Bangalore: As the effects of the economic slowdown begin to wear out, India’s information technology firms are seeing more demand for building high-value applications from customers upgrading or maintaining their business software.
Enterprise resource planning (ERP), or business software, is a high-margin segment that includes consulting as a key component and commands at least 40% higher billing rates than plain-vanilla applications and development and maintenance services. Such software is typically sold and maintained by firms such as SAP AG and Oracle Corp. Indian firms began acquiring ERP capabilities only in recent years to enter the big league of companies such as International Business Machines Corp. (IBM) and Accenture Ltd.
For instance, Infosys Technologies Ltd and HCL Technologies Ltd, India’s second and fifth largest software firms, fought a bid last year to buy British ERP implementation and consulting firm Axon Group Plc HCL won.
The impetus came during the downturn, when firms in the US and Europe, the biggest markets for Indian IT firms, slashed technology budgets and spent a bare minimum on the so-called lights-on projects for maintaining existing IT infrastructure, to keep their businesses running.
Now, with a recovery in sight, firms such as British oil explorer BP Plc. and power equipment maker ABB group are again upgrading their business applications but prefer outsourcing the work to firms in low-cost countries such as India, analysts said.
Mint could not independently verify ERP contracts won by Indian firms.
“Clients are becoming more open to discretionary IT spending, especially in areas such as enterprise resource planning, in which deep spending cuts have already happened,” Harmendra Gandhi and Pinku Pappan, analysts with brokerage Nomura Financial Advisory and Securities (India) Pvt. Ltd, wrote in a 10 September report to clients.
By discretionary spending, the analysts are referring to the money that customers keep aside to spend over their planned IT budget.
“Customers are also talking about some transformation of deals, apart from offshoring support and maintenance work. Thus, the propensity to spend out of the 2009 Budget is much more now compared with that a quarter ago,” Gandhi and Pappan said.
The shift to Indian firms was also prompted by price increases at their regular vendors.
Germany’s SAP last year raised its annual support costs to 22% of the licence fee from 17% earlier, saying this would bring down the total cost of ownership of the licence for customers.
Firms had not factored in a hike in maintenance fee during the recession and “are exploring outsourcing to Indian vendors, who can maintain at half the cost, but with the risk of losing support on upgrades from the vendor,” said Asheesh Raina, a principal research analyst at Gartner Inc. “Indian companies have also been able to demonstrate maturity in offering support.”
Spending on business software was the lowest in the five years to 2009, but is expected to pick up in 2010, Raina said.
Firms such as Wipro Ltd, HCL, Cognizant Technology Solutions Ltd and even smaller companies such as Defiance Technologies Pvt. Ltd, the IT services unit of the Hinduja group, say customers are looking to improve efficiency and integrate their business software with their core processes, and not just to cut costs. But it does help that Indian ERP firms are cheaper by at least a third than Accenture or IBM.
“Saving costs and capital continues to be the most important thing clients are discussing,” said Sangita Singh, head of enterprise application services, or EAS, for Wipro. The segment contributed a third out of the 26 customers that Wipro added in the first quarter ended June.
“You don’t have many companies spending $100-200 million (Rs482-964 crore) on new licences. It may be in the range of $50-70 million. The implementation business is three to four times on licences,” Singh said.
HCL earns nearly a quarter of its overall revenue from business software projects. EAS projects accounted for 23.6% of its fourth quarter revenue of Rs2,908 crore, up from 10.8% a year ago.