“Companies cannot afford to be generalists anymore”

Puni Rajah, vice president, Research at IDC Asia-Pacific talks to Prashant L Rao and SHIPRA ARORA on the changing dynamics of the Indian and global IT industry, the direction in which offshore services are headed, how Indian companies can gain entry into total outsourcing where billion dollar deals are commonplace and whether Nasscom’s ambitious target of software exports hitting $50 billion by 2008 can be achieved

The global IT industry outlook seems to be very dim. What will keep the Indian IT industry ticking?

It is true that the days of double-digit growth globally are gone. However, the India IT industry will be more buoyant as compared to the global market. This is because India is an emerging market in terms of IT usage and penetration is still very low. On the exports front, the slowdown in global IT spending will certainly impact IT exporters in India. However, this will also mean that offshoring will grow much faster. Estimating a 5 to 6 percent growth, companies are going to increasingly move from in-house development to outsourcing. Outsourcing to offshore facilities is expected to grow at around 30 to 40 percent globally. India will leverage on this trend. This will see the IT industry growing in India.

How is India poised vis-à-vis other countries in grabbing a share of this outsourcing demand?

It is difficult to say exactly how much India will be able to partake of the global outsourcing pie. India has an advantage of early leadership so it will be an attractive location for offshoring. However, at the same time the fact is that that there are other attractive locations like China and Eastern European countries like Russia and Poland that are emerging as powerhouses in providing offshore and near shore services to European companies. Canada is also positioning itself as an attractive near shore destination for the US. From a cost perspective, India is still ahead of competing nations. However, it has to closely monitor countries like Philippines, Vietnam and Sri Lanka, which are also emerging as cheaper offshore destinations. So, India has to weigh its assets like language and early mover advantages.

What are the emerging trends that are shaping the ITeS landscape in India?

The Indian ITeS industry is emerging as a healthy market. Over the next few years many large companies will be setting up their own direct subsidiaries here as part of their global expansion plans. For a lot of companies, handing out control of their business processes is not easy. And this option offers them greater flexibility. However, the third-party players’ segment, which is growing at around 30 to 40 percent globally, will also continue to flourish here in India.

What about IT services outsourcing?

Because India had a head start in IT services, IT services outsourcing is a bigger proportion of the total outsourcing pie of India. It will continue to be so over the next few years. But globally ITeS is the bigger cake to go after.

Presently, many nodal back-office operations are up for grabs. There is a high volume of back-office work happening in horizontals like accounting, document and processing management, engineering development tools and designing in the manufacturing sector and research activities in the finance sector. Scientific R&D will also be one of the business processes that will earn good revenues in the back-office segment. Life sciences, and to some extent, the manufacturing industry have started outsourcing R&D processes to India. It is, however, still in an embryonic stage. Furthermore, scientific R&D arrived in India at the same time as it arrived in China. So, you could expect competition.

Getting a ticket to the total outsourcing ballgame isn’t easy. What do Indian services companies need to do to gain a foothold in this sector?

The ticket to entry in this segment is capability. Big companies demand that the companies they outsource to have the capability [to get the job done]. The most important factor influencing the decision to outsource is the financial stability of the business partner. IT is being entrusted based upon confidence in the partner’s management. Partners need to share similar values. The culture of doing business should be consistent. In countries where it operates, IBM looks like a local company.

What short-term strategies should companies adopt to catch up with growth?

It is very important not to lose sight of short-term strategies in order to survive in today’s competitive market scenario. The short-term strategies of companies should be focused on getting new customers and bringing costs down to reasonable levels.

The biggest danger of being a services company is that you can easily diversify into other service areas. But you need to have a more complex set of capabilities for that. Another hitch is that companies tend to go beyond what they need to focus on, thereby exhausting their resource pool. Hence, the need to remain focused. Partnerships will be a good indication of maturity. But organisations will need to comprehend where they need to partner and how to partner effectively.

In terms of trends in IT spending, lot of spending is happening in areas like security, integration, mobility and embedded systems. These are going to be the big drivers for the IT industry worldwide. However, for India, tapping these high growth sectors in terms of outsourcing opportunities will not be very viable in the short term as these are emerging markets and so companies might not be very comfortable with outsourcing.

Indian software companies are increasingly depending upon the offshore segment. How can companies providing offshore services stay competitive as MNCs start muscling in on their turf?

Companies providing offshore services need to articulate that they are good at managing specific applications and [non-English] languages. These companies need to look at whether they can afford to be generalists anymore.

Indian software services companies have touted consulting as a way of moving up the value chain. Does a move into consulting make sense for them?

Consulting companies are struggling. When times are tough, consulting projects are the first to go. Understanding current processes, re-engineering them and generating savings is a requirement that is inherent within outsourcing. Indian outsourcing companies will need to build consulting capabilities. It could be difficult for them if they decide to go after consulting as a standalone business as it is a very culturally sensitive business.

Nasscom has said that software exports from India will hit $50 billion by 2008. Is this achievable in the context of the ongoing downturn?

The target is achievable, provided Indian companies are able to approach the global market in a more structured manner. So far, they have taken a
tactical, sales-driven approach. China, Philippines, East Europe and Latin America are emerging as contenders to India. It is more important for Indian players to re-differentiate themselves as leaders [in this market].

Consumer driven e-commerce is growing in the US with Amazon and eBay showing the way. Is B2C becoming popular in the Asia-Pacific to the same extent?

We haven’t yet seen widespread adoption by the ‘C’ sector in the Asia-Pacific. SARS helped in education, Asian schools and parents are now convinced of the use of the Internet [as a medium for] education. The use of the mobile Internet supersedes the terrestrial Net in the region. Small businesses in Singapore can file their taxes using mobile phones.

Vendors like to talk about server consolidation. Is this trend for real?

We are yet to see a large number of examples of server consolidation. You have to spend money to get server consolidation going. Where customers have looked at business continuity, they have consolidated the workload. After 9/11, US banks have to maintain a hot standby at least 50 miles away. Many companies had hot standbys three miles down the road. They are consolidating servers at these standby locations.

Spam is being cited as the next big problem by security vendors. What is IDC’s take on this?

There are enough tools available that an administrator can use to lock out spam. However, it is an issue.