BackIndian IT firms look to new avenues for growth
Indian IT firms look to new avenues for growth
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Bangalore: Hurting from a slowdown in their largest market, the US, Indian software services firms such as Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd are looking to earn more revenue from new services; new customers in Europe, the Asia-Pacific region, even India; and alliances they have struck with large multinational IT firms such as Cisco Inc. and EMC Corp.
“Growth is about having larger relationships, having multiple service lines, ability to integrate them and deliver value to clients," says S. Gopalakrishnan, CEO and managing director of Infosys. “We are continuously evolving..."
“The next growth areas will be in emerging markets outside of the US and the UK and the domestic markets," adds Avinash Vashistha, CEO of Tholons Inc., an outsourcing advisory.
The change could well mark the beginning of the second big shift in the Indian software services business, which is expected to touch $60 billion (Rs2.6 trillion) in revenues by 2010, according to industry lobby group National Association of Software and Services Companies, or Nasscom.
Till 2001, the Indian companies earned much of their revenue by designing and maintaining applications for customers, largely in the US. After the near-recession in that country in 2001 following the dot-com bust, these companies diversified into services such as consulting, back-office services and infrastructure management. These services, introduced in the past five-six years, now account for almost half of the revenue of most large companies. And through much of the past decade, firms such as Infosys, Wipro and TCS, Indian IT’s Big Three, parlayed low-cost labour, a depreciating currency and a tax holiday into a significant competitive advantage. In 2007-08, the three together accounted for 46% of the outsourcing business that came to India.
Their business continues to be driven by firms such as General Electric Co. and General Motors Corp. that have been moving work offshore largely because it costs one-fifth less in countries such as India. A significant amount of work, however, has already been outsourced to India and in the context of a slowdown in the US, Indian IT firms need to give customers more immediate reasons to outsource work. Nasscom expects growth in the business to slow by around 4 percentage points from last year to 25%.
Offerings,? models, pacts
The new services on offer include pay-as-you-use software and so-called platform-based back-office offerings where IT companies set up a common process, say, claims processing for insurers, and offer it to several customers who, in turn, have the option of customizing parts of it to suit their needs. Both are cost effective services.
The software companies are also hoping that their alliances with firms such as Cisco and EMC will help them develop and market custom-built solutions.
In the past two quarters, Infosys has entered new businesses such as learning services and pay-as-you-use software (where the company builds an application or delivers a solution to a customer that pays for this in terms of usage—a sort of advanced licence agreement) and expects to grow these significantly in the next three-five years. Its around Rs3,300 crore bid for the UK-based Axon Group Plc., if successful, will enhance Infosys’ capabilities in the SAP area. Companies use software developed by SAP AG to run their businesses but this software is usually so complex that they need to hire an IT firm to help them implement it. The acquisition, if it goes through, will also increase Infosys’ revenues from consulting and package implementation, which currently account for one-fourth of revenue.
“Infosys’ buyout marks the beginning of the long-anticipated takeover of the European IT services sector by Indian players, and we expect further consolidation over next 12-18 months," says Alexander Simkin, senior analyst at London-based research firm Ovum.
But it isn’t just Europe that is on the radar of these IT firms.
TCS is looking to grow by focusing on emerging markets, small and medium businesses and governments. “The overall size of the pie is large and we are looking at growth in all our traditional areas besides diversifying into specialized niche areas and markets," says TCS’ chief operating officer N. Chandrasekaran.
One such niche is the company’s platform-based business process business where it already has offerings in the areas of insurance and human resources management. TCS is now looking to add three new platforms to its portfolio. “We are looking at even renting out the platforms, which would contribute to our non-linear growth," says Chandrasekaran.
Wipro, meanwhile is betting on alliances with five large multinational IT firms—Microsoft, Cisco, SAP, Oracle and EMC. “Each of these partnerships has the potential to earn as high as a billion dollars in the medium term," says the company’s co-CEO, Suresh Vaswani.
Wipro has created a global alliance programme to chase deals above $100 million, which “will be a topping to our normal growth", adds the company’s other co-CEO Girish Paranjpe.
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