Business

IT industry: waiting to exhale in 2009

— FILE PHOTO

CHALLENGES AHEAD: Employees at work at the Microsoft India Development Centre in Cyberabad.

As the last sheet of 2008’s calendar lapses into history, the Indian IT industry will continue to hold its breath. Though relief is on the horizon in 2009, the first half may not be time yet for that collective sigh.

“The year 2008 was a tough one for the IT industry,” says Kaustubh Dhavse, Deputy Director, ICT Practice, Frost & Sullivan, South Asia & Middle East. With ‘bailout’ being declared the Merriam-Webster word of the year for 2008, tough is the adjective that most industries would choose.

Diptarup Chakraborti, Principal Research Analyst at Gartner, sees 2008 divided into two parts. “The First half was good, the scenario was rosy, everything looked up,” he says. “Suddenly this crisis happened and people started becoming cautious, investments started going down and there was a liquidity problem,” he says.

A squeeze on the U.S. financial markets meant that the Indian IT services industry choked. “IT risk is essentially business risk,” says Mr. Dhavse. And, business for the Indian IT services industry traditionally meant the BFSI (banking, financial services and insurance) segment in the U.S.

The numbers of the IT services industry illustrate this relationship. Sangeeta Gupta, Vice-President, events and research of the National Association of Software and Service Companies (Nasscom), says that traditionally the industry was focussed on the BFSI industry. “Till March 2008, the BFSI segment formed 40-41 per cent of our total industry’s revenue.”

About the geographical spread, she says, “North America formed about 59-60 per cent in 2007-08. Europe was 28-30 per cent and the rest of the world 10 per cent or so.” If the technology companies that have captives in India, which form around 18 per cent, are removed from this tally, the result is 42 per cent outsourcing and offshoring exposure to the U.S., she says. (Captives are firms fully owned by the parent company abroad.)

To tackle this scenario, IT services companies adopted diversification, or move your eggs to different baskets approach.

Ms. Gupta says, “In the second half of 2007, we saw the sub-prime crisis impact some companies dealing on mortgage. IT companies then started diversifying into other verticals, such as healthcare, manufacturing, retail and media. The diversification strategy started in late 2007 followed in 2008.”

The move began in terms of geography too. “Even in 2007-08, Continental Europe grew at the rate of 45 per cent,” says Ms. Gupta.

But there are teething troubles. Mr. Chakraborti says, “The idea of India has been sold in the U.S. and the U.K. We need to sell India first and then the services companies in other markets.” There are local vendors to be dealt with and a parochial attitude in certain markets. Language is another barrier, he adds.

“The Indian IT industry is geared in a certain way. There is a certain business model followed,” he says, which will take time to adapt to newer markets.

The manual to this change comes with an instruction on top that reads caution in bold letters. “When general sentiment is affected, people will be cautious, but it won’t be as pessimistic as it is made out to be,” says Mr. Chakraborti. For instance, recruitment, he adds, may go down from 100 to 75, but it will not be zero. “Good skills are in huge demand even today,” he adds.

Companies will focus within instead of looking outside for talent. “The model will be non-linear, with more focus on employee utilisation,” says Mr. Dhavse. This implies that there will be attempts to increase productivity while maintaining a smaller workforce.

Adoption of new technology will be marked by a precautionary principle, says Mr. Chakraborti. “In a year when there is a slowdown, new kinds of technology create problems, even if they have a cost-saving model,” he adds. But cost-saving will top to-do lists. This makes cost-effective models, such as SaaS (software as a service), remote infrastructure management, cloud computing and virtualisation technologies, as attractive options.

The year 2009 has come at a point when the Indian IT services industry is adjusting to an altered landscape. “It is going to be a challenging year. You can expect slow but purposeful growth,” says Mr. Dhavse.

Ms. Gupta adds that no one is willing to comment on 2009 because only in January, the clients would determine their budgets for technology spending.

Clients affected by the crisis will start demanding price negotiations, predicts Mr. Chakraborti.

But it is not all a tale of gloom and doom, according to Mr. Dhavse if you look at the opportunities in the Indian market. The IT industry fact-sheet released by Nasscom in August 2008, reports, “Domestic IT services spends are estimated to be growing at about 43 per cent in financial year 2008, and are showing strong signs of increasing sophistication as building enterprise IT infrastructure and applications, networking and communication become key priorities for India Inc”.

Multinational companies realise India’s potential, says Mr. Dhavse, “Globally when there is zero or negative growth, we are still growing. MNCs are looking at Indian markets to bail them out.”

For the Indian IT industry, it is a question of ploughing through the sheets of the calendar, according to Mr. Chakraborti. “When the markets turn around — they will turn around,” he says, there will be growth, but not as spectacular as before. He adds that the situation is bound to improve by the second half of 2009. The diagnosis is, he says, “a short-term of acute pain and a long-term of health.”

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