The Hindu Business Line : Time to catch up

India is shining. And shiny things catch attention. Indian multinationals are peeling their eyes away from the allure of North American and European markets to the sub-continent.

Even as global giants such as IBM, HP and Accenture boast of their Indian deals and pump in investments into the country, industry experts tut-tut that Indian IT multinationals have missed the bus, or, at the very least, been set back by a few years when it comes to the domestic market.

Indian IT services firms are being widely acknowledged for their performance on global ground, being hailed as `outperformers' and `formidable competition'. Gartner's report on TCS, Infosys, Wipro, Cognizant, Satyam and HCL Technologies revealed that they accounted for 1.9 per cent of the total IT services market in 2006, up from 0.5 per cent in 2001. But Infosys' India business dropped in the last quarter to 1 per cent. Wipro Infotech, the India, Middle East and Asia-Pacific IT business unit of Wipro Ltd, claims that the domestic market contributes to 90 per cent of its revenues. The unit's contribution to Wipro Ltd in the half year of fiscal 2007 stood at 18.7 per cent. India contributed to 9.4 per cent of TCS' $4.3 billion in fiscal year 2007, and is now hovering between 8 and 9 per cent.

The Bharti-IBM deal was the first marquee deal that made everyone in the industry do a double take. FMCG major Dabur going with Accenture and Bank of India with Hewlett-Packard confirmed the fact that global MNCs were ruling the domestic market roost. The Bangalore-based food business Britannia chose HP and the Government of Karnataka awarded its e-governance project to the company.

For IBM in India, the growth is stupendous. "Compared to Brazil growing at 19 per cent and China at 14, our India division is leading the pack with 42 per cent growth in the January to June period," says Sandip Patel, Partner, IBM Global Business Service. "We made a conscious decision to pursue India as a market and have invested in making our centres here a microcosm of our global organisation," says Patel. After Idea Cellular, CEBT, Delhi International airport and Karur Vysya Bank, the IT behemoth is now creating a health superhighway with the Apollo group. "The project is under way, in keeping with market research," he says. Healthcare will be the fastest growth subvertical in the public sector, according to analyst firm Springboard Research. The highway will connect 150 hospitals. "It is a very India-relevant project as our health system is still evolving," he shares. Integrated solutions for microfinance and retail markets are also on the anvil. "Our future is a very healthy pipeline of deals. We will double our growth by 2010," he says.

HP has 30 deals of various sizes in India and its business is growing fast, says Marshal Correia, Director, Outsourcing Services, HP India. The five-year contracts with Andhra Bank and UCO Bank and the collaboration with Infosys for the United Bank of India deal are the jewels in its portfolio. The $100.5-billion enterprise is investing heavily in its global delivery centre, and in tools, processes and people.

WIPRO, INFY AND TCS

The second largest software maker Infosys has formed a separate business unit to focus on India and tap the growing domestic market. "We have been exploring India for the last couple of years and we thought that we need to bring in a renewed focus to India and that is the reason why we have created an independent business unit," said the chief executive, Kris Gopalakrishnan, at a press conference recently. The company is yet to announce the head of the unit. The company expects the India business to become significant - contribute over 5 per cent - in the next five years.

TCS, which has won seven deals since the beginning of this fiscal (April, 2007) says India has been and will continue to be a key market for it. "We have seen sustained demand for our service offerings in the domestic market in the past," says a spokesperson. From HDFC Bank to Reserve Bank of India's Public Debt Office to the largest core banking solution implementation in India for State Bank of India, TCS has a sound portfolio of domestic clients. It recently bagged a $140-million deal from Bharat Sanchar Nagam Ltd (BSNL). This multi-year engagement involves setting up of complex data networks across the vast BSNL footprint in North and West of India and includes deployment of Operational Support Systems (OSS) and Business Support Systems (BSS) components such as customer relationship management, billing, mediation and directory enquiry, among others. Wipro Infotech has won 10 outsourcing contracts in India over the last two years. Two top ones were HDFC Bank and Dena Bank, both decade-long projects worth approximately $80 million and $60 million, respectively. A third similar-sized deal was not disclosed. Colgate Palmolive, Sanmar and Optimix are other deals bagged. Wipro will provision IT infrastructure for HDFC Bank and handle total outsourcing of Dena's core banking operations over a 10-year period. Other clients include BSNL, ITC, Indian Oil and UB Group.

"Given the IT market investments and growth rates, India is clearly identified as a priority market for us. We clocked about $650 million last year in India in gross sales. We are growing twice the market and we have strong senior management talent dedicated to the domestic market," says Suresh Vaswani, President of Wipro Infotech. He takes pride in that despite the presence of global counterparts, "we were adjudged by independent market research as the fastest growing domestic IT solutions provider in 2006-07."

According to a recent media report, the company holds strong in the infrastructure space and is the largest Network Integrator in India. "We are the largest system integrators in India for pretty much most of the global technology innovators, e.g. Cisco, Nortel, Microsoft, SAP, Sun. Our ability is in combining the best of both worlds - knowledge and experience gained from global IT deployments as well as deep knowledge of the Indian environment gained through 27 years of focus on this geography." TCS claims its project management capabilities, large and complex mission-critical projects execution capability and global experience give it the success. Indian customers, like their global counterparts, are extremely demanding, shares TCS. The Indian giants are on a spree, and the current leaders of the domestic services market are cautious. "Our competition - Infosys, Wipro and Accenture - have had a limited focus on Indian market. But this has changed recently and we are watchful," says Patel of IBM.

WHY INDIA? WHY NOW?

The country's scorching economic growth, with 8-9 per cent gross domestic product (GDP) and sudden rise in investments in almost all sectors of the economy - from telecommunications, oil and gas and defence to the booming financial services, retail and real-estate verticals - are drawing attention. Businesses are leveraging IT for transforming and differentiating themselves through efficient operations, superior customer service and ability to launch new products and services quickly. This has made India a key attraction.

Indian enterprises are investing in significant business transformation initiatives to achieve global competitiveness, and IT is proving to be a key lever for the same. "A few years ago, only multinationals in India were our clients. But now the number of Indian clients is on the rise," says Marshal of HP. Infosys says, "We want to definitely grow the Indian market, of course it is a natural hedge for the appreciating rupee. India and China are large economies that are growing fast and we want to make sure that we have a play in them. As a global company, we must. Last, many of our multinational global clients are entering India in a significant way and we want to support them in India." The company expects financial services, telecom and manufacturing to be the drivers of growth of the domestic market. "Retail could also give explosive growth," according to Gopalakrishnan.

The total domestic spending on outsourced IT services across service lines that include IT Consulting, System Integration, Application Development, end-to-end Outsourcing, Maintenance and Support, and IT Education and Training is expected to reach Rs 23,800 crore by 2009, according to analyst firm IDC. Partha Iyengar, vice-president, analyst and regional research director of Gartner, says the low priority of domestic clients to Indian MNCs has been a major concern area for the domestic industry over the past few years. "It's heartening to see that the view of India as a domestic opportunity has recently changed. This bodes well not only for India but also for the longer term prognosis for service providers. Infy's staunch anti-domestic stance has now changed. Leading service providers will be able to compete more aggressively now. The challenge will remain - initial public posturing is fine, but we will need to watch if the best resources are being put to work here or will India be a training ground for opportunities elsewhere," he says.

DEALS - NOT MEATY ENOUGH?

MindTree's Krishna Kumar, president and CEO of its IT services business, says, "Deals have changed - the flow of demand is now at the same level as global. Two years ago, it wasn't as good. India's demands and potential is now global." He agrees that the pricing realisation is still low, but the lowered sales expenses help. "An overseas sales expertise costs $200,000, but here, sales expenses are low. Removing the overseas cost component drops the SG&A expense for selling to Indian clients," he says.

Infosys counters with, "For revenues earned in India we will have to pay income tax and we get STP relief for revenues earned outside India which is delivered out of India. So we need to make slightly more margins to get the same amount of bottom line. The Indian market is also quite different from other regions. Companies are not buying discrete services but a business solution. Adoption of newer things is also much faster."

In a market like India, replied the TCS spokesperson when asked how the firm combats the low profit from domestic deals compared to global ones, the key is to select deals, primarily mission-critical engagements, that help maintain margins.

But IBM declaims that it is a misconception that Indian deals are not up to global standards. "It is not the size of the deal that defines a global deal," feels Patel, adding that the Bharti project was large even by US standards. Many outsourcing deals from India rank among the largest in the world. "Currency arbitrage has been a predominant driver for outsourcing firms. Only now are they recognising their short-sightedness when it comes to winning deals in their own backyard. They have to focus on volumes, then there is scope. As IT spend increases, projects will flow in," adds Partha Iyengar.

"The nature of deals here is different. While global servicing deals are primarily to remove cost and are based on legacy systems, Indian clients are outsourcing IT more as a transformational need rather than cost. New applications are also invited," says Correia. There has been an uptake in overall number of projects this year as well as different types - be it strategic outsourcing, selective outsourcing or `outtasking' and just consultancy or service integration services. The services market here has been growing rapidly in the past two years.

THE TIER 2 ADVANTAGE

The domestic software and services market has been dominated by MNCs with Indian firms gradually gaining ground. However, Nasscom expects that, over time, this could become a larger SME play. As IT adoption increases amongst small and medium businesses, the opportunities for small and mid-sized IT service providers will proportionally rise. Technology innovation, adapting remote delivery model to previously unexplored business processes, architecting business process management solutions and exploring new business models to tap unexplored segments will give the smaller players the edge.

Krishna Kumar of MindTree says what will be needed is not only the capability to execute but also the on-field approach. "In sales and maintaining relationships, we have an edge over the multinationals," he says. The Bangalore-based MindTree has always focused on India. "Domestic market has been our strategy since 1999, when we began operations: 4 to 5 per cent of our revenue comes from domestic clientele." The company services ING Vysya, private banking major ICICI and Hindustan Lever.

FUTURE IS SHINIER - GOVERNMENT SHOWS THE WAY

While traditional sectors such as banking and financial services, insurance and telecom will continue to boost the service providers' top line in the future, the providers also expect spending in verticals such as retail, travel, healthcare, automotive and government to accelerate in the near future. The traditionally tech-averse public sector behemoths are also changing.

According to Springboard Research's recent study of public sector technology spending, India is the fastest growing market in the region with the market forecast to grow at a compounded annual growth rate of 19.5 per cent through 2010."There was a point where the public sector did not invest in IT services," agrees Patel of IBM. But the government now wants to get more advanced and offer more citizen services. The propensity to invest has increased, he says. "New business models and entrepreneurs who harness the local demand - low-cost airlines, retail chains, mobile telephony and micro financing are also emerging," says Wipro's Vaswani.

"There is an emergence of a vibrant midmarket - enterprises that are currently small but growing rapidly and are investing in emerging segments. These organisations are investing in IT to get efficiencies and drive a better customer experience," he says.

MindTree's Krishna Kumar says the domestic market will grow in line with increased IT deployments and that more Indian organisations are getting sophisticated and global. "When people get into a mindset of deploying technology, the market will rise."

In certain verticals, IT is being used to reach out to new markets, explore channels and to beat competition, says Correia of HP, adding that more firms in India are making the decision to focus on their competency and look at external help for managing IT.

TCS chimes in with, "With domestic companies increasing their expenditure on technology, we see huge potential in the market in the years to come." The market has evolved, has opened up. Global awareness has changed India, adds Patel of IBM. The whole environment has matured and companies are looking at services separate from hardware and software, and significantly large contracts in the services space, adds Gopalakrishnan.

The Indian IT market was at $12 billion in 2006 and is expected to grow at 22 per cent in 2007. In the next three years, it is expected to grow at a CAGR of 17 per cent, making it the fastest growing IT market in the Asia-Pacific. The worldwide services market is estimated to grow at 6.3 per cent between now and 2011, according to a July 2007 report by Gartner.

The potential is obvious, and the tussle will be a sight to see.

preethij@thehindu.co.in

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