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June - 2012 - issue > View Point
GROW-or-DIE
Pradeep Shankar
Friday, June 1, 2012
The Indian IT industry has come a long way. Including the domestic IT business, the industry has crossed $100 billion in revenues with over 3.5 million employees. Five of the top 10 global leaders in software services are Indian companies. With all Indian companies put together account only for 10 percent of the $850 billion global IT services industry indicating there is ample space for growth.

However, the growth for Indian IT industry is choked at present. Although India's IT services exports grew by a robust 19 percent year-on-year in dollar terms in 2011-12, the trends in the last two quarters are worrisome. Hit by the continued macro-economic woes in developed countries that resulted in delays in project ramp-ups, the top four Indian IT companies grew at 17 percent in the third quarter and 14 percent in the fourth quarter, against a healthy 24 percent in the first-half.

In the current volatile global economy even achieving growth rates of 10-14 percent has become challenging. Some of the aftershocks of this global economic downturn are already visible. The BFSI (banking, financial services, insurance) industry, which has been the bread earner for the IT services industry —accounting for more than 40 per cent of Indian IT services players revenues— is lurching from one crisis to another, never having fully recovered from the 2008 meltdown. In 2011, global BFSI clients reported a dip in profitability due to lower revenue growth and pressure on margins. Telecom clients too, have been going through tough times. As a result, the cash flows and discretionary spending of such large clients have come down significantly in the last few quarters of 2011-12 and is expected to remain subdued in the next few quarters.

In such a scenario, the competition for Indian IT service players is not from the global IT service majors. The new competition is mainly between Indian offshore players leading to lack of pricing power, commoditization and reduction in margins. There will be growth but margins will be lesser.

To remain profitable companies will have to change strategy and invest in consulting space, handling business transformation projects like how IBM or an Accenture has been doing. As one of the eminent industry observer puts it, "The Indian players will need to build a high-quality consulting and domain-rich front end, change sales to a partner model, empower the front end, create a more visible country specific local leadership, spend more on marketing and brand equity, change compensation structure and move the center of management from India to the countries where their market is. The existing delivery-based centralized power structures need to morph into client focused groups, more federated and less control based. It also means changing the focus to tackling business challenges leveraging technology, transforming enterprises, than being purveyors of technology-led projects. In short, from delivering projects to transforming enterprises."

Unlike the past, this phase is going to be painful. Many of the companies are directionless. This is interesting times to be a leader in the IT services space. It is a true test of ability of today's leaders if they can pull this through. On their ability to transform themselves to meet the needs of the market will lie their success and profits. The risks are too high. If they succeed, they are game in. If they fail, perhaps there isn't a second chance.

The Indian players will need to build a high-quality consulting and domain-rich front end, change sales to a partner model, empower the front end, create a more visible country specific local leadership, change compensation structure and move the center of management from India to the countries where their market is.

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