Medium-sized software companies -- Ramp-up, and windows will open

Krishnan Thiagarajan

FOR SOFTWARE industry, opportunities are virtually world wide, and can be tapped with a judicious mix of offshore and onsite capabilities. While frontline software companies, such as Infosys Technologies, Satyam Computers and HCL Technologies, are already exploiting this huge opportunity, medium-sized companies are also poised to capitalise on this trend.

In doing so, medium-sized companies (revenues of Rs. 50-250 crores) are trying to move up to fill the slots vacated by their frontline peers.

To place the opportunity landscape in perspective, last December, a Nasscom-McKinsey Report on Indian IT Strategies projected an ambitious target of $87 billions in revenues ($50 billions in software exports and the balance from domestic sources). Most industry captains acknowledge that looking beyond a three-year horizon in the software industry may be a hazardous exercise, but they also concur on the Nasscom-McKinsey Report representing a road map of opportunity rather than being a mere play on numbers. For the medium-sized companies in the Indian software industry, scaling up from this level will be a litmus test of integrating and delivering on the industry projections using a number of attributes. These range from the much acclaimed ``Global Offshore Software Delivery Model, the second largest pool of IT knowledge workers in the world, Government support and commitment to software through hi-tech habitats to extending the success of outsourcing capabilities with Fortune 500 companies to Fortune 1000 companies.'' And all this from a small base (but a reasonably critical mass) of IT software and service revenues which were placed at $5.70 billions (Rs. 24,530 crores) for 1999-2000 by Nasscom, the apex body for software, dotcom and IT services in the country.

For the frontline and medium-sized companies, there are four key portals of opportunity -- IT services, software products, IT-enabled services and e-business. For medium-sized companies, IT services, to a large extent, and e-business, to some extent, are expected to be the route to sustainable topline and bottomline growth in the next three years. For more details on opportunities in the software landscape, please refer to the Industry Analysis on Software -- Frontline Companies in Investment World, Business Line, June 11.

IT spending and growth

As the Indian software industry's growth is inextricably linked to the growth in the worldwide IT spending and the sustained technology growth of the US -- the key destination of software exports from India, Business Line tried to assess these strengths (in the light of a possible slowdown in IT investments) through two studies conducted worldwide.

Digital Planet 2000: Focussing on the growth in IT spending worldwide, Digital Planet 2000, a study by the World Information Technology and Services Alliance (a consortium of 41 IT industry associations worldwide) using data from the International Data Corporation made the following observations:

The worldwide ICT (information and communication technology) market surpassed the $2-trillion mark in 1999 and continued to grow at 9 per cent. According to the report, the phrase ``information and communication technology'' refers to computer hardware, software and services (consulting, training, systems development and integration), telecommunications hardware and services, office equipment and internal IT spending.

The industry's focus has shifted from hardware, that generated the early momentum of the ICT revolution, to software and services. While the hardware market grew 6 per cent in 1999, the software and services segments increased by 14 per cent and 10 per cent respectively.

The forecast for ICT in the next five years is bullish with the global market expected to exceed $3 trillions by 2004, with growth rates faster than that of the economy. The report further adds that the pace of this expansion will accelerate because of:

The continued global build up of the Internet, with new `on ramps' created by using wireless networks, high-speed broadband technologies and a multitude of intelligent devices;

The privatisation of government-owned infrastructure and the opening up of markets to international investment;

The transformation of business models and the global adoption of e-business-based exchanges, auctions and integrated supply chains;

The harmonisation of international laws and regulations on policy issues such as taxation, privacy and security; and

The emergence of major new ICT markets on the world stage, including China, India and Brazil.

Digital Economy 2000: The report Digital Economy 2000, released by the US Department of Commerce in June, confirms the vitality of the digital economy, the improvement in productivity and the sharp improvement in US economic growth as a consequence. As long as this positive feedback loop is in operation, the growth trends and spending in IT are unlikely to move into a negative spiral suddenly, taking the industry by surprise. According to this report, the following factors are expected to sustain IT growth in future:

Evidence increasingly suggests that the US economy has crossed into a new period of higher, sustainable economic growth, and higher, sustainable productivity gains. These conditions are driven by a powerful combination of rapid technological innovation, sharply falling IT prices, and booming investment in IT goods and services across virtually all American industries. An analysis of the computer and communications industries, in particular, suggests that the pace of technological innovation and rapidly falling prices should continue well into the future.

Moreover, businesses outside the IT sector almost daily announce IT-based organisational and operating changes that reflect their solid confidence in the benefit of further substantial investments in IT goods and services. The largest and clearest recent examples come from the automobile, aircraft, energy and retail industries, all of which have announced new Internet-based forms of market integration that should generate large continuing investments in IT infrastructure.

Although IT industries still account for a relatively small share of the economy's total output -- an estimated 8.3 per cent in 2000 -- they contributed nearly a third of real US economic growth between 1995 and 1999.

New investments in IT are helping to generate higher rates of US labour productivity growth. Recently, six major economic studies concluded that the production and use of IT contributed half or more of the acceleration in the US productivity growth in the second-half of the 1990s. This was despite IT capital accounts for only 6 per cent of private business income.

IT has not only propelled faster growth during this expansion, but will have a tendency to dampen the next business cycle downturn. Because IT investment is driven by competitive pressures to innovate and cut costs more than to expand capacity, it will be less affected by a slowdown in demand. In addition, by creating supply-chain efficiencies that reduce inventories, IT should dampen the inventory effect that has worsened past recessions.

Even after allowing for a healthy dose of scepticism, both the reports paint a bullish picture for the IT industry in general, and for the software industry in particular. As Mr. Arun Jain of Polaris Software said, ``There is no market constraint, if at all there is any constraint it is on the delivery side.'' Effectively, for medium-sized companies in India, the real challenge lies in tailoring the delivery mechanism in the form of quality systems and internal processes, rapid build-up of infrastructure and recruitment/training of talented IT professionals to fulfill the outsourcing requirements of the customers in the developed world.