The Hindu Business Line : Tech sector sees new trends

Technology sector is witnessing new set of challenges — both internal and external— necessitating service providers to change their business plans, improve productivity and manage dollar-rupee/currency fluctuations better.

These trends may possibly lead to more consolidation in the sector. This is part of ‘polarisation’ in the technology landscape, which is poised to see more mergers and acquisitions.

While larger technology companies are better placed to insulate themselves from these changes, captives and small and medium sized services companies are finding the going tough.

The Country Head-India, Forrester Research Inc, Mr Sudin Apte, contends that these changes will mean that the captives and BPOs have to get innovative or brace up for tougher times, including closure and possible sell outs.

CURRENCY CONCERNS

Forrester does not predict currency conversion trends. However, IT services and BPO companies must gear up for a possible 5-8 per cent fluctuation in a year. The sector is faced with a challenge on how to handle fall in dollar without impacting profitability. Some address this through hedging.

While avoiding predictions on future currency moves, it would be appropriate to get better internally. However, BPOs lack this feature as they lack huge cash flows, the luxury of treasury and hedge mechanisms. The only way out is to continuously focus on productivity improvements, including next generation integrated global delivery model. For example, Wipro manages about 5-6 per cent improvement on year-on-year productivity.

Firms need to ensure there is better utilisation of resources by using the Services Automation Technology and predictability of pipeline to ensure higher skill deployment. TCS and Infosys manage this well. They need to explore non-linear ways of growth unlike the earlier model where growth was synonymous with HR increase.

RATE REVISION

Interestingly, to address this, companies are looking at rate revision and co-sharing the money fluctuation. However, some clients do not like this as all this cannot be passed on to them.

While the HR numbers grow, some companies have mentioned about reducing intake by about 5-6 per cent. In this aspect, small firms with single digit growth are worst affected. So is the case with captives and call centres. Unlike offshore entities, for whom HR costs could be around 30 per cent, captives often bear the entire cost.

These scenarios could lead to Polarisation which Forrester talks of. Struggling mid sized companies will be forced to sell out, Mr Apte explained.

US MORTGAGE IMPACT

For companies with significant exposure, they will be in trouble but this does not impact the financial services in general.

This would mean companies would have to de-risk and strengthen their market facing front end. Mere branding and logo change alone would not help.

The gap between top three IT companies and the other $3-billion companies is widening. They need to look at this aspect seriously. Rather than increasing the spread, the focus should be on growing some verticals into $1 billion units.

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