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Yet another boom year for IT

Sanjay K Pillai | January 28, 2005

Here's some good news -- 2005 is going to be another boom year for the Indian information technology industry.

"In 2005, expect more of the same. It could be even slightly better," forecasts the soft spoken Girish Paranjpe, president of the financial solutions division of the $1 billion plus Wipro Technologies.

In fact, Indian IT companies already know what 2005 holds in terms of IT spending. This is because most US companies, which account for the bulk of their customers, follow a January to December accounting year and their IT budgets are decided by the end of the calendar year or the beginning of the next year.

"For most of our customers, 2005 has already started. IT budgets are already frozen around this time and from what we see customers hope to continue to do well in 2005. At least the current quarter and the next quarter look decent, from the customer point of view," the chief executive of a major Indian IT company points out.

Last year separated the men from the boys. Customers showed a willingness to partner with big IT companies and grow their existing relationships with them. So 2004 can best be described as the year of Indian software services: IT companies reported growth rates of over 50 per cent.

One reason top Indian IT companies and multinational companies which have huge Indian operations flourished in 2004 was their scale of operations.

"Managing growth is very challenging but is in a good position to be in. When you become bigger in the size and scale of your operations, from a customer point of view it minimises risk," Kris Gopalakrishnan, deputy managing director and chief operating officer at the $1billion Infosys, pointed out in an earlier interview.

For example Infosys has doubled in size over the last two years from about 16,000 employees to about 32,000 now. This is the case with companies like Wipro, which has in the last two years added about 17,000 employees to its work force of about 37,000.

So apart from building on what they achieved in 2004, IT companies will continue to cash in on offshoring business from the US. More and more of the Fortune 1,000 companies will offshore in 2005.

Says the chief financial officer of a Bangalore-based software company: "Offshore outsourcing has become mainstream. This will gain momentum and fringe players who have sat out will climb the bandwagon purely because of peer pressure."

Agrees Paranjpe: "Most of the Fortune 1,000 have already offshored. Only a minority has not participated and now they have no justification not to offshore to India."

Ramkumar Ramamoorthy, chief knowledge officer at the Nasdaq-listed Cognizant Technology Services, argues that newer companies in industries like pharmaceuticals and healthcare will also start outsourcing work to India.

"These industries have now understood offshoring and outsourcing and IT services will be the next logical step for them to look at farming out," he says.

Adds Paranjpe: "The phamaceuticals and healthcare industries have started outsourcing and offshoring. So far, governments abroad have not yet come on board strongly, for political reasons. They could also start this year."

This apart, outsourcing in high-end areas is expected to gain ground. Not long ago, Tata Consultancy Services announced that it had won a contract from Italian car maker Ferrari for embedded work.

TCS to power Ferrari F1 car

According to an analyst at a data tracking company, Indian software service companies that have expanded their operations to newer areas like China, eastern Europe, South Africa, Australia, New Zealand and Latin America will now look at expanding their domestic operations to second rung cities in India.

"This is a natural reaction when companies are losing talent by the hundreds to multinational companies which are setting up base in India. So I would expect cities like Coimbatore, Mysore, Bhubaneshwar and even Kolkata to a certain extent to see increased investment by companies," the analyst points out.

Admits Paranjpe, "There is pressure to get out of the hotspots (cities like Bangalore, Mumbai, where most of the companies are located) when you talk of attrition and tier II cities."

At the same time, Indian IT companies have consciously been expanding the services that they offer clients.

These new services which almost all the top IT companies have introduced or have expanded include consulting, infrastructure solutions, package implementation, business process outsourcing and even testing services, apart from increasing the number of their bread and butter engagements like software application maintenance and development. So 2005 will be a year where companies will see bigger revenue streams from these new services.

Indeed, it makes sense for Indian companies to offer such services. According to Forrester Research, the total North American market for IT services could touch $250.9 billion by 2008, up from $ 194.7 billion in 2004.

Of this, IT consulting will contribute $28.9 billion in 2008 (up from $ 23.8 billion in 2004). Systems integration, which includes packaged implementation, customised application development and application integration, will contribute $100 billion in 2008 (up from $86.2 billion in 2004).

Software application related outsourcing will contribute $112 billion in 2008, up from $86.8 billion now. Gartner has also pointed out that, despite all the hype, the level of outsourcing is relatively low and will gather pace.

According to Gartner, under three per cent of the corporate global IT services-related spending of about $606 billion was on globally sourced services in 2004. By 2007, though, Gartner estimates that about 7 per cent or about $50 billion will be spent on global IT sourcing.

Indian IT companies are also not just acquiring new customers but also looking at tapping existing customers and selling them more IT services.

Cognizant believes so much in "mining" its current customers that it has more relationship managers than sales and marketing professionals. TCS and Infosys too have made impressive beginnings in cross selling more to their customers. So expect Indian companies to not just add clients but to look at getting more out of their existing clients.

Still, not everyone is convinced that the future is rosy. "According to recent studies by leading IT analyst companies, Indian IT service providers will through 2005 lead the IT industry in IT processes and service improvement. But concerns remain. In 2005 the  growth of offshore infrastructure services will be slow because of deep concerns over  offshore providers' ability to deliver  secure, high-quality infrastructure  services," points out  the marketing head of a Bangalore-based company.

"The simple choice of on-site versus offshore will be replaced by four options: on-site, offsite in the same region, near-shore and offshore. The importance of vertical expertise in the IT service provider selection process will increase as customers seek application outsourcers that address their business requirements and bring proven experience. A few more big application outsourcing deals will be signed in Europe and the United States as large buyers consolidate their providers and seek greater accountability with one major provider," predicts a research report on what 2005 will hold.

Clearly, Indian IT companies should not fritter away the gains of 2004. "The kind of growth last year has led to huge expectations from an employee, management and industry perspective. The toughest challenge of 2005 will be managing this expectation and not doing any imprudent stuff," Paranjpe concludes.


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