and positive business environment,” says Hanuman Tripathi, Group Managing Director, Infrasoft.
Patil also does not seem to be threatened by this. According to him the Indian IT Services companies are much more evolved than the Latin American market and this would be more of an opportunity for the Indian IT Service companies than a threat. “We can set up our base in Brazil or Mexico or Chile and provide our services from there. It will be like companies such as IBM and Accenture operating in India,” says Patil.
If the Latin American emergence is not a threat then what is! Tripathi considers the major threat to be inflated cost and decreasing level of government support to export oriented IT companies. “This significantly impacts small and medium companies such as ours and this is further aggravated by certain level of protectionism in some markets,” adds Tripathi. He says scaling up can help smaller companies as of now but getting the right talent will be an issue in the near future.
The never give up attitude
Like us Indians the Indian IT services industry is also refusing to give up. It was trashed and beaten down by the recession but it is like a Phoenix. This reminds of a quote from the movie Rocky Balboa, “It ain’t about how hard you hit. It’s about how hard you can get it and keep moving forward. How much you can take and keep moving forward.” The industry seems to know this very well and is following the moral it is giving to the word. The industry hung by a thread during the recession period. It survived that ordeal and is now aiming high and is looking forward for a better spot in the IT services market than what it ever had before.