The Hindu Business Line : Where do we go now?

Slowdown in several industries. Individuals at senior levels leaving IT companies. Small-sized companies looking for opportunities to merge with like-sized ones... Why is all this happening together now? Is there something cooking? eWorld tak es stock of the IT scene.

VIVEK Paul, Raman Roy and Richard Garnick from Wipro, Hema Ravichandar and Basab Pradhan from Infosys, Ravi Ramu and Anand Mutalik from MphasiS BFL, Tiger Ramesh, Jessie Paul and Anu Sharma from iGate Global, K Krishnam Raju from VisualSoft Technologies, Mohan Krishna Reddy from Infotech Enterprises... .

Sounds like a roll-call of honour? Sure it does. It is also a list of folks resigning (or wishing to resign) from prominent positions in Indian software companies.

Interestingly, most of these people are not leaving to join hands with competing organisations.

They are either becoming entrepreneurs in the same field of software solutions or are getting into entirely new areas as news reports would already have told you.

This made eWorld think a bit. Is this a sign of things to come? Why are these professionals leaving secure, rewarding positions? Granted the desire to explore new boundaries is keen amongst those who make it to the top quickly.

But is it more than just coincidence that the adventure bug bit all of them at more or less the same time?

And it is not these high-profile resignations alone that intrigued us. We found that in the last few months, mergers and acquisitions in the software services arena have gathered momentum.No, not the ones put through by the top-rung companies — such as Satyam's recent acquisition of Citisoft and Knowledge Dynamics or Cognizant's of Fathom Solutions or Patni's acquisition of Cymbal late last year.

But look at the surge in sell-outs by Indian promoters of third-rung software companies.

Take, for instance, Pawan Kumar, former President of IBM, selling out his company vMoksha to Helios & Matheson or B.V. Venkatesh, former CEO of BFL, allowing Majoris Systems, a firm founded by him in 2000, to be acquired by French-headquartered Valtech or Chandra Kumar and his team ceding their equity stake in Linc Software to MindTree Consulting.

Is it a vote of lack of confidence or are some fundamental changes afoot in the industry?

Are these people, putting in their papers, beginning to see that the quantum jump that happened between 1999 and 2005 may not be easily replicable?

That despite their having proved the global delivery model is workable from India, it cannot be easily broad-based to other low-cost geographies such as the Philippines or China or East Europe?

Vivek Paul seemed to exhibit this train of thought when, post-resignation from Wipro, he said, "So far, Indian IT companies have dominated the Indian radar. Not so in future. The likes of IBM and Accenture will do as much or more... Exports of items manufactured in China by US companies investing there exceeds exports by native Chinese. The same will happen to India."

The pressure points

Put these high-profile exits in context with events in the global scene, especially in some key verticals. The automotive industry is slowing down in the US.

As a supplier to the likes of GM, Ford and Toyota, TRW has had it a bit rough.

Its CIO, Joe Drouin, recently told eWorld that the slowdown did have its impact. "We had to fight steel price increases and the slowing down of orders by car makers."

On the IT budget front, he said, "It has stayed flat and am hoping it will continue to stay flat." There was no talk of increasing budgets!

The semiconductor business too is starting its next cycle of a slowdown, though it may not be as traumatic as the last one.

As early as 12 months ago, Milind Gandhe, General Manager, strategic planning, Sasken Technologies, feared a slowdown in this sector.

At the time, he had said, "I am concerned about the semiconductor business. There could be a cyclical downturn in the second half of 2005.

Capacities tend to get built and then used up. Now there is a lot of capacity being built. Once that is over, utilisation would be low and prices would fall.

That would affect spending in R&D. We have seen large capacity expansions in the last two quarters. In the next 5-6 quarters, you could expect semiconductor prices to drop. Growth rates would slump and outsourced services would feel the impact too."

This was also reiterated in the latest public offer document of Sasken, which stated that, "the semiconductor market will post little revenue growth for the next two years, as the factors that drove strong growth in 2004 will dissipate."

And on the retail vertical too, some spending slowdown is beginning to be seen, despite the hype surrounding RFID (radio frequency identification) technology and its enormous potential for the Indian offshoring story.

On the geography front too, all is not hunky-dory with the industry.

The European geography is sending out mixed signals for the biggies and second-rung players.

While the biggies such as Infosys, TCS and Wipro claim that the next phase of growth will come from Europe, extending well beyond the UK and Germany, the recent experience of some of the second-rung companies has not been all that encouraging.

Hexaware Technologies and KPIT Cummins recently revised their revenue guidance downwards, citing delays in IT spending and internal reorganisation among their European clients. Is this just a one or two-quarter aberration or a trend? It remains to be seen.

In this backdrop, eWorld decided to sound out players to see if there was any pattern to this jigsaw puzzle.

Why were individuals going their separate ways? More importantly, what are companies — those that these new entrepreneurs are starting up and existing ones — doing differently from the past?

An insight into three themes could give us answers to all those questions above. These themes, which have resonated in the industry since 2001, are probably falling into place for the first time. Why now, than at any time in the past?

As the high-profile exits and acquisitions suggest, the need for innovation has never been more acutely felt by the industry, as much for the biggies, as for the second and third-rung companies in the software value chain.

Productivity leap through productisation

Following the meltdown in the global IT and telecom industry in 2000, Fortune 500/Global 1000 clients took to offshoring in a big way to capture the cost arbitrage potential.

Since the initial years, however, most of these customers have stayed wedded to the offshoring wave for the quality of services offered by the Indian companies.

Be it SEI-CMM or Six Sigma or BS7799 or PCMM or eSCM or COPC or such other arcane certifications, Indian companies have offered their clients these and more.

But companies are beginning to realise that these quality certifications are no longer a differentiator and unless they innovate, both their revenue and margin growth will get eroded, sooner or later.

S. Ramadorai, CEO of India's largest IT software services company, TCS, says that they are deliberating whether revenue generation from the offshoring model linked to mere growth in employee numbers is a sustainable one.

Keeping this aspect in view, he added, "asset leveraging and productivity improvement are two key things for us."

The industry has reached the inflection point where this mindset change is slowly beginning to happen.

The realisation has dawned that innovation through productisation of application development and management alone can help the industry grow and protect its margins.

And productisation is bound to take the form of tools, frameworks and project methodologies, akin to an assembly line in automobile manufacture. In other words, work done once in coding a piece of software need not be replicated but the vendor could reuse that piece.

One only wonders if these will be built or developed by small companies, led by the high-profile names that have worked with the biggies, or within the software factories of the biggies themselves.

Pricing model changes

Just as productisation can shakeup the application development/maintenance segment, the traditional pricing model that has worked around time and material contracts (and to a lesser extent, fixed-price projects) may also undergo a change in the coming years.

As software services get meshed with IT-enabled services, clients and offshore vendors will begin to leave their comfort zones and experiment with the transaction-pricing model.

Among the biggies, HCL Technologies recently claimed that it is gradually moving towards value-based pricing.

Explaining the rationale, Vineet Nayar, President, HCL Technologies, says, "For long, the Indian IT software industry has priced its offerings based on the effort and time it took.

Now, revenues based on a customer's success or business benefit will increase in proportion to overall revenues."

Of HCL Technologies' $750 million of revenues, about $100 million comes from contracts with such pricing.

Giving an example, he says, "If we work with an insurance client, for example, instead of pricing just manpower used and time taken, we would get a certain fee per policy. So, we go up or down with the business volume of clients. There is a certain risk involved.

But because of efficiencies we would bring in through automation, we would get higher revenues. So, that risk is mitigated."

iGate Global, led by Phaneesh Murthy, is also working on popularising the transaction-based pricing model.

Using what it calls an ITOPS (or Integrated Technology and Operations Model), iGate is already offering transaction-pricing contracts for its financial services clients.

Though the company has bagged a few orders using this pricing mode, Phaneesh Murthy admits that clients will be slow to catch on, as their understanding of this model is quite superficial at the moment.

Niche positioning with scale

Second-rung software companies, which have focussed on one or two verticals, have realised that niche positioning alone will not help them survive.

Given the widening gap between the revenues of frontline and second-rung companies, they are also working to enhance their scale or size to grow within their defined niche.

The flurry of consolidation that has recently happened within the third-rung companies of the likes of Helios & Matheson-vMoksha, Mindtree-Linc Software, Valtech-Majoris, Aztec Software-Disha Technologies is probably a precursor to a similar trend among second-rung companies.

Considering that a few third-rung companies have already raised the competitive bar, the possibility of consolidation across the second-rung companies, say, either between two Tier-II companies or between a Tier-I (be it global or Indian company) and a Tier-II company, is set to rise.

maverick@thehindu.co.in

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