The Hindu Business Line : So near, yet so far

Indian vendors have been expecting big business from the government sector. Tata Consultancy Services, for instance, is eyeing about $1 billion revenue from government contracts in three years.

But though the sector is emerging as one of the largest IT spenders globally, high entry barrier, importance given to prior work with governments while choosing vendors, and lower margins, are some of the factors that might make it difficult for Indi an vendors to tap a significant share of government opportunity, argue analysts.

Quoting IDC figures, analysts at Edelweiss say that in 2008 the worldwide IT spending in the government vertical was $169 billion and has grown fastest at 6.4 per cent compared with other verticals. Further, IDC expects that spending in this sector would increase the fastest (CAGR of 5.5 per cent over calendar year 2008-12,) the analysts say. “We note that a substantial portion of the total government IT spend (50-55 per cent) is on software services,” they add.

The vendor selection process for most government projects is request for proposal (RFP)-driven and has pre-conditions such as requisite certifications for even participation, and high priority is placed on prior work with government, the analysts say. Therefore, to qualify for bidding in government projects outside India, an inorganic move ( HCL Tech through Axon) enables one to enter and kick-start operations. Also, vendors need to have a well-trained sales force intimately familiar with the working methodologies and procedures of governments. In this the Indian vendors are still far behind. Only TCS (due to its acquisition of Pearl BPO in 2005) and now HCL (through acquisition of Axon), have made some progress, they say. “We expect other Indian vendors to start working with governments through the healthcare vertical, which could serve as a platform to get into core government work,” they point out.

There are other risks of working with governments. To begin with, almost all government projects are fixed price, which increases the inherent risk for the vendor. Further, delays, uncertainty of completion and modification in scope of work could affect the project’s profitability to a great extent.

Also, governments usually have the right to change the scope of projects or terminate projects for lack of approved funding at their convenience. Moreover, the government contracts require more extensive scrutiny and publicity than contracts with commercial clients, which require additional resources, the analysts say.

To be successful in targeting public sectors and defence customers, vendors should focus on aligning their sales approach with longer sales cycles of government and defence customers, building local sales team familiar with government processes and acquire certification required for participating in government and defence RFP process.

The vendors should also shift to a transparent cost-plus pricing model, given the pressure on governments to get the lowest pricing, and decide an onsite mix based on security and proximity needs of governments. They should also invest in developing relationships with local players focussed on defence and government deals, the analysts add.

shamik@thehindu.co.in

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