Indian IT Industry: Coping with the US recession

Indian IT Industry: Coping with the US recession

The US downturn is slowly but surely redefining the Indian IT paradigm and if the Indian IT companies are not watchful, they may lose the outsourcing advantage soon

Thursday, April 03, 2008

BANGALORE, INDIA: The signs are for all to see. US employment fell for the first time since 2003, manufacturing declined 5.3 percent, first time house buying - a good proxy for economic health - plunged 8.1 percent in December. Technically, it might not qualify as a recession, but according to Warren Buffet, "by common sense definition", the U.S. economy already is in a recession.

A December report on the Indian tech sector by Morgan Stanley says the uncertainty in the United States may delay tech spending in the first half of 2008. Margins are already under tight pressure due to the weakening dollar. With Indian IT salaries rising 10-15 percent a year, the overall operating margins have been reduced to six percent. The major crisis in the US financial markets has had a ripple effect on all sectors and it might be a while before things start looking up. As Laksmi Narayanan, Nasscom chairman and VC of Cognizant said, "The current situation is not temporary.

It is the new baseline. The industry will have to learn to operate under the new parameters." Anecdotal evidence suggests that fewer development projects from existing clients are coming through. The sales cycles have increased and winning new customers has become increasingly difficult.

If there was a major watershed in the Indian IT Industry post Y2K, this is it. After the dizzying growth of the last 10 years, it is time to pause, reflect and realign strategies. If the industry has to survive, then it needs to adapt to the changing market scenarios quickly. Talk of a software upgrade.

Diversify globally

For far too long, Indian IT industry has focused on the US. Yes, US accounts for about 60 percent of the total IT spending. However, IT spending of American companies is slipping with the slump. It's also been a long time since US firms embraced the outsourcing model, so further growth seems very limited. With that in mind, the Indian IT firms need to focus their attention on the other markets, especially Europe. Using UK as the base, software firms can branch out onto mainland Europe. There will be a certain amount of language and cultural resistance in countries like France, Germany, and Nsetherlands, that Indian firms will need to grapple with. Eastern Europe has a large number of skilled software programmers.

Many global firms want to continue offshoring, however they are looking at non-India based partners as a way of addressing the issues of talent shortage, salary hikes, and high turnover which are becoming more acute in the Indian IT sector. Such firms are even willing to back development centers run by Indian giants elsewhere, purely from the standpoint of flexibility, business continuity, and seamlessness in global operations. Hence, Indian IT companies should establish a strong presence globally through delivery centers in emerging regions, so as to maintain its existing business and gain a bigger portion of the IT revenues pie.

Local foray

With the rupee gradually strengthening against the dollar, it makes imminent sense to enter the local markets decisively. Indian IT market is growing at a compounded annual rate of 21 percent. Indian companies have been traditionally slow in embracing IT, but are now adopting technology at a breakneck speed. A few large multi-million dollar contracts like the Bharti-IBM, Dabur-Accenture and SBI-TCS deals should make the rest of industry sit up and recognize the potential of the Indian market.

South East Asia is another region where IT big-wigs can focus their energies. China, Korea, Japan, Australia are big markets, and Indian firms should make a firm thrust in capturing them. The region can not only be tapped for local markets, but also be used as satellite facilities to support their Indian counterparts.

Tighten recruitment and retention processes

Since the last few years, the composition of IT resource pool has undergone a substantial shift. Earlier, many reputed companies only recruited engineers through campus placements. However, the demand for Indian IT services kept getting bigger. Post dot-com bust and 9/11 tragedy, business conditions in the US became tougher, and companies wanted to focus on key operational and strategic functions and outsource technical application development and support to the experts. India as an IT destination offered notable cost advantage, better flexibility, 24/7 support and improved accountability.

Figures suggest that only 25 percent of the total graduates in India have employable 'production-worthy' skills. Fewer contracts in a sluggish economic scenario would automatically drive down the break-neck speed of recruitment. However, instead of a complete stop to all recruitment, the IT industry should use this period for a meaningful introspection and a substantial realignment of its hiring and retention processes.

Address the skills shortage

Concurrently, this quiet period needs to be used to get the existing resource pool ready for the next big wave. Most programmers are too caught up in the daily quotidian tasks to catch up on the latest technical advances, and appreciate breakthroughs that will sweep the IT world. To address this gap, workshops and technical trainings to educate the workforce should be held at regular intervals. Similar sessions on soft-skills and cultural orientation programs should be conducted to make the people more customer-centric.

Service Oriented Architecture, Software-as-a-Service, Cloud Paradigm (or desktop virtualization) are emerging as some of the biggest IT trends. Additionally, platform consolidation is the biggest IT change that many CIOs have on their radar. Much of the work coming along will be governed by these trends. The software designers should be brought up to speed on these new trends, and the programmers trained on the technologies that underline these trends.

Upside down in a Flat World

Cut-throat competition from global players and the falling dollar has squeezed the margins for typical run-of-the-mill work. Yes, consulting is a niche that eventually all Indian IT companies would want to get into. But basic factors like maturity (dearth of experienced consultants), perception (image of Indian IT firms as application developers and implementors) and location (failing of global delivery model in primarily client based work) will hinder any real inroads into the consulting space.

The trick is to innovate - not necessarily do different things, but do things differently. In that regard, the focus on innovation of some of the top Indian companies is a step in the right direction. Wipro's Applied Innovation Framework lays down a roadmap for systemic change to deliver sustainable business benefits.

Summing IT up

This is indeed a tricky time for the Indian IT industry, but there's no real reason to panic. The IT guns showed great character and resilience during the years following the dot com bust. They are wise enough to read the signs and realize that change is in order. With a slight course correction and an unswerving view on the long-term, the India IT industry can emerge stronger and bigger.

Author: Abhishek Toraskar, Consultant, Wipro Consulting Europe

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