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You cannot ignore spending on IT

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CIOL Bureau
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The months of April and May, in recent years, have often been the harbinger of good times for Indian enterprises. As virtually every sector has been recording growth, this period of publication of annual results has proved to be a source of unbridled optimism for all stakeholders. These annual results might capture the growing toplines and healthier bottomlines as well as stronger P/E ratios, but they have not been able to successfully register another crucial facet of India Inc particularly visible in the last few years-the IT spend.

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Yet, the fact is that hardly anyone can ignore the growing trend of automation across Indian enterprises. Not only has it led to more sophisticated usage of IT by Indian organizations to conduct their businesses, but, more importantly, it has resulted in increasing spends on IT across sectors. And while the annual reports of companies might fall short in tracking this growing expenditure on IT, the task has been undertaken eminently by the DQ-IDC Megaspenders Survey.

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Source: DQ-IDC Megaspenders Survey 2007

This year has been no exception, as the survey has tracked the pattern of spending on IT by various Indian organizations during 2007. However, with changing times, maintaining the nomenclature of the survey as Megaspenders might not remain politically correct too long. In these days, when corporate fiscal discipline has become sacrosanct to any organization's well being, it is undeniable that many CIOs would flinch from publicly proclaiming themselves as megaspenders.

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It is probably this perception of the stigma of negative connotation that has prevented the likes of HDFC Bank, LIC, Hutch, ONGC and a few other leviathans from participating in the DQ-IDC Megaspenders Survey 2007. Not just them, many of the CIOs from the 211 organizations that responded have desisted from allowing us to divulge their IT spends for the year. In light of this scenario, we have decided to only list down the Top 50 organizations with the highest IT spends, but not publish the exact expenditure figures.

  • IT spending records a healthy 27% growth in 2006-07. Though growth may decline marginally to 26% this year due to reduced IT costs, the nature and pattern of IT adoption is becoming more sophisticated.

  • Over half the Top 50 spenders on IT during 2006-07 are PSUs. The myth is busted: that most modernization processes such as automation and IT deployment can take place only after privatization

  • While BFSI and telecom continued to show steady growth, utility, automobiles, and discrete manufacturing stole the show in 2006-07 with increased investment on various modes of IT; retail was low key last year, but projected to really zoom up in FY '08

  • The surveyed organizations have an IT spend per employee of Rs 34,000, nearly double of those surveyed last year (Rs 20,000), with several companies with a lower employee base having come into the top 200+ surveyed.

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Up or Down?

DQ-IDC Megaspenders Survey 2007
Spending Patterns
India's Mega Spenders
Attaining Global
Infotech Mega Spender
Tech Shopping
Vertical Snapshots

Interestingly, the survey projects that the average industry spending on IT would record a 26% growth in FY '08 to touch Rs 42.94 crore. This poses the important question: Does the projected reduction in growth by one point signifies that IT spending by India Inc is gradually plateauing? A couple of CIOs and analysts we asked for corroboration, however, refused to take the bait.

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Both Akhilesh Tuteja, executive director, Advisory Services, KPMG and Hilal Khan, head, Corporate IT, Honda Motors India desist from reading too much into this drop in IT spending. Instead, they both account it to the increasing reduction in costs of IT, both for hardware as well as software. "The adoption of IT is not coming down, rather it is becoming more sophisticated, but due to reduced IT costs, the absolute spends might show a decline," says Khan. For the same price, today, an organization is able to pack in much more IT power than it could have done a few years back.

Coupled with the fact that average IT spend as a proportion of the company turnover too has gone up from 0.6 to 0.7, the veracity of what the CIOs feel gets established. The fact that IT adoption has just not increased, but it has become more sophisticated and democratic (spread across all hierarchies) puts to rest any apprehension about IT spends petering off in the near future. "The configuration of IT equipment that can be purchased at the same value has gone up significantly," asserts Tuteja.

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And while still delving on the fact that projected IT spend can reduce next year, Sunil Kapoor, director, Central Buying, Fortis Healthcare suggests another plausible reason. The IT spending for most organizations is moving from a capital expenditure towards an operating expenditure and this could account for the slight tapering off in actual spending. "This is positively a sign of maturity for most Indian enterprises," observes Kapoor.

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"The adoption of IT keeps increasing and becoming more sophisticated. But due to reduced IT costs, the growth in spend might show a slight decline"

 

"The fact that IT adoption has just not increased, but it has become more sophisticated and democratic (spread across all hierarchies) puts to rest any apprehension about IT spends petering off in the near future"

-Hilal Khan, head, Corporate IT, Honda Motors   -Akhilesh Tuteja, executive director, Advisory Services, KPMG

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Tuteja in fact devises a thumb rule to gauge the IT spending pattern of India Inc. "According to a global estimate, in case the ratio of capex to opex on IT is 40:60, or in other words, the capex on IT is less than 40%, the company is still considered to be a high spender on IT." Going by Tuteja's formula, most Indian organizations can still be categorized as mega spenders on IT, even as their expenditure gradually move towards the opex side.

Last but not the least, both Sanjay Singh, head IT, Timex Watches and Tuteja argue the fact that since the DQ-IDC Megaspenders 2007 survey includes most of the organizations in the ET500 list (implying mostly listed companies), they are mostly mature on the IT adoption curve. This too can explain, to a certain extent, why expenditure on IT can dwindle next year.

Average IT expenditure across the "megaspenders" grew 27% to Rs 34 crore per organization, in 2006-07
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Tracking the Spend

However, Kapoor is not so optimistic as he feels that majority of the spending under services category still comes from AMC contracts. Indian enterprises are still looking at IT investments more from the IT consultancy perspective than business consultancy preview (read, business changes). Some big-ticket deals in recent times have signified that India Inc is slowly starting to move towards a model of asset stripping, where device-based resources are outsourced from the traditional model of facilities management. But at the same time, the fact that 42% of services spend is still constituted of support and maintenance is a major dampener.

Some interesting facets emerge even within the hardware and software spending areas, especially for global MNCs that have significant presence in India. In case of global companies, either they do not pay the software license fees in India (parents have global contracts with software vendors) or they obtain major discounts on license prices as per global negotiations. Hardware costs also often involve bundled cost of both the boxes as well as operating systems.

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"The IT spending for most organizations is moving from capital expenditure towards operating expenditure, and this could account for the slight tapering off in spending growth"

 

"Since the DQ-IDC Megaspenders 2007 survey includes most of the organizations in the ET500 list (mostly listed companies), they are mostly mature on the IT adoption curve. This could explain why IT expenditure growth might marginally decline next year"

-Sunil Kapoor, director, Central Buying, Fortis Healthcare   -Sanjay Singh, head, IT, Timex Watches

Presently, mail messaging solutions, security and WAN are the most commonly used technologies by organizations, and in future most of them would continue to expand on the deployment of the above-mentioned technologies across organizations (breadth and depth). Line of business specific application like core banking in BFSI, engineering applications in automobile and implementations of ERM and CRM across verticals are some of few technologies that would be the drivers of IT spend next year.

Methodology

The "Dataquest-IDC Mega Spenders 2007"- A Study among large enterprises in India" is compiled on the basis of a methodology jointly decided by IDC India and Dataquest. The IDC team was led by Shailendra Gupta who was assisted by Satya Sundar Mohanty and Shakyadev Mitra.

The objective of this year's DQ-IDC Mega Spenders Survey 2007, like the last four years, was to find the top IT spenders in FY 2006-07, both in terms of individual organization as well as across various sectors. In addition, the survey also intended to assess the IT investment pattern during the year; and plans for future investment during FY 2007-08. On the basis of the set objectives of the research, Dataquest commissioned IDC India to undertake a large-scale quantitative survey across various cities in the country. The survey involved face-to-face interviews with CIOs or IT heads of organizations across different sectors. Following the survey, Dataquest organized a close-door meeting of a few leading CIOs and analysts to discuss the survey findings. A preliminary list was prepared on the assumption that companies with higher revenues would probably spend more on their IT infrastructure. The sample list included more than 200 large enterprises from ET500 & BW500 lists, and the key players from banking, technology, and related verticals-with traditionally high IT spend. IDC administered the questionnaire to 222 companies who participated in the survey, while a few questionnaires were rejected either while validating the data or due to logical errors in the data. One obvious problem faced by the survey was that while the final analysis was based on a sample size of 211, at least 15 large traditionally heavy IT users refused to participate. However, for authenticity of the survey, the IT spends by these companies have been estimated by IDC from secondary sources and projections from previous surveys to determine the overall spending graphs and tables. For individual trends, the survey has stuck with the 211 participating respondents. Those missing from the survey include the likes of TCS, HDFC Bank, Reliance Communications, BSNL, Bharti, Tata Steel, Maruti Udyog, and Dr Reddy among others.

Note: Unfortunately, this year we had to drop the Telecom vertical analysis due to very low base or unavailability of key contact persons in Telecom hence all IT spend analysis based on Telecom is based on previous data/Internet/IDC respiratory knowledge base. In all other analysis (Except IT Spend) is done without Telecom Company or only for surveyed organizations.

Utility:

Rajneesh De

rajneeshd@cybermedia.co.in

Graphix: Paras Jain

At 45%, this sector recorded the highest growth among all verticals in terms of IT spend. Most of the companies involved in this sector were implementing SAP during the year. And since ERP deployment is normally a long drawn process, implementation cycle would likely to continue this year too for many of the companies. Therefore, though next year it might not match the high growth percentage of this year, even at 35% it is projected to be a hi-flier amongst verticals on IT spendings.Once you dissect the IT spending pattern, hardware continues to top the charts at 42%, though, as discernible from last year, a paradigm shift towards packaged software and services seem to have started. The combined spend on packaged software and services easily exceeds that of hardware, and quite obviously this investment translates into the fact that Indian enterprises are maturing and looking at IT beyond its traditional role of automation.Taking all key IT spenders into consideration (even those who did not participate), Megaspenders Survey 2007 discovered that average IT expenditure across organization has recorded a 27% growth, touching Rs 34.08 crore in FY '07 compared to Rs 26.86 crore the previous year. Telecom, utility, and discrete manufacturing turned out to be the top three sectors soaring above the industry average; a host of other verticals like BFSI, automobiles and media maintained the industry average while, surprisingly, sectors like retail and oil & petrochemicals proved to be relative laggards.

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