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Next Decade of Growth in Indian IT Services Market
Victor Kannan
Monday, February 1, 2010
The Indian IT services Industry has had a profound impact on the Indian economy, percolating down to the lower echelons of the Indian society and influencing the life of the common man. From the disproportionate increase in real estate prices to the continuously increasing workforce affected by the bad ergonomics to the huge demand for software engineers in the matrimonial market, the Indian IT industry has profoundly altered the country’s social and economic pattern.

The avalanche effect of the recent recession had spared none, but we are on the road to recovery, say the experts. Higher sales forecast by an industry leader seem to be signaling the resurgence of the $60 billion Indian outsourcing sector. Companies have resumed hiring and are giving hikes and perks to retain skilled resources. The recession also forced many from the younger generation to consider entrepreneurship, leading to mushrooming of startups. In spite of president Obama’s policies, U.S. companies continue to offshore IT, ITES services.

The Rise of the SMBs Worldwide
For companies that want to reduce costs, outsourcing seems to be the best alternative. In fact, it is expected that the small and medium sized businesses will be forced to find a way to collaborate and work with domestic IT services companies with offshore ties. So far it was only the IT biggies who were hogging the limelight by signing multi -million dollar, multi-year deals. But the future will see the smaller, eager, and agile companies bagging significant overseas contracts. SMBs in the US and Europe are looking to outsource, and want to work with SMBs in the Indian IT sector who can give them the time and attention that cannot be expected from the IT behemoths.
This isn’t a mere prediction as more and more mid-sized Indian IT companies are inking deals with clients from U.S. and Europe. So the next phase of growth in the Indian IT market will not just see the growth of the Goliaths, but will witness the emergence of a new generation of Davids. This breed of SMBs will have the technical competence and agility to meet the needs of another SMB and provide the required attention, solution, and cost effectiveness.

Bucking the Trend - Domestic SMBs
Another new trend that is emerging is that much of the growth will be fueled by demand from the Indian small and medium business (SMB) segment. Indian SMBs are expected to emerge as a significant opportunity. This is an indication that building enterprise IT infrastructures and applications, networking, and communication have become key priorities for India Inc. The NASSCOM-Zinnov study anticipates that, in line with Indian companies’ increased technology spending, revenue from the domestic market will grow to $4 billion to $5 billion by 2015. SMBs’ requirements and buying patterns have flung open a door for domestic providers. Working closely with Indian SMB customers will also help Indian companies make their products both ‘enterprise-ready’ and suitable for other markets, especially emerging markets.

Reverse Brain Drain
A third interesting factor is the returning Indian expatriates, who have been very successful in the USA and Europe. These NRIs are realizing the potential that the growing Indian economy offers and are returning to their home country with their international exposure, experience, and capital to set up businesses or fund ventures. This reverse brain drain will play a crucial role in upping the standards in these SMB providers and also in the entrepreneurial world of software industry.

Spreading the Joy
This shift in buying pattern and the leaning towards the SMBs will lead to a substantial increase in revenues of the mid-sized IT companies, which will have a trickle-down effect. Currently seven Indian cities account for 95 percent of IT export revenues; but the focus is now on developing 43 new locations to emerge as IT-BPO hubs. Most of the mid-sized companies are situated in the tier-II cities and employ local workforce. The growth of SMEs can help replicate the economic and technological development of the metropolitan cities in tier-II towns and cities.

The Indian domestic IT Services market is at par with international levels in terms of average gross margin and provides immense opportunity to the vendors. However, vendors need to strategize around services delivery by implementing efficient processes, developing reusable tools and templates, and customizing according to local needs.

In terms of industry focus, banking, financial services, and insurance lead the Indian IT services market with 21.5 percent market share, followed by the public sector (including education) and the telecom industry. However, energy and utilities, followed by healthcare, remains the fastest growing segment for the IT services companies.

When the Going Gets Tough, the Tough Get Going
In order to survive the increased level of competition in the world market, especially from other low cost Asian nations like the Philippines and China, Indian companies will have to develop new products that are at the high end of the value chain. Indian software exporters have so far focused their attention mainly on custom computer programming, manpower training, consulting, and developing customized software products. To retain their lead, Indian companies are now trying to adopt a culture that encourages innovation, embraces new trends such as Green IT, and delivers solutions that are focused on re-engineering and transformation. India is emerging as a leading innovation hub with increasing number of patents being filed and granted from India.

India is also poised to offer an enhanced value proposition to MNCs in integrating the entire gamut of conception to customer service cycle involving R&D, engineering, manufacturing, marketing, sales, and support. When executed effectively, this will encourage more companies to transfer their business to India. Apart from the cost savings that result from an effective offshore strategy, being closer to end customer is a big second wave that will pull MNCs to India. Every time there is an economic crisis in the west it is a long-term boost for India and this recession of 2008-2009 is no different.

Keeping this in view, The Indian IT SMB sector has to regain the momentum lost during the initial stages of the recession and enter the fray with renewed vigor and energy. According to the NASSCOM, the global technology related spending is expected to grow from 2010 onwards with growth in outsourcing adoption. The services and software segments are estimated to cross $1.2 trillion by 2012. This is more than the 5.2 percent growth expected in the total IT spending. Service providers are expected to enhance focus to domestic market to de-risk business and tap into the local growth opportunities.

Recovery from recession is not a mere rhetoric. The SMBs that have survived the turbulence of recession have emerged nimbler and more productive. The end of 2009 saw new deals being signed and relationships extended. Enterprise mobile phone, applications domain, and enterprise social media monitoring space show immense potential to grow. With India having 500 million handsets and the user base still growing at a robust rate, viral mobile marketing and advertising domain is very hard to ignore.

Other technology trends that are hard to ignore are intermediate sized devices like tablet PCs, growing computing capacity of small devices, and the functionality they are able to offer to a mobile workforce, shift towards server based computing in centralized data centers through cloud computing, and a growing consciousness of energy use and efficient management of its consumption.

Futuristic companies need to be armed with the knowledge of current trends not only in technology but its evolving applications as in the social media, cloud computing, and small form factor channels on mobile and PDAs, the capability to relate to the Gen Y culture, and ability to innovate solutions for its customers in complex applications of IT.

The author is Victor Kannan, CEO, Symbioun Technologies
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