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Indian IT’s Next Big Push

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In November 2012, multinational financial services giant American Express Company — AmEx — stopped outsourcing technology work, worth $1 billion. Among the vendors affected by Amex’s move were India’s Infosys and Tata Consultancy Services (TCS), and Cognizant Technology Solutions. Neither AmEx nor any of the vendors spoke in public about why the work was suddenly withdrawn. But it worried analysts tracking the Indian IT software services sector. They wondered whether this was an isolated case or part of a trend that could acelerate over time.

Earlier in July, the global IT outsourcing industry had witnessed a mild tremor courtesy Randy Mott, the new chief information officer (CIO) of US automaker General Motors (GM). Mott said GM would cut IT outsourcing from 90 per cent to 10 per cent. The move to bring all technology development and deployment work in-house would immediately affect GM’s current IT vendors such as Wipro, IBM, HP and Capgemini. More importantly, it was seen as a setback to the entire trend of outsourcing which had accelerated over the past decade.

GM’s move was particularly worrying as, at one point of time, along with GE, it used to be among the largest customers of most big IT vendors in India. The step by GM — which only survived because of a bailout from the US government — may have been an exception. With high unemployment and a slow-growth economy being hot button issues, government-funded GM may have been trying to be politically correct by making the right noises on outsourcing. But for some time now, a spate of headlines — both in domestic and international media — have been screaming about the stalling engine of Indian IT, which had grown on the back of outsourcing and its subset, offshoring. Mcquarie Equities Research, in a grandiosely titled report, Trouble in Paradise, said valuations of top Indian IT firms were very rich and growth was unlikely to bounce back. Earlier, financial services major JP Morgan was equally cautious in its analysis of the Indian IT sector.

Of course, the latest quarter results from Infosys, TCS and HCL Tech have all beaten street estimates and there is some optimism in the air about the offshoring budgets of clients becoming better. That said, there is a degree of concern that the old model is no longer capable of powering the industry’s future growth.

After a decade of rip-roaring growth — when it grew from $8 billion in exports (in 2002) to $69 billion last year, at a compound annual rate of 24 per cent — the headlines seemed to suggest that Indian IT’s model had come unstuck. Stumbles and slowing growth by erstwhile market darlings such as Infosys and Wipro seemed to only buttress the argument that Indian IT, having captured less than 10 per cent of the global services market, had run out of steam.



The global delivery model (GDM) that Indian IT companies pioneered and perfected was passé, having been replicated by multinationals and thus conferring no competitive advantage. Traditional IT services such as customised application development, software testing and remote infrastructure management are now increasingly getting commoditised with margins coming under pressure.

However, the bigger worry has been around growth. A stalling global economy has meant industry verticals such as banking, financial services and insurance (BFSI), telecom and manufacturing, which provide 75 per cent of Indian IT’s revenues, are under stress.

BFSI, which accounts for over 40 per cent of the revenues, is facing challenges, mostly because of regulatory issues and a trust deficit, particularly in the US and Europe. The Lehman implosion, Barclays’s Libor-fixing scandal and BankAm’s continuing troubles have led to greater scrutiny, regulations and a slowing decision-making processes.

The telecom vertical has done reasonably well, but anaemic growth rates have been a concern. With piled up inventories and decelerating growth or even a decline in sales, companies have been trimming production, impacting the manufacturing sector. Rising protectionism, increasing competition from destinations such as the Philippines in the BPO segment, as well as near-shore centres in Canada and Mexico, and the rise of China and eastern Europe in IT services, are also proving a threat to Indian IT.



All this has meant that the $101-billion Indian IT industry (including the $32 billion domestic market) — which employs 2.8 million people and contributes about 7.5 per cent to the gross domestic product and is accustomed to double-digit export growth — is now looking at single-digit growth rates.

So, will the industry have to resign itself permanently to incremental growth? Has it lost its mojo? Hardly, say industry players. Most agree on one point though — the current model is maturing and growth needs to come from new models, new business areas and innovations. If Indian IT needs to keep growing at its old pace, it needs to reinvent itself.

The Old Order Changeth
S.D. Shibulal, CEO and managing director of Infosys, is under massive pressure, though he has gained some breathing space after the last quarter results. For much of 2011 and 2012, Infosys fell behind in the growth race. Its challenges are symptomatic of the issues that the Indian IT industry is facing and to that extent it continues to remain the bellwether.

But Shibulal retains his sangfroid and smile. “Each time there is a shift in the marketplace, this question about Infosys and Indian IT is asked. First they said, after Y2K what? Everybody said we were body-shoppers and would not succeed in building GDM. We disproved them,” he says. “Then they predicted our doom after the dotcom bubble burst. Critics claimed we could not break into package implementation. We did.”

After the Lehman crisis in 2008, Shibulal says, their ability to grow was questioned again. “Yes, the current environment is both different and similar in some ways. There are challenges. Infosys has invested ahead of the curve in transforming itself under our 3.0 mission. Everybody will see how resilient we are. I am sure the Indian IT industry will be the same,” he says.
 
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Echoing him is his cross-town rival T.K. Kurien, who heads Wipro’s technology business. “Every industry goes through a cycle of expansion and contraction, with phases of boom and muted growth. The Indian IT industry is at an inflection point, with changing customer expectations from technology and evolving business dynamics. For companies that recognise this shift, achieving go-go growth will not be a challenge,” says Kurien.

He points out that Indian IT companies together account for a mere 7-8 per cent of the over $900 billion IT services industry. “So, for growth, it is more a question of reaching out to untapped markets and segments,” says Kurien. “Also, there is a large opportunity to exploit non-traditional business, which is quite significant.” Som Mittal, president of industry body Nasscom, is even more optimistic. “I actually believe the best days for Indian IT are ahead of it.”

Mid-sized companies remain equally confident. Krishnakumar Natarajan, CEO and MD of MindTree, says the go-go rates are history, but adds that growth rates will continue to be mid-to late-teen. The first phase of demand was led by pent up demand for cost efficiency. This will be replaced by IT investments, which are driven by business value, and hence the market growth itself will be lower. Even with growth in the mid-teens, the size of the market and its growth makes it an attractive proposition for industry players and investors.

But for all that, everybody admits that the uber successful model of Indian IT badly needs tweaking. Natarajan says Indian companies need to move away from the mentality of ‘order takers’ to ‘advisors and order makers’ with deep industry and domain expertise. Managing director of KPIT Cummins, Kishor Patil, says verticalisation is the key and the future.

Intellectual Arbitrage
“The slowdown is just a symptom that has exacerbated the problem. The root cause is a deeper malaise,” says Phaneesh Murthy, CEO of iGate. “The industry has become fat, lazy and complacent. A large chunk of companies lack creativity and imagination.”



Murthy says that many companies do not realise that ‘lift and shift’ doesn’t work anymore. “When you are doubling revenues every three years, there is very little incentive to innovate and change, especially when your net margins are 20 per cent-plus. iGate recognised this early on and bet heavily on outcome-based models, but all of us need to do more.” The lift and shift Phaneesh refers to is what Natarajan had also done earlier — just taking (lifting) orders and shifting a large portion of them to India to avail the benefits of lower costs.

“All of us need to recognise that the demand side of the equation has changed. Customer problems are different. There have been structural, economic and technological changes. Those who have recognised it early have benefitted. Customers do not care whether you are offshore, near-shore or best-shore. They look at value being delivered. This is more about intellectual and not labour arbitrage,” says Malcolm Frank, VP-strategy, Cognizant.

Frank points out that in spite of the relatively large base, IT services continue to remain a cottage industry, which is highly fragmented. Even the largest player, IBM, has less than 10 per cent of the overall pie.

For a decade, India had easy pickings in the global market, says Sudin Apte, CEO of Offshore Insights, an advisory firm. “The high margins of Indian players will converge with the lower numbers of the likes of IBM, Accenture, HP or a Capgemini. Most of these MNCs also have large operations in India. In horizontals such as ADM (application, develop and maintenance), testing and IMS (information management services), there is little differentiation. Indian IT needs to find new triggers for growth.”


Not many buy this logic. Kurien insists that emphasis on ‘new’ does not take away focus from ‘traditional’ businesses. “Considering our depth in traditional IT services, from a business perspective, we see innovation in delivery models, to make them more automated and industrialised, as the need of the hour,” he says, adding, “besides there’s need for increasing non-linearity in the system through flexible business and alternative commercial models and developing reusable and productised solutions and process accelerators.”

While no one will argue that ADM, which brought in 51 per cent of Indian IT exports in 2012, will disappear, new growth will necessarily have to come from newer offerings like products, platforms and solutions around XaaS (anything as a service, on the cloud), offerings in mobility, analytics, security solutions, business intelligence or BI and social media. New growth will also come from tapping further segments such as healthcare, media, entertainment, energy and utilities, apart from expanding geographical footprint.

Akhilesh Tuteja, partner at KPMG, says Indian IT companies focused on ADM because their business model was predictive. Now the mindset is moving towards products and ‘productised’ solutions and platforms, he says, adding that the majority of revenues over the next decade will still come from legacy services.

“But the future is in mobility; integration of applications for industry will be a major revenue earner for IT companies. To integrate 30 different phones into an organisation will require a lot of skill as it involves different operating systems and hardware compatibility. This will be a major revenue stream along with cloud, big data (which means huge databases and computing power) and security in four years,” says Tuteja.

SMAC, NMACS And Others
The advent of cloud has been a great leveller, enabling small, nimble companies to compete more effectively with large players, says Ashok Soota, one of the doyens of the Indian IT industry. For Indian IT, this is both a threat and an opportunity. Some traditional services might get automated, he feels.

Soota, whose latest venture Happiest Minds operates in new emerging areas, says, “It makes very little sense for somebody like us to go and head-butt larger players in legacy services. We will focus on innovating in emerging areas, which are the right bets for the industry, too, for getting additional growth.”

Ganesh Natarajan, CEO of Zensar Technologies, also feels commoditisation of IT had to happen. Hence, the opportunity is in the cloud. The advent of the cloud has set the stage for a new approach to IT that enables individuals and businesses to choose how they will acquire or deliver IT services, with reduced emphasis on the constraints of traditional software and hardware licensing models, claims David Cearley, vice-president at research firm Gartner.

Companies have been creating an alphabet soup to emphasise their offerings in these new emerging areas. Cognizant calls this the SMAC (social, mobile, analytics and cloud) strategy, while Tech Mahindra-Mahindra Satyam calls it the NMACS strategy — adding networks and security solutions. To understand how these trends can turbocharge the next wave in Indian IT one needs to examine at least the four broad  growth drivers.
 
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CLOUD: What exactly constitutes cloud offerings is hard to define. It is an all-encompassing term. A company that remotely hosts even its email solution thinks it is in the cloud business. A better way to look at it is to see how IT assets and software are delivered and consumed, which is changing rapidly.

Faced with an increasing pressure to justify investments and demand uncertainties, businesses seek flexibility in alternative models. Cloud promises to provide this, along with efficiency and agility that businesses seek to adapt to changing market realities.

Cloud services span public, private and open source platforms. Indian IT firms will not compete with the likes of Amazon Web Services, Microsoft Windows Azure, Opsource, Savvis, Skytap and Rackspace. Rather, the role of Indian IT companies is to partner them and act as middlemen to help clients use public, private or hybrid cloud services.

Apart from helping enterprises identify the most suitable, robust and cost-effective solutions, the value addition that Indian IT players would bring is in building a layer of security by custom-developing applications and guaranteeing performance.

Estimates for the kind of revenue opportunity cloud services could bring in for Indian IT in the near future varies. Gartner, for instance, estimates the market at $109 billion in 2012, with it growing to $207 billion by 2016. Everyone expects the cloud to be big and all the companies are pumping resources into it.

Infosys says the cloud as a new growth area continues to yield results and the business currently has more than 190 engagements and 3,500 experts. “Over the last quarter, we won more than 15 engagements across cloud services, big data and security. We are working with more than 30 partners to help clients create and manage their unified hybrid cloud environments,” says a company release.

Meanwhile, Wipro has partnered with Google to offer cloud solutions that leverage the search giant’s vast computing infrastructure. Wipro will build technology services solutions such as developing applications using Google App Engine, cloud-based storage solutions that use Google’s vast data centres and data analytics. It will use both Google’s compute engine and its extensive server farms across the globe.

TCS (which did not participate in this story) had launched ION, an enterprise resource planning (ERP) solution on the cloud, in 2011. At the time of its launch, CEO N. Chandrasekaran had indicated that TCS was expecting revenues of $1 billion over the next five years from small and medium businesses alone. TCS has said that it has seen significant growth from its cloud offerings, though it has not indicated a specific number.

BIG DATA, ANALYTICS, BI: Enterprises are sitting on vast mines of data. The only way that they can monetise this or get a better handle on that data is to start formatting that data so that it becomes usable and then running analytics on it to glean business insights.

At the ground level, most companies still struggle a lot with managing data — there is a lot of scope for automating, collecting and presenting data. At the same time, there happens to be a huge explosion in data and businesses also need to manage them real-time.

The question is how to transform this into actionable intelligence. Indian companies are helping customers right from their data strategy, in complex processes such as master data management (MDM), to building enterprise data warehouses and then taking that data to experts and statisticians to create models they can monetise.

This also requires business analysts, data analysts, solution architects, business intelligence analysts, data integration specialists, subject matter experts and project managers — that’s a big opportunity. Consulting firm Deloitte, for instance, estimates the big data market to be around $1.5 billion in 2012.

While this may look fairly middling in size, it is growing at a fast clip. As Deloitte points out, this market was just about $100 million in 2009. IDC estimates the big data market at a whopping $10.2 billion in 2012. The huge variation in estimates is primarily due to different technologies and offerings that get included in the big data basket.

MOBILITY: With the explosion in mobile and smart devices and the use of social networks, demand dynamics are increasingly governed by end consumers. As consumers and employees seek greater flexibility and continuity of experience, there is a growing ‘consumerisation’ of systems, including IT infrastructure and platforms, which forces enterprises to ‘mobile-enable’ their IT infrastructure and brace for resulting security, scalability, heterogeneity and governance challenges.

The entire BYOD (bring-your-own-device) and enterprise mobility market is estimated at $78 billion in 2012. The challenge for Indian IT firms would be to offer innovative solutions and globally scalable services over mobile technologies. The focus should be on enabling users of mobile communication devices to efficiently create, share and consume information while on the move.

This would mean creating a full portfolio of services required to plan, design, develop, deliver and maintain mobile solutions for the needs of end-customers, business partners and employees. This is not going to be easy.

Arun Jain, CEO of Chennai-based Polaris Financial Technology, says, “What we did in India so far is a bit like the automobile garage: mechanics doing bits and pieces of work. Now we need deep systems architecture knowledge to grow over the next five years.”

SOCIAL: Increasing penetration of the Internet and it being available on mobile has led to technology convergence. Enterprises look at social media to market offerings. They want to use social media to be used as a business communication and collaboration tool.

If a customer is complaining on Twitter or Facebook, a company wants to know about it, address it before it goes viral. Similarly, if a prospective customer is looking for a product or a solution, quickly identifying and delivering it would help in having an edge over competitors. Gartner estimates this market to be about
$ 14.9 billion in 2012.

SECURITY SOLUTIONS: The move from on-premise legacy applications to remotely-accessed cloud applications has meant that security has become a top priority for enterprises. C.P. Gurnani, CEO of Mahindra Satyam, says this is a huge emerging business opportunity, which has not yet been fully tapped by Indian IT. The size of the addressable market in each of these spaces is large, according to experts. Market researcher Canalys, for instance, estimates the enterprise security solutions market in 2012 to be about $22.9 billion.

It is not just these horizontal offerings, even in certain industry segments, Indian IT has hardly made a dent. Mittal emphasises that segments such as healthcare, energy and utilities, media and the public sector are where Indian IT companies can capture greater market share.

“Healthcare is a $30-32 billion opportunity and we have tapped less than 10 per cent of it. So is the large government sector business, worth $80 billion, where Indian IT has less than 1 per cent share,” says Mittal.

In markets such as Latin America, Japan, China and continental Europe, Indian IT companies have just about scratched the surface. There is immense potential for growth there too. So, despite the temporary blips, the long-term trend for Indian IT looks positive thanks to the compelling value proposition it offers. With newer opportunities beckoning in emerging technologies, newer markets and industries will power Indian IT’s next wave of growth.

With reporting from Vishal Krishna

venkatesha(dot)babu(at)abp(dot)in

(This story was published in Businessworld Issue Dated 28-01-2013)