The Hindu Business Line : Best foot forward

The word ‘recession’ (a household term these days) has probably made its impact felt on the Indian IT sector and all its dependents in a way it has touched few others in the country, leading to speculations, uncertainties, apprehensions and a sense of dejection.

Be it an enthusiastic media that bombards the IT companies with hazaar questions on the slowdown and manages a steady stream of stories, or apprehensive tech professionals living under the fear of job cuts, or companies that have put up a brave front — all have contributed to this overwhelming feeling.

Going by the prevalent mood, if one had been to the recently held Nasscom India Leadership Forum anticipating good doses of gloom and doom, one would have been thoroughly disappointed. Muted it certainly was, compared to the previous years, but there was a buzz of activity, of companies taking stock of the situation, of looking at the devil named recession eye-to-eye, of formulating new strategies, and finally, accepting lower growth rates, at least for the time being.

None can deny the severity of the situation and never in history has the Indian IT industry witnessed such a downturn. “We are definitely in difficult times, but we have seen such times earlier also, such as the recession in 1989-93, or the tech bubble burst in 1999-2002. Perhaps now is the mother of all recession,” said Narayana Murthy of Infosys.

But the industry has put its best resilient foot forward, and as the cliché goes, is preparing for the worst while hoping for the best.

fighting Uncertainty

In such a situation, what is really worrisome for the IT vendors is the uncertainty that persists. The global economy has shown little signs of stability and analysts are doubtful if the crisis has reached its bottom. As a result, companies are unsure about their business and are unwilling to commit money for technology upgrades.

This has led to lower number of projects for the vendors as well put pressure on billing rates, forcing many to revise revenue expectation for the next quarter. Also, the cross currency fluctuations, more importantly the appreciation of the dollar against the pound and the euro, has impacted earnings of these vendors.

Industry experts, be it the IT vendors or analysts, have been unable to forecast when there could be an upswing in the economy. “Taking an optimistic view, an uptake is about 12 to 15 months away. But a two-to-three-year time frame is much more likely,” said John Willmott, CEO of BPO analyst firm NelsonHall.

Peter Redshaw, Vice-President, Gartner Research, said, “I do not know, but I will be surprised if it is at the end of this year.” The Infosys CEO, S Gopalakrishanan, recently said business recovery could take between two and four years in the worst case scenario. Viewing the scene optimistically, recovery could start by the end of fiscal 2010, he added. Political interference and protectionist measures could be a further setback during 2009, said Redshaw.

Offshoring under scanner

With unemployment rates rocketing in the US and a new government in place, many feel that offshoring could come under the scanner. However, Redshaw said the fundamentals of offshoring are still in place, and companies would have to offshore to be competitive. “In the long term, offshoring looks good, and it would be a reasonable guess to expect more offshoring by the end of 2010,” he added.

The vendors too, are hopeful that companies would offshore more to cut costs even if there is an overall cut in IT budgets. Spending on technology would vary according to geography and industry. Redshaw expects the US clients (where the recession started) to start spending before the European clients loosen their purse strings. However, outsourcing would grow much more slowly than before, he added.

Tata Consultancy Services, the country’s largest IT services exporter, also expects a slow pick-up in client spending. “I think the sudden surge is more of an optimistic view. A surge happens when the industry as a whole picks up. But I think the pick-ups are going to be client by client,” said N. Chandrasekaran, Chief Operating Officer and Executive Director, TCS.

Redshaw said a lot of technology refresh and upgrades would need to be done once the companies decide to spend, and there would be good demand for application maintenance and BPO services. However, hardware and high-end consulting would continue to be slow. He said in the short term, the KPO sector would face some headwinds as risk-averse clients would prefer to go with the tried and tested BPO model.

Vendors ready for the show

Also, IT vendors would have to be more flexible and agile to win contracts. When times were good, a lot of emphasis was placed on trust and good relationship. In a more volatile world, increased flexibility would help the vendors to win trust. They would have to be agile in the way they structure the contracts and must follow more flexible pricing strategies. There would also have to be a lot more knowledge sharing between the vendor and the clients. The vendors might even have to explain how a particular process works.

He said a lot of emphasis would be placed on the viability of a vendor. There could be a flight to safety, and clients might be willing to pay a little more for a more viable vendor.

The IT vendors, on the other hand, have factored in the challenges posed by the slowdown, and are optimising their processes to drive efficiency and cut costs. The vendors have multiple levers that they can use, and most are now looking to use all available options.

While headcount addition has definitely come under the scanner for some, improving the onsite-offsite mix is also an important factor. A lot of emphasis is also being put to increase the utilisation rate. They are also looking at more fixed price contracts, which would allow them better margins. The performance bar for the employees has also been raised this year. In a bid to reduce the bench and be able to hire as per demand, some players such as TCS and Wipro have decided to go for campus recruitment only in the final semester. Lateral hirings have also been squeezed.

Nasscom recently said India’s IT and BPO export revenues would grow only 16 to 17 per cent to $47 billion in fiscal 2009, as compared with the previous estimate of $50 billion. During fiscal 2008, export revenue stood at $40.4 billion. For many clients IT budgets have come down. Gopalakrishnan said recently that from whatever clarity Infosys has on client budget, one can see that IT budgets would be down 3 to 6 per cent compared with last year.

Also, even after the clients decide on IT spending they would not be spending the money immediately, they would be in a wait-and-watch mode.

TCS said it expects more transactional contracts in the banking, financial services and insurance (BFSI)segments, where the deal sizes would be a few million dollars. Chandrasekaran said clients are not looking to spend all the money at one go.

Europe beckons

But what could be of cheer for the Indian IT industry is that the continental market is gradually opening up to Indian vendors.

Uptake in Europe, faced with rising costs and an aging workforce, has been encouraging. “We should not expect a revolution just yet,” said Chris Gentle, Director, Europe, Deloitte.

The European companies are looking to cut costs and are re-designing their back office operations, which is an opportunity for India, he added. However, the Indian vendors would have to develop domain expertise, location-specific capabilities, newer pricing models based on gain-share to clinch deals in the European market.

Opportunity in meltdown

While the slowdown is definitely not something that one might wish for, there are some who think this could be the opportunity for India to migrate to the next level. Vendors are now under pressure to provide more value to their clients and that might help them to move up the value chain.

“If you do not come up with solutions that reduce the marginal cost of delivery, if you do not innovate, you will die. May be that is the good thing about this recession. The Indian companies will start innovating. For long we have talked about the headcount. Probably now we will talk about our brainpower. I think that will be our learning,” said Jeya Kumar, Chief Executive Officer, Patni Computers Ltd.

Whether we grasp this opportunity or not is to be seen.

shamik@thehindu.co.in

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