Will India Software Inc. get caught in US-Iraq crossfire?

When US forces struck at Iraq on March 19, many analysts and industry players shrugged it off because they felt a short, decisive war would have little impact on India Software Inc. But with Iraqi forces refusing to stick to the US war script, things could get pretty messy for the US and for the Indian IT industry. Pankaj Mishra analyses the impact of the war on the Indian IT industry

The Indian software industry didn’t seem very worried when the first American missiles hit Baghdad. Everyone expected a quick American victory. Fact is, even the United States expected that. But within a few days, it was clear that the story wasn’t going the way the US expected it to. Iraqi resistance has meant that the US is now rushing in more troops, all of which adds to concerns that the war could drag on for a while. And that scenario has the Indian software industry worried.

According to Kiran Karnik, president of software industry association Nasscom, India’s software exports for the current fiscal are likely to fall 2-3 percent in value terms on account of a weakening US dollar. Earlier, the software sector had predicted that the dollar would appreciate to Rs 50 over a few quarters, which did not happen. A prolonged Iraq conflict will lead to a deferral of capital spending in the US and a weakening of consumer confidence.

“As during the Kashmir crisis last summer, and the aftermath of September 11, 2001, there will undoubtedly be a negative impact on international travel. That, in turn, will slow down client visits to offshore facilities and, as a result, could delay projects that are dependent on face-to-face interactions,” Stephen Lane, research director, IT Services for Aberdeen Group told Express Computer. “The same holds true for sales cycles as visits to supplier sites and meetings with top management are an important part of the due diligence process that companies must go through when building an offshore relationship,” he adds.

Bangalore-based MindTree Consulting has witnessed a 25 percent fall in customer/prospect visits. Some other Indian companies have also admitted that prospect visits have fallen in the range of 25-50 percent.

Economists have pegged the cost of the war at around $100 billion, equivalent to 1 percent of US GDP. With the US accounting for around one-third of Indian software exports, there are obvious reasons to believe that a sluggish US economy will affect India Software Inc.’s prospects in the near-term.

From the BPO/ITES perspective, K Ganesh does not expect a significant impact if the war is short

There is a school of thought however, which believes that a slowing US economy will force US enterprises to increase offshore outsourcing. It will also result in several new outsourcers seeking to offshore their IT needs. According to Gartner, fears of war are strongly affecting offshore outsourcing engagements between global enterprises and geographically diverse service providers. Disaster recovery and business continuity planning are going to drive outsourcing decisions.

“Cancellation/postponement of customer/prospect visits are seen from the US and Japan geographies, while there are no cancellations so far from Europe. This leads to delay in decision making, but in a few cases only since people do take decisions even without visiting us,” says S Janakiraman, president and CEO of MindTree’s Technology Business. “If the war continues for a longer period it can lead to a slowdown in the market and impact us in medium term outlook for Q2/Q3,” he adds.

“We do not see any significant long-term implications for Indian offshore players, except the fact that pre-sales scrutiny by clients will be more rigorous in terms of understanding the ability of the service provider to offer disaster recovery and business continuity services,” says Govind Singhal, executive director of Polaris Software Labs.

New outsourcers may hold decisions
“The biggest impact will undoubtedly be on new business opportunities involving companies that have little or no experience with offshore models and who lack the experience or dedicated resources for managing international business relationships,” says Lane. Aberdeen research indicates that such companies tend to consider geopolitical risks as being much more important than companies that have experience with offshoring.

There is the question of the potential impact of the current conflict on the global economy. If it continues to deteriorate companies could end up spending even less on IT, even in areas that are fundamentally about cost reduction, such as offshore outsourcing.

Client visits
Recent high profile visits of Sun Microsystems’ chairman, CEO and president Scott McNealy, and Dell chief Michael Dell have endorsed the fact that India is definitely very safe for trade visits. However, analysts believe that there is a definite decline in the visits made by traditional outsourcers. They peg the decline at around 25 percent, compared to a quarter ago. A facility visit is integral to any offshoring decision process, therefore, any decline in client visits leads to a much longer sales cycle.

“Client visits to India may get stretched owing to the war that may lengthen sales cycles in the short-term but we don’t expect it to be extended longer,” agrees Singhal. However India’s largest software services firm, TCS doesn’t think this is true. A TCS spokesperson said that the company has not seen any drop in client visits.

The bottom line: A decline in client visits might be short-lived if the war doesn’t continue beyond a quarter. In the event of a prolonged conflict, things will get worse.

Mitigating geo-political risks
Time and again, analysts have been asking Indian companies to formulate a comprehensive de-risking strategy, diluting focus from the US to other markets. For an outsourcer, it is very important to have a strategy that provides a choice of multiple offshore locations. But do outsourcers consider geopolitical issues before offshoring? “I take a contrary view to the conventional wisdom that states that geopolitical issues are the most important things a company should consider with regard to offshore outsourcing. Companies outsource to other companies, not to countries. If I were negotiating a contract with any outsourcing supplier—foreign or domestic—my goal would be to transfer as much risk to it as possible,” argues Lane of Aberdeen.

Establishing a near-shore centre in another geography is an effective way to mitigate geopolitical risks. “Apart from strengthening their local sales presence, the companies should also set up proximity centres so that some of the projects can be initiated locally,” says Janakiraman.

“This situation once again reinforces the need for Indian companies to have business continuity and disaster recovery plans in place and the need for them to highlight their global delivery models to their potential clients. Currently though, it is business is usual, customer visits are taking place as planned and Indian companies are pitching for new projects,” says Karnik.

“More companies are investing in business continuity and disaster recovery plans covering people, processes and technology to ensure continuing availability of business support systems and minimise disruption risks,” says a Mascot spokesperson. Mascot has a near-shore development centre in Wuxi, China and an offsite development centre in Toronto, Canada, which gives location redundancy to its clients.

“Some BPO companies have adopted the multinational business model to mitigate geopolitical risks. For the deals that are already in the pipeline we are in constant contact with our clients through our international offices abroad and facilities such as video conferencing, tele-conferencing, e-mail etc.,” says K Ganesh, president of ICICI OneSource.

Implications for the Indian Big Five
According to a Merrill Lynch survey of CIOs at 50 US and 25 European companies, about 17 percent of these enterprises are expected to slow their technology spending because of the war in Iraq. Going by past records, Indian software companies, especially the biggies, have shown that they are vulnerable to any slowdown in the US economy. Though most of them declined to talk about the specific implications for their companies, industry observers admit that the client visits at the Indian Big Five firms have definitely dropped. “Bigger players like TCS, Wipro and Infosys have ongoing, mature relationships with their clients who need not visit their facilities for giving future business. But new outsourcers have scaled down their business trips to these companies,” says an analyst.

“While there is some uncertainty, by and large, our business has not been impacted. Clients have been visiting India as regularly as before,” says Atul Takle, vice president, Corporate Communications, TCS. Companies like TCS have also insulated themselves to a large extent by having a worldwide development and sales presence. Wipro, Infosys and Satyam have also realised the importance of having location redundancy.

Govind Singhal says pre-sales scrutiny by clients will be more rigorous in terms of understanding the ability of the service provider to offer disaster recovery and business continuity services

SMEs to suffer the most
Many SMEs are dependent on large software companies for sub-contracting opportunities, which is definitely going to shrink if the war continues for long. Moreover, the SMEs lack financial muscle to invest heavily in building a proper disaster recovery system and business continuity planning. This will prevent them from getting new outsourcing deals. SMEs focussing on niche areas like embedded and chip design will also suffer as the manufacturing and semiconductor segments worldwide will enter recession if the war persists for long.

Will it affect the ITES industry?
ITES clients do not need to visit offshore processing centres in the country as much as IT services clients do. However, a slowing US economy with shrinking IT spend will not spare this segment. “From the BPO/ITES perspective, we do not expect a significant impact if the war is relatively short. Currently some clients are avoiding travelling to other geographies, based on travel advisory warnings and hence decision-making may slow down a little,” says Ganesh.

“In the short term though, potential clients may defer signing of contracts or travel plans. From a medium-term perspective, if the war continues, there will be added pressure on American companies to offset recession losses by outsourcing to India,” says Sri Dasari, president, India Operations, Brigade. “Companies, especially those with business process outsourcing deals in the pipeline will see delays in closure of these deals,” he adds.

Client relationships will drive new business and some of the IT services companies having BPO arm may benefit, as outsourcers would be keen on bundled contracts.

Final take
Over the years, Indian companies have been nurturing relationships with large outsourcers like GE, Amex and others. While business from old outsourcers may not be threatened, relatively new outsourcers will definitely go against offshore outsourcing, as they are very sensitive to geopolitical issues. Indian vendors need to undertake an awareness campaign, collectively or even individually, to educate these customers about their business continuity planning and disaster recovery mechanisms. Indian vendors should also realise that location redundancy is an effective strategy to address geopolitical issues. China can be leveraged as a near-shore base. For ITES companies, the war may not pose an immediate threat, but in the long run a sluggish US economy may hamper their prospects as well. The last word-there’s no need for war paranoia; what is required is a proactive approach in educating customers and prospects and also beefing up delivery systems with disaster recovery and business continuity planning.