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 Software
Services
Offshore projects power India Software Inc.’s
forward march
Offshore development volumes are driving revenues
in the software industry as destination-USA continues to dominate
India’s software exports. The industry will continue to grow with
a steadily diversifying revenue mix in 2003, says Prashant L Rao,
while analysing the significant trends that will shape the Indian
software services industry in the financial year ahead
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| Adoption of Web services in banking is
still in the early stages, says V Shankar |
Of the nearly 80,000 crore rupees ($16 billion)
netted by Indian IT in 2002-03, almost 75 percent was accounted
for by the software services industry. Of this latter percentage,
80 percent came from software exports which accounted for Rs 47,500
crore ($9.5 billion), according to Nasscom estimates. The remainder
came from the domestic software services market, which contributed
Rs 12,400 crore ($2.5 billion). The software industry is expected
to account for something like 20 percent of India’s exports
for 2002-03 once all the final figures are in. On the downside,
software product revenue (exports) has been stuck at Rs 1,500 crore
for the past three years, says Nasscom. While there was a lot of
hype about diversifying to other geographies, Europe in particular,
the fact is that Europe’s share of Indian software exports
fell to 21 percent in 2002-03, down from 24 percent in the previous
year. Cultural differences and language barriers were cited by Nasscom
as the reason. After years of recruiting raw engineering graduates,
Indian software houses began hiring experienced professionals with
industry-specific knowledge.
Geographical
diversification
While the slowdown in the US economy led to US corporations slashing
IT budgets, they also began to outsource work to India to cut costs.
North America accounts for almost half of global IT spending. Therefore,
the US is going to dominate software exports from India in 2003-04
as well. The Giga Information Group predicts that IT outsourcing
to India will grow by 25 percent in 2003. Giga expects that companies
will insist on some portion of the work being done in a foreign
country in almost every major outsourcing deal this year.
Indian companies are attempting to boost
their European presence but linguistic and cultural barriers remain.
The UK accounts for 60 percent of India’s software exports
to Europe. In stark contrast, non-English-speaking Germany accounts
for 11
percent.
Verticals and
service lines
The banking, financial service and insurance (BFSI) sector is far
and away the biggest vertical for Indian software companies. It
accounted for 35 percent of software exports in 2001-02. The next
two were manufacturing and telecom equipment with 12 percent each.
Almost all the verticals are expected to grow at the rate of 10-12
percent in the next few years. Chances of any dramatic shift in
the export mix are therefore unlikely.
In terms of service lines, 80 percent of
IT services exports are accounted for by custom application development
and application outsourcing. These two lines account for barely
10 percent of the global IT services market. India’s share
in lines such as system integration and IT outsourcing is below
1 percent. In the medium term, Nasscom expects that India can double
its share of the custom application development and application
outsourcing lines from the present level of 14-16 percent to 25-30
percent. With large vendors diversifying into IT outsourcing, system
integration, network infrastructure management and consulting, the
share of the dominant service lines is likely to drop to 50-60 percent.
Significant opportunities exist in areas such as Enterprise Application
Integration (EAI) where the market is projected to triple from $6
billion to $18 billion in the 2001-05 timeframe. Indian software
companies have started moving up the value chain by undertaking
consulting assignments. To this end, many of India’s software
majors have been recruiting locals in the destination country for
senior marketing positions. Implementing ERP and CRM applications
is another potentially lucrative area.
Threat from other
countries
India is a preferred destination for IT services outsourcing today.
While India’s position is reasonably secure, there is no room
for being complacent. Several upcoming destinations—Argentina,
the Czech Republic and China in particular—need to be watched
closely. India scores over China in employee costs, primarily due
to that country importing project managers from Hong Kong and Australia.
East Europe is home to top-notch engineering talent; it is quite
likely that high-end engineering work will flow there. India has
a large number of companies that have achieved CMM level certification;
here it towers over the competition. Other countries have very few
or no companies with CMM certifications. India has little to fear
from countries like Ireland that are hampered by the limited supply
of IT professionals; the threat is from emerging destinations.
Interestingly, there is an opportunity
for India in the Chinese software market, which is facing a shortage
of information technology professionals. Gartner’s research
on key IT trends and scenarios for Asia-Pacific in 2003 states that
a huge shortage of top-end professionals exists. China is unable
to produce system architects and project managers, the majority
of whom come from India.
Potential growth
markets
Nasscom has identified several markets that could result in large
opportunities for Indian software in the future. Product Data Management
(PDM) is one such area, covering applications that manage product
data and product development workflow. The global market for PDM
is projected to grow to $11 billion by 2006, according to CIMData.
Automotive, electronics and telecom, aerospace, machinery and process
industries are major users of PDM. The big consulting firms presently
dominate the service side of PDM. Content management is another
growth area with the thrust being on delivering digital content
across multiple channels. This market is projected to be worth $27
billion by 2006. Services account for roughly 90 percent of this
market. Indian companies can offer implementation services for content
management solutions, support for interactive TV and develop applications
for set-top boxes. EAI is a potential gold mine for Indian software
houses. It is projected to be a $43.4 billion market by 2005; services
account for 73 percent of this market. Business Intelligence and
data warehousing will together account for a $29 billion market
by 2005. Indian companies can offer system integration, BI application
implementation, customisation, support and maintenance and data
warehousing/mining consulting. The market for wireless and mobile
infrastructure consulting, integration and management services will
be worth $37.4 billion by 2006. Indian companies can offer protocol
development, network design and re-engineering, porting, testing
and network management of wireless networks, system integration
of legacy systems with wireless networks and applications and wireless
enable vertical-specific or enterprise applications.
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| A number of worldwide insurers are now
locating their servicing centres in India to take advantage
of the good infrastructure and lower costs, says D V Jagadish |
Straight-through processing (STP) is the
complete automation of stock trading from order entry to final settlement.
The global market for STP is expected to touch $6.3 billion by 2004.
India can offer customised application development, maintenance
and support, consulting and transaction processing outsourcing in
this segment.
Mainframes continue to present an opportunity
as core systems in banking and insurance are on mainframes. As it
is difficult to replace mainframes in the insurance sector, companies
are focusing on using modern technology to get data out of the big
iron and push it to mobile phones. There is a lot of interest in
Web services. “Opinion is divided about the capacity it can
handle. Adoption of Web services in banking is in the early stage,”
says V Shankar, who heads the IT services division at i-flex solutions.
Verticals
Potential growth verticals for Indian software companies include
telecommunications, utilities, retail and healthcare. Deregulation
and restructuring in utilities has resulted in IT spending rising.
By 2005, this sector will account for $36.3 billion. System integration,
customer management and billing and customer support outsourcing
are key areas for India Software Inc. to explore. Wipro already
gets 8-9 percent of its revenues from this vertical. Retail accounts
for 3 percent of the global outsourced IT services market. Indian
companies can undertake system integration (SI) of SCM, ERP, logistics
and POS solutions, business intelligence work and outsourced support.
Infosys gets 12-13 percent of its revenues from retail; Daksh handles
customer servicing for Amazon.com. The healthcare segment is projected
to increase IT spending, it will account for 4.3 percent of the
global IT market in 2005, up from 3.9 percent in 2001. Regulatory
reforms are driving this market. Once again, SI work and consulting
opportunities exist. Additionally, HIPAA (Health Insurance Portability
and Accountability Act of 1996) compliance services and medical
transcription and health insurance processing outsourcing can be
looked at.
D V Jagadish, a group vice president at
FirstApex says, “The total of world insurance premiums is approximately
$2,400 billion, which translates to around $20 billion being spent
annually on software services. While many insurers handle their
IT needs in-house, increasingly we are seeing insurance companies
looking to outsource to service providers as they prefer to focus
on their core competence in running the insurance business. The
Internet is changing the way insurers do their business through
the automation of processes towards STP. Indian companies are currently
serving a small percentage of this business. However, a number of
global leaders figure in the customer lists of Indian firms. A number
of worldwide insurers are now locating their servicing centres in
India to take advantage of the good infrastructure and lower costs.”
Shift to CMMI
CMMI, the Capability Maturity Model Integration certification, is
fast picking up in India. This isn’t surprising considering
that India has been the biggest market for SW-CMM in the past. With
eight to nine CMMI assessments conducted, companies that successfully
adopted SW-CMM are migrating to CMMI. Infosys, Wipro, Polaris, i-flex
and SSI are already using the new model. Many Tier-II companies
are planning to migrate soon. Even companies that did not adopt
SW-CMM are considering adopting CMMI from scratch. SW-CMM will reach
its end-of-life by end-2003; the Software Engineering Institute
(SEI) will not fully support SW-CMM assessments beyond end-2005.
Customers are already asking for CMMI level certification, rather
than SW-CMM levels.
Billing rates
Rates for both onsite and offshore work are expected to stabilise
in 2003 with no dramatic changes, according to Nasscom. Billing
rates fell by almost 25 percent compared to 1999-2000 and stabilised
in June, 2002 at around the $22-25 level for
offshore development and the $55-60 level for onsite work.
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1999-2000 2000-01 2001-02 2002-03
(Estimated)
Onsite 9,850 15,900 16,500 18,500
Offshore 5,950 10,950 18,500 27,500
Products & unclassified 1,350 1,500 1,500 1,500
Total 1,7150 28,350 36,500 47,500
Source: NASSCOM
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- War in Iraq. If anything can
upset the Indian software industry’s plans, it is the
possibility of conflict in the Middle East
- Rising Rupee—with the
rupee appreciating vis-à-vis the dollar, India Inc.’s
competitive edge will get blunted to a certain extent
- More vocal resistance to outsourcing
in some parts of the world—by trades unions, labour
associations and even governments. The Indian government
and industry associations need to be pro-active in countering
this trend
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Key Statistics
-
 The
$520.8 billion worldwide IT services industry is expected
to reach $696.2 billion by 2005 with a CAGR of 6.0 percent.
Of this, the North American IT services market is forecast
to grow to $332.4 billion in 2005, while Western Europe
is forecast to reach $183.8 billion in 2005.
- Current penetration of offshore
IT services in the US market is no more than 5 percent as
an average across all industries.
- 40 percent of US enterprises
surveyed will retain their current levels of offshore services
spending while 46 percent expect to increase their offshore
services budget in 2003.
- 42 percent of enterprises
increasing their offshore budgets planned to do so by more
than 40 percent, and by as much as 200 percent at the high
end.
- 3-4 Indian Tier 1 vendors
will make it to the ‘global top 10’ list of IT
Services companies in terms of mind-share with global buyers.
They will consistently be on most short-lists for even the
high-end projects, as well as, increasingly, IT outsourcing
projects for vendors that develop this capability aggressively.
- IT Services companies that
are attempting to go up the pure ‘consulting’
value chain are looking at the ‘wrong’ value chain.
The world does not need more consulting companies. There
is a more compelling value chain in terms of becoming more
full-function providers within the current space that these
companies operate in. They need to get increasing mind-share
as companies that can add value at the front-end business
problem formulation, analysis and then the requirements
definition stage at high levels within client enterprises,
and not just at the applications development stage of projects.
- Product vendors will find
increasing acceptance and entry in overseas markets, as
a ‘rub-off’ effect from the credibility achieved
by Indian IT services vendors. However, regardless of the
quality of their products, only those vendors that invest
in building successful sales and marketing channels—a
perennial Achilles heel for most Indian product vendors—will
be successful.
- The domestic IT market should
not be neglected by vendors, and will be the source of good
growth on most fronts, including IT services.
- The Chinese IT services market
has to be viewed as a major opportunity, and not as a threat.
IT services vendors that do not develop a viable China presence
to address the domestic market there in the medium- to long-term
will see their overall growth rates suffer.
Partha Iyengar, VP, Research
Director, Pune, India
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Infosys is focusing increasingly
on IT outsourcing and system integration. Infy has said that
these areas will start contributing significant revenues over
the next 18 to 24 months. While revenues have been trickling
in already, Infy is expecting the inflow to increase over
time. Infy’s philosophy is that as the company grows,
and as it generates larger amounts of revenue from existing
clients, it can become the prime vendor for those clients,
and they will not have to go to other companies that do IT
work. The aim is to be the one-stop shop for these companies.
Infy has made a thousand campus
offers during the recent campus recruitment season. These
candidates are expected to join the company in July-August
this year.
The company has been unable to
raise billing rates and is relying on volume growth to drive
revenues. Infosys is seeking large-sized IT outsourcing deals
that could each be worth $50 million per year, including taking
over a client’s IT-related staff.
Infosys has been unable to
raise its billing rates and is relying on volume growth to
drive revenues
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TCS plans to hire 3,000 software
professionals in India and overseas, taking the total strength
of the company to 23,000 by March 2004. It is planning to
scale up its SAP practice; the company will recruit 1,000
professionals in six months. This could see the company overshooting
its recruitment target for the year. The SAP thrust is a result
of the new ERP-II solution from SAP that requires all vendors
to develop industry-specific modules based on the original
package. TCS will make lateral hires and the company is creating
a special training unit of experienced professionals to train
new recruits in SAP technologies. The SAP practice is part
of TCS’s e-business practice—e-business contributes
close to 40 percent of revenues. TCS will target opportunities
in China, Latin America and India.
TCS’s public issue of shares
is expected this year. Once the IPO happens, the Tata group’s
four IT companies may be merged into TCS, creating a giant
IT company with 28,000 to 30,000 employees. The Tata group
has four IT companies in addition to TCS—Tata Infotech,
Tata Elxsi, Tata Technologies and CMC. The group’s IT
companies have been collaborating to a greater extent in the
last two years.
Among Indian software companies,
TCS is the one looking most seriously at China. TCS will look
at servicing existing MNC clients that have expanded their
operations in China and need support there—for instance,
GE Medical Systems. China will also be its base for addressing
markets in the APAC region, including Japan, South Korea and
Taiwan. Last but not least, TCS will attempt to tap China’s
huge domestic market. It has already set up base in China
recruiting 250 engineers from Shanghai University.
TCS will look at servicing
existing MNC clients that have expanded their operations in
China and need support there
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Wipro’s chairman Azim Premji
has declared his vision for the company, envisaging it to
grow to a $5 billion giant by 2003-04. One way to get there
would be through acquisitions. Wipro acquired Spectramind,
the Global Energy Practice of AMS and Ericsson India’s
R&D centres in Bangalore and Hyderabad in the recent past.
It is looking at strong brands with good business for its
acquisitions. With realistic valuations, much lower than valuations
during the IT boom, Wipro believes that the scope for strategic
acquisitions in India and overseas is brighter than ever.
Growth is expected from telecom,
embedded software, e-commerce, data warehousing and areas
such as ERP and CRM. At this point of time Wipro has no plans
to invest in setting up development centres in China but the
company isn’t ruling out the possibility of doing so
in the longer term if costs in India increase to the point
where Indian software labour becomes uncompetitive.
With realistic valuations Wipro
believes that the scope for strategic acquisitions in India
and overseas is brighter than ever
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