Opinion | We need new metrics to gauge India’s infotech industry

Last week in Mumbai, the National Association of Software and Services Companies (Nasscom) held its flagship conference, newly rebranded as the “Technology & Leadership Forum”. This is an annual pilgrimage for many who attend this conference—as much for the networking opportunities it provides as to listen to the people who have come to speak.

There are many peripheral players who attend this conference. Many come from the ranks of consultant and research firms who study the information technology (IT) and business process outsourcing (BPO) industry. They derive revenue from both the “supply side”—the IT and BPO outsourcing majors—and the “buy side” of banks, manufacturing companies and others who outsource to India. Some of these firms such as the Everest Group, HfS Research, McKinsey & Co. and Information Services Inc (ISG) are regulars at the conference . They also regularly publish various research statistics, especially about what they see in their crystal balls as the future growth of outsourcing services.

I have argued in this column before that we need to find new metrics to gauge India’s IT outsourcing industry. The industry has metamorphosed over the last decade and is now an agglomeration of very large players. The Indian players are no longer underdogs. Tata Consultancy Services (TCS) now enjoys a market capitalization that is almost as large as that of International Business Machines Corp. (IBM). As of the end of January 2019, TCS’ market capitalization at $102 billion was less than 1% smaller than IBM’s $103 billion. In addition, the combined market capitalization of India’s largest players is not much smaller than that of their multinational (MNC) counterparts.

For many years now, the captains of India’s IT services industry have relied on numbers from Nasscom to help guide growth expectations for IT services. One number that was often spoken of in guidance estimates for the industry was the yearly estimate that Nasscom put out for Indian IT exports. It appears as if, along with the rebranding of its flagship conference, Nasscom has decided to stop publishing this number as a benchmark. It will refrain from providing guidance for fiscal year (FY) 2020.

Regular readers of this column will remember that late last year I had written that the Nasscom number was out of sync with India’s balance of payments (BoP) data. While software exports recorded in the BoP had been in the rather tight range of $73-77 billion over FY14-18, the Nasscom-estimated India IT services exports grew from $98 billion in FY14 to $125 billion in FY18. The difference was stark.

This was hardly Nasscom’s fault. The trade body has a heterogeneous member set that includes Indian outsourcing firms, in-house centres of clients who have set up on their own in India, as well as MNCs, many of whom have a very large India presence and who provided their best estimates of growth to Nasscom for its prediction. The sheer heterogeneity of this member pool means that their data was based on a variety of accounting treatments that don’t necessarily fit the classic BoP definition of exports. They still, however, correctly showed robust growth.

Information in the absence of comparisons is not something one can act upon. Given that Nasscom, at least for the present, is refraining from providing a growth benchmark, investors will look for the vacuum to be filled by analyst and consulting firms.

One such firm is ISG, my former employer. It puts out a quarterly view of the industry called the ISG Index, which measures the health of the large deal space in outsourcing. Given that visibility gets murkier as deals get smaller, it refrains from commenting on deals that are smaller than $10 million a year in annual contract value. Nonetheless, it has a robust methodology and a startlingly accurate view of the deal cycles in the industry.

I spoke last week with Steven Hall, president of ISG’s European operations, who was in India to attend Nasscom’s conference. Hall provided much food for thought by sharing a few salient data points. First, he said, the traditional outsourcing market has been growing at a paltry rate of 3.6% per annum since 2014. In the corresponding period, “infrastructure as a service” (provided by firms such as Amazon Web Services and Microsoft) has grown by 38.2%, and “software as a service” (provided by firms such as Oracle and SAP) has grown by 16.1%.

To shore up this statistic, he pointed out that the market capitalization as of the end of January 2019 for the “infrastructure as a service” companies such as Microsoft, Oracle, and SAP (including an estimate of capitalization at $600 billion for Amazon’s Web Services subsidiary) was almost $1.8 trillion, while the traditional outsourcing industry comprising Indian and MNC IT outsourcing firms, as well as telecom providers such as British Telecom, Deutsche Telekom, and AT&T, who all have outsourcing services, was only $1.09 trillion.

The question for the traditional outsourcers now is: what next? According to Hall, smaller firms that have been able to “reload” have been growing faster than their larger counterparts. Firms in the revenue range of $500 million to $1 billion have been growing at 12%, and the $1 billion to $3 billion players at 5%. This is compared with almost zero growth for those between $3 billion and $10 billion in revenue, and 4% for those over $10 billion.

It appears that the middle order might collapse. Or seek to consolidate.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on deep science and tech in India.