Year of cautious optimism

CIOL Bureau
New Update

If ever there's been a year that's kept everyone in Indian IT guessing, it

was fiscal 2002-03. The year began with signs of a recovery, but most of

Calendar 2002 saw wild swings, gravitating around vicious pull factors–the

US-led coalition war in Iraq, sluggish economic conditions in the US and most of

the West, the outbreak of SARS, rising visa and immigration issues, price

manipulation by buyer enterprises, seething undercutting of rates by IT and BPO

vendors... The slowdown-inflicted practice of tighter belts and lighter wallets

continued through the year, and it was only in the last quarter that shades of a

rebound in IT purchase and implementation made themselves seen.

bgColor=#ffffff colSpan=2> size=1> width=3 border=0>

bgColor=#ffffff colSpan=2> size=1> width=3 border=0>
color=#000080 size=1>The overall Indian IT industry grew 19%–from Rs

62,584 cr to Rs 74,787 cr
src='' border = "0">

color=#000080 size=1>Despite concerted efforts to enter other

geographies like EU and the APAC region, Indian IT's reliance on the

US market increased–from 64% to 67%
color=#000080 size=1>While the private sector led in IT spend, PSUs

showed the maximum growth
color=#000080 size=1>SW & services exports–including BPO–made up

64% of total industry size
color=#000080 size=1>IT training was the worst hit of all

segments–it shed 23% to Rs 1,215


What you had at the end of March was a grin-and-bear-it tally–overall growth

of 19%, against the previous year's 14% score; software exports growth of 17%

(26% if BPO numbers were added), compared to last year's 20% (27% with BPO);

growth of 5% in domestic hardware sales, respectable only against a negative 3%

showing; and a steep 14% fall in hardware exports, compared to 45% growth. The

total services space showed marginal recovery with 16% growth, against 2% last

year, and IT training looked healthier despite its 23d% negative growth, only

because it had shown negative 37% last year.

2002-03: The macro-economic picture

India's economic growth

prospects were pegged down to 5.1% earlier this year, from an earlier projection
of 6%, mainly due to the impact of the war in Iraq, SARS and dampened growth in

the US and EU. However, analysts feel India's GDP may not be affected so

adversely and it may post 5.5-5.6% growth this year. "Since the Iraq war was

short, India's GDP will grow in the region of 5.5-5.6%. If oil prices fall, we

might end up with 6% growth," said one.

Saving grace #1–even after the downgrade in growth prospects, India continues

to be one of the fastest-growing nations after China, slated to grow by 7.5%,

Vietnam (7%) and Fiji (5.2%). Saving grace #2–India's GDP for the previous year

was 4%. Therefore, while the pace may be debatable, the Indian economy is moving

ahead. Saving grace #3–stock markets, the most telling barometer of economic

health, have been moving up for the last many months.

PSUs to the rescue

The DQ-IDC India Megaspenders Survey for fiscal

2002-03 rattled out odes to the BFSI sector... but even as BFSI saved the day,
the final tally was far lower than projections. Overall, against forecasts of

56% growth in enterprise IT spend in 2002-03, final figures showed a decline of

17%–the slide would've been worse, if not for heavy spending by the IT industry

itself. Last year's survey had reflected an upbeat CIO mood, as they predicted

56% growth in spend on infotech products and solutions–signifying an end to the

slowdown and a return to the days of rock 'n roll. Grim end-of-the-day numbers,

however, pooh-pooed that forecast.

It was public sector banks and insurance companies that placed the biggest

orders in fiscal 2002-03, with four of the top five spenders coming from this

space. The top corporate IT spender in 2002-03–Punjab National Bank, with IT

investments of Rs 180 crore. Last year's leader LIC (Rs 140 crore IT spend in

2001-02) was still strong at #3 this year, with Rs 105 crore of spend this time

around. Canara Bank, Bharti Cellular and Central Bank of India made up the Top

Five Club.

Other verticals that had shown promise in the previous year and projected a

steady climb in the ongoing year, however, fell by the wayside, as the slowdown

and tighter pockets placed all but the most ambitious plans on ice.

Surprisingly, though, the vertical that fell most in terms of projections and

actual investments was insurance–43% short of forceast spend. Telecom (-40%),

manufacturing (-27%) and the government space (-25%) were other laggards. As for

where most of these monies will go, it is hardware that continues to top the

CIOs' agenda–with 42% of overall spend expected to go there.

Why did banks figure so prominently in our list for the second year running?

The reason came from CIOs themselves–given the success of tech-savvy private

banks, PSUs had no choice but to embark on IT-enablement of their operations.

PNB tied up with Cisco Systems to evolve the network design and implement a

nationwide network backbone connecting all its offices across India. The rollout

already covers 300 branches, and will be extended across 1,000 PNB branches by

2004. Given its IT spend, it was little surprise that PNB bagged the 'Best Bank

Award' for excellence in banking technology from IDRBT in October 2002. Similar

was the case with Canara Bank, which tied up with Wipro Infotech to interconnect

its 835 offices and branches across 98 cities, using a high-speed WAN. And

everyone knows about Tata Consultancy Services and its mega-order from State

Bank of India and its affiliated entities.

Storage: Coming of age

Despite being 18 months in the past, 9.11

and its fallout continued to cast its spell on the storage market, with an
increasing number of enterprises implementing disaster recovery and data

replication solutions, driving demand for hardware, software and networking. The

year saw a proliferation in business spend–sophisticated storage infrastructure

was in. Network storage options found greater favor, at the cost of some

percentage points for DAS. While the trend of lower storage hardware prices

continued, vendors weren't mauled as much as last year. The year ended with a

growth of 6% in value terms, compared to a fall of 5% last year, even as growth

in volume terms matched last year's level of 70%.

Crashing disk and hardware prices meant more businesses could afford

sophisticated infrastructure. An interesting side-effect of cheaper disks was

that it encouraged large and medium enterprises to go in for disk-based data

replication solutions, abandoning tapes altogether. Steadily-decreasing margins

on hardware forced vendors to focus on storage strategies. The storage software

market continued to grow rapidly–posting 65% growth–riding on the back of

increased enterprise spending on applications like disaster recovery, business

continuity planning and high availability. Growing awareness among Indian

enterprises about the availability of solutions offering these enhanced features

acted as a catalyst for growth. As data continued to grow beyond the

'manageable', need for software-controlled automated processes like online

backup and restore, and storage resource management forced many to look at

software solutions.

Strategy: Brand positioning

Whether it was storage or peripherals,

networking or systems, vendors went in for brand positioning and took a
segmented approach, with SMB topping the agenda. With urban markets reaching a

point of saturation, vendors went deep into the upcountry markets and organized

roadshows and custom campaigns to tap the market potential. It was a year to

realign strategies and reach out to the customer.

In the SMB and SOHO space, the top three–Tech Pacific, Redington and Ingram

Micro–drove the industry at large. For second-tier distributors and resellers,

the going was tough because of lack of best practices. They struggled to manage

multi-vendor product and credit lines, resulting in unethical practices

abounding and some resellers closing shop, leaving distributors in a fix. New

products, technologies, aesthetics and styling were in. In the case of

peripherals, for instance, devices like printers, scanners and monitors became

sleek and thin. Above all, the year gone by also drove home what convergence is

all about–multi-function devices became a reality, with vendors offering

integrated all-in-one devices that could print, scan, copy and fax.

SW exports & BPO: Champs again

Let's begin with BPO, which

stood out bright and zippy (and nearly alone). Larger BPO players continued to
increase numbers at a steady clip–some even more-than-trebling their headcount.

But this was also the beginning of a phase of consolidation, and this was

evident in the crashing billing rates as competition grew fierce. Smaller

companies–those that can find suitors–will get bought out sooner rather than

later, while countless others will die a sudden death... quite similar to the

beginnings of the IT services industry in the country. One clear trend in BPO

was that this was a space where mere specialization and success in the IT space

would not guarantee success, for the rules and economics of business were very

different. Thus it was that other than Wipro (with Spectramind), none of the Top

20 companies made any news in this space, though nearly all had kicked off their


What this jump in numbers in the BPO space did was to provide a reason to

live for the beleaguered training industry. Still reeling from the 37% revenue

drop in 2001-02, the training industry made quick and deft moves toward BPO

training–while that helped, smaller training companies continued to shrink and

disappear. This forced IT education players to experiment with product bouquets

and offer courses specific to the BPO segment. The focus toward improving

processes and enhancing efficiency and quality levels fueled demand for training

programs like project management, testing and CMM/PCMM. Again, thanks to BPO,

the balance hung in favor of soft skills training–to enhance customer relations

management, talent transformation, multitasking and knowledge and job


As for software exports, Year 2002-03 was a mixed bag. At Rs 35,181 crore,

the software services export sector accounted for 47% of the total industry

size. But it wasn't size that was cause for worry–it was the crashing growth

rates, this time well into the sub-20s. And clearly, there's no respite in

sight–"We are entering an era of the teens," Nasscom president Kiran Karnik

said, commenting on growth rate for the next year. As many as eight of the Top

20 software exporters saw growth shrink into the teens or below. Four of these

showed single-digit growth... one showed negative growth.

Buyouts & acquisitions

In India, there are few big M&As,

especially in the tech business. Most have been quick and matter-of-fact, such
as Airtel's acquisitions in Bangalore, Chennai, Kolkata, et al. But the slowdown

has triggered some brisk merger action. Aptech's fairly quick sale to SSI was

one. For the merged entity, it makes sense to move to an operation with the

scale necessary to compete with NIIT. It was just very unexpected–SSI,

struggling with dropping margins, suddenly buying out the much larger Aptech for

a mere $5 million. Then GTL buying out Singapore-based Redington Group,

including Redington India. While everyone twiddled their thumbs to figure out

what a telecom equipment and services company would do with a thoroughbred IT

distributor, the proposed merger went into a tailspin.

Siemens Information Systems, traditionally a strong player in telecom, firmed

up plans to acquire a financial software company. The ostensible reason being to

ramp up its product line and acquire its customer base. Mentor Graphics acquired

three companies and is said to be looking for more.

EDA bigwig Cadence acquired system-on-a-chip verification tools vendor

Simplex Systems for $300 million. The same day, Cadence announced the

acquisition of privately-held Plato Design Systems, a place-and-route tools

company. These deals looked like a response to the decision by Synopsys to

acquire troubled Avanti for about $737 million, which is one of the larger deals

witnessed in EDA history.

Then we had restructuring at this year's Giant #4–announcement that the SW

export business of HCLI would be hived off to HCLT. HCLI would hive off its

128-seat facility for the technical help desk business, under HCL Infinet.

Former group company NIIT continued its acquisition drive–it bought out

eGurucool to strengthen its focus in the IT-assisted education space, and tied

up with leading Japanese Systems Integrator CAC Corp to tap into the system

re-engineering space in the Japanese market.

And finally, the mother merger–HP and Compaq, which has been coming along

just fine. As 1+1 came pretty close to being 2, detractors were sent scurrying

away. Another move within the company is that of Digital absorbing over half of

HP India Software Operations–that should pan out through the year.