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IT companies turned crisis into opportunity

IT companies turned crisis into opportunity
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First Published: Fri, Sep 18 2009. 01 15 AM IST

Updated: Fri, Sep 18 2009. 10 54 AM IST
Bangalore/Mumbai: When the financial crisis struck across the world, India’s information technology exports were among those hardest hit.
The local IT industry relied heavily on the US and Europe and on the banking, financial services and insurance (BFSI) segment for growth. When the New York investment bank Lehman Brothers Holdings Inc. imploded last September, the US and European markets accounted for at least 80% of India’s IT export revenue.
The BFSI segment, traditionally the largest spender on IT, accounted for 41% of the sector’s overall revenue in India.
“While all of us realized that things wouldn’t be the same post September 15 (2008), nobody anticipated the scale and speed of developments,” said Suresh Vaswani, co-chief executive of India’s third largest software exporter Wipro Ltd. “The business landscape underwent a tectonic shift. Clients started cutting down on both discretionary and even planned budgets. Everybody was impacted.”
The Lehman collapse was felt at other financial institutions in the US and eventually across the Atlantic in Europe. With it, Indian IT companies entered a world of drastically reduced budgets by clients, weak order books and weaker deal pipelines.
Eyeing growth: A file photo of a Wipro campus. Nasscom president Som Mittal says tough times taught the IT industry to look for newer markets and enhance its domain knowledge to get additional business. Hemant Mishra/Mint
The fall in revenues that started in the October-December quarter for India’s top three software exporters—Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and Wipro—has continued into the last reported quarter.
Export revenue for the IT and business process outsourcing (BPO) sector grew at an average 26% between the financial years 2005 and 2009 to $60 billion (Rs2.9 trillion), according to the National Association of Software and Services Companies, the industry body better known as Nasscom. This year, Nasscom has projected a growth rate of 4-7%.
The Bombay Stock Exchange’s tech index BSE-IT started sliding last September from its then 4,000 level and touched a 52-week low of 1,987 points on 24 February. In early March, investors began finding IT stocks undervalued and started investing in them. With the most recent quarterly results, IT exporters signalled that the worst may be over, prompting investors to make further purchases. On Thursday, the BSE-IT touched a 52-week high of 4565.34 points.
The knee-jerk reaction of big IT firms in India was to freeze hiring, reduce staff and trim salaries. For mid-size players, it was time for counter-intuitive decision-making in a sector where skilled manpower and employee morale is critical.
“We refused to look at employees as a problem,” said Elango R., chief human resources officer at MphasiS Ltd. Instead, he said, the company made its workers a part of the solution by talking to them and getting them to agree to a pay freeze till it got out of the woods.
“We put employee allowances and discretionary expenses on a tight leash to improve profit margins and cash reserves, which have now reached a stage where we can afford to pay 15-20% bonus to our employees,” Elango said.
Illustration: Paras Jain / Mint
For its latest quarter that ended July, the mid-size IT services provider’s revenue jumped 43% as it added seven clients and its profit more than doubled to Rs229 crore, according to a Reuters report.
Another mid-size IT firm, MindTree Ltd, approached the issue from a different angle and re-deployed idle employees to research-oriented activities to generate intellectual property to be monetized when the economy recovers.
“This crisis has been a test of the quality of management at different companies and the results of this can be seen as we go along. Those who had the vision to read the signs were better prepared while the others were caught napping,” said Rostow Ravanan, chief financial officer at Bangalore-based MindTree. “We at MindTree utilized the downtime by investing our idle manpower to create intellectual property, which will now start to pay off.”
The industry, which had grown accustomed to high growth rates and higher margins the last few years, was forced to review the cost structure, pricing power and even the entire business model, industry analysts said.
The large firms are attempting to move up the value chain by offering consultancy services rather than just cheap manpower for software coding or back-office work.
“Indian IT companies have started moving away from the linear model of increasing head count to grow,” said Diptarup Chakraborti, a principal research analyst at Gartner Inc.
The firms are also becoming more flexible in working with clients. Part of this trend can be observed in the increasing number of business transformational deals that Indian firms are taking up.
Partnership is the new key word, said Chandramouli C.S., an analyst with Zinnov Management Consultants Pvt. Ltd. “Service providers have moved forward from strict pricing models and are open to being result-oriented than cost-driven, thus taking on a partnership model rather than (a) client-vendor relationship model,” he said.
Forrester Research Inc., a technology and market research firm, too, sees this change in attitude. “Since things went bleak, there is an across-the-board willingness on the part of Indian service providers to adapt and change the way they do business, such as accepting reward for outcomes rather than efforts,” said Sudin Apte, a senior analyst at Forrester.
Another outcome of the meltdown is the urgency with which India’s IT firms are reducing their dependence on the US and Europe, by exploring other areas including the domestic market.
“However, it is not clear yet how many Indian players are succeeding in this,” Gartner’s Chakraborti said. “At least one market which top Indian firms are aggressively pursuing is the Indian domestic market, where significant spending from the government is awaited in various sectors.”
While attempting to move up the value chain, IT firms are also trying to improve the cost efficiency that they bring to the table by looking at cheaper development locations, besides India.
Earlier, for most firms, a global delivery model largely meant shipping work offshore back home to cut costs, said Gaurav Gupta, principal and country head (India) of Everest Group, a consulting and research firm.
“Now they are truly looking at an international delivery model where the emphasis is on best-shore rather than just (to) ship work to India.”
Chakraborti of Gartner concurs: “With the increasing realization that India is not the only low-cost destination for outsourcing, Indian companies have shown a desire to open more development centres in locations in Asia-Pac and Latin America.”
“Tough times have also taught the industry to look for newer markets, verticals and (enhance their) domain knowledge to overcome the crisis-induced difficulties to get additional business,” said Som Mittal, president of Nasscom. “This is also not going to go away when the crisis is over, so I think the sector has used this crisis as an opportunity to mature and evolve.”
venkatesha.b@livemint.com
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First Published: Fri, Sep 18 2009. 01 15 AM IST