After the worst year in its history, the beleaguered Indian software industry is looking forward to 2002-03. At the same time, the exuberant BPO sector expects 2002-03 to bring in even greater cheer. Rajneesh De reports

Software & ITES: Top Trends

• Software industry cautiously says 2002 will be turnaround year after dismal 2001.
• Move to newer markets will intensify; utility and energy vertical might generate handsome returns.
• Chinese threat won’t hurt in 2002-03.
• BPO market set to grow at 70 percent.
• Indian BPO offerings will move from non-critical processes to critical, comprehensive process management.
• Call centre segment will take off after strong showing in 2001.

Racing along a high growth highway, 2001 for India Software Inc. was like a stone wall that suddenly came out of nowhere, forcing the industry to brake hard. The software industry witnessed a growth rate of 65 to 70 percent year-on-year over the last decade, with the major contribution coming from outsourced software projects from the US. But the US economic slowdown, coupled with the 9/11 WTC attacks spoilt the party. The end result: the industry witnessed a growth of only 31 percent in 2001.

So, will 2002 bring back the cheer, or will dark clouds continue to hover over India’s software sector? “The software industry has bottomed out and its worst days are over. The turnaround has already started and it has almost regained 80 percent of its earlier position,” says Ashank Desai, chairman and MD of Mastek, and ex-chairman of industry association Nasscom. The debate is now on the growth rate expected in 2002. Conservative estimates put it somewhere between 35-40 percent, while die-hard optimists are forecasting somewhere close to 50 percent. Whatever the actual number that finally pops up, some like Satish Joshi, senior vice president, PCS, feel that it is extremely unlikely that the industry will ever again regain the glory of its heydays around 1998-99.

Towards newer shores

What will be the drivers for the turnaround, however marginal, being predicted in 2002? The geographical diversification of Indian companies in the wake of the US slowdown would definitely be one of the primary reasons. Traditionally, the US had contributed nearly 74 percent of Indian software services revenues, but this number has dwindled substantially in the last year. 2002 will witness a consolidation of what had already started in 2001 as Indian software companies venture more and more into hitherto virgin territories in Europe and the Asia-Pacific region.

Only a handful of Indian companies like TCS and Mastek had a traditional presence in Europe during the American honeymoon. Therefore, the transition for them would be easier in 2002. Ditto for companies like PCS which has been strong in Japan, or those like NIIT with prominent visibility in the Asia-Pacific region. However, it won’t be a cakewalk for the others in 2002, since except the UK, every European country as well as Japan and countries in the Asia-Pacific region have their own culture and business processes, which require some time and effort to adapt to. Geography-wise, the likely revenue spread in 2002 would be around 55 to 60 percent from the US, 30 to 35 percent from Europe and another 10 percent from Japan.

Verticals and service lines

Financial services and insurance are two verticals where Indian companies have traditionally been strong in, and this trend is likely to continue in 2002. Manufacturing and retail are also going to be verticals with substantial revenue potential. However, the common belief is that the utility and energy vertical might turn out to be the dark horse, especially after the deregulation of the US energy sector. However, the hospitality sector, another significant revenue earner, was badly hit post-9/11, and is likely to remain in the doldrums this year.

According to a Merrill Lynch survey on buyer intentions by service lines, the service lines where a considerable spurt is expected in 2002 include the tried and tested packaged software integration sector, which 56 percent of buyers say they will outsource to India, up from 22 percent this year. 54 percent of buyers say they will outsource e-business solutions to India, up from 18 percent this year. 88 percent of buyers say they will outsource legacy application management, maintenance and migration, up from 52 percent of buyers currently, while 14 percent of buyers, up from 8 percent last year, will go in for data centres/information services outsourcing. Strangely, despite all the talk of moving up the value chain, only 4 percent of buyers would consider outsourcing network management services, while 4 percent would consider engaging Indian firms for consulting, from the current 2 percent.

Billing rates

The pressure on billing rates, probably the most direct impact of the 2001 slowdown, is likely to continue this year too. In fact, the consensus is that the pressure would be even higher during Q1 and Q2 2002, easing out somewhat in the latter half of the year. However, the lucrative rates during the salad days of 1998-99 can probably never be achieved again, let alone in 2002. Even here, geographical diversification can act as a balm, because the introduction of the Euro in Europe will ensure a strong and uniform rate across the continent, whereas in Japan the billing rate is on a monthly basis.

Technology adoption

One interesting trend in 2002 would be the adoption of new technologies by Indian software companies. In 2001, about 29-30 percent of work was still being done on IBM mainframes, and while large customers would still require such work for their backbone frameworks, the number should come down to around 25 percent in FY 2002-03. Even Unix or its different variants, currently accounting for about 10 percent of projects, would see a drop of about 2 percent this year. The Microsoft suite (Windows NT, Visual C++, C++) would witness a 4-5 percent drop from its current figure of 20-23 percent, while Internet technologies like Java or Netscape-based platforms would fall by 2 percent from its current position at around 17-18 percent. The client/server model is likely to continue, but there will be a change in front-end tools from the likes of PowerBuilder and Delphi to Web-enabled ones, more so with most vendors betting heavily on Web services. However, Oracle would continue to remain the preferred choice for the back-end.

In addition, there will be a gradual adoption of newer technologies like .NET, wireless, 3G and Linux. Initially, most clients would prefer to have only pilots to gauge applicability and implementation issues. .NET is not likely to become the preferred platform for business critical applications at least before Q3. 3G will see some niche adoptions in areas like sales force automation projects in mobile devices. Ditto for Linux, where potential real-time projects are likely to be implemented in various embedded and controlled devices.

Lastly, the perceived threat from China is likely to remain only on paper. Though McKinsey predicts that China would grow via the Japanese outsourcing route, the fact is that India would still be holding the aces in 2002-03. Japan might be closer to China geographically, and by language, and Chinese billing rates might be lower, but India’s ability to produce better quality software than China is unlikely to change soon. Even software engineering processes in India are far more sophisticated, and business processes are much more mature. As such, despite lower billing rates, total project costs in China would turn out be higher because of the higher overheads incurred.