Year of cautious optimism

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='https://img-cdn.thepublive.com/filters:format(webp)/ciol/media/post_attachments/15fd47343e720668dbd1b9442997f7bde4c3acc862ab7a188af8fd06c0426527.gif' 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 cr

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
operations.

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
enrichment.

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.

RAJEEV NARAYAN