Challenging days ahead for IT industry

By V. S. Sambandan

CHENNAI, MARCH 17. Behind statements of confidence, there is a realisation that challenging days are ahead for Indian IT companies following the slowdown in the U.S. economy. Of the total Indian software exports of $4 billion in 1999-2000, the U.S. share was $2.35 billion. Projections for 2000-01 have it that of the expected $6.24 billion total exports, $3.7 billion would be to the U.S.

Well, some pleasant news first: Indian companies that execute project services are unlikely to be hit severely in the next six months. In fact, some companies stand to gain from the U.S. slowdown: cost-conscious American firms, the argument goes, could turn to Indian firms with their lower labour costs.

The bad news then is that Indian companies that are involved in ``professional services'' - those that send Indian IT personnel to work on overseas projects - are already facing the crunch. The focus of Indian firms in the days ahead would be on attracting more offsite projects from the U.S.

With rates coming down across the board, the worst part of the still unfolding story will come after the next two quarters, industry sources feel. ``If the recession continues, then there will be a serious problem,'' they say.

For project companies, however, the situation is a wee bit better. As the mainstay of their business is carrying out projects that are outsourced from U.S businesses, the impact of a slowdown contains an element of delay. Armed with contracts that were concluded even before the downturn started in the U.S., their position is somewhat comfortable for the next six months. But this would mean using all their reserves to consolidate their position after the present contracts are over. Or hope for the U.S. economy to reverse its downward move.

Meanwhile, Indian companies would have to draw on their financial muscle and press more aggressively in sales and marketing. Software major, Cognizant Technology Solutions (CTS), for instance, is confident of turning its past investments in sales promotion and marketing to its advantage. ``We have been consistently setting aside a part of our profits for this vital segment,'' says Mr. N. Lakshmi Narayanan, President and COO, CTS, a leading e-business and application service provider. By the end of the second quarter, he feels, Indian outsources would start feeling the pinch. Faced with a ``do or perish'' situation they would have to move on the offensive to sign new deals that would see them through.

Yet another dimension is the nature of outsourcing being done in the country. Companies that execute projects for the U.S. banking and financial services sector, for instance, feel that the long- term nature of their relationship would help safeguard business interests. Mr. Raghuraman Balakrishnan, Assistant Vice President, Corporate Communications, at Polaris, says that the sectoral interests would ensure that sustainability is not affected.

While professional services would be affected for some time, in terms of project services, the impact is not likely to be immediately felt. The next three to six months he feels, are important.

Shakeout in Indian companies

Yet another dimension is the ability of the number of Indian companies to stand the test of difficult economic operating conditions. Falling margins and inability to edge out competition could result in a number of companies either folding up or becoming vulnerable to acquisitions. The smaller companies that were not willing to sell, Mr. Narayanan points out, will now be unable to defend themselves as before.

He foresees a number of acquisitions of private companies for yet another reason. Complementarity in the nature of services being executed could weigh high in the expected acquisitions.

Of the present companies in the sector, while ``the top-20 will survive'', there may not be place for ``more than 150'' in the years ahead. This means a considerable number of acquisitions, while the remaining, the financially weaker ones would die.

Send this article to Friends by E-Mail

Section  : Business
Next     : We will overcome: Dewang Mehta