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Vipin V Nair
Krishnan Thiagarajan

Nasscom has been a highly visible face for the Indian software industry. Over the years, it has worked to get a better policy framework for the industry from the government. It has also come up with surveys that point to latent IT potential in India. With some feeble signs of recovery in the IT sector, the Nasscom Chairman, Mr Kiran Karnik, shared his thoughts with Business Line on recent industry trends. Excerpts.

From the lowered earnings guidance offered by major software service/ product majors such as EDS, Oracle and Xansa, it is obvious that the US economy and the stock markets are heading towards a prolonged recession. If this perception of a bearish view persists, do you think that a further reduction in technology spending will result in the offshore outsourcing to India being affected in a big way? What is the likelihood that by taking a bullish view, we maybe misreading the signals emerging from the tech slowdown in the US and Europe?

While it is true that we will witness reduced technology or IT spending in the US and Europe for sometime due to the recession, the interesting trend is that we will continue to see a rise in outsourcing as companies are faced with increased cost pressure. In order to remain competitive and serve their customers better, global companies will have to outsource.

A recent finding of the latest quarterly CIOs survey conducted by Merrill Lynch for the quarter ended September this year reveals that the Indian IT sector continues to make inroads in the US and Europe, with the total IT spend to be outsourced to India by the global companies set to double from the present 3 per cent to 6 per cent in the next calendar year.

From the market and business intelligence gathered by you, Nasscom has recently indicated that contract/deal sized in the July-September quarter has increased, billing rates have stabilised and first time client visits are at an all time high. Can you spell out individual cases which have helped you reach this conclusion? Have first-time client visits reached these levels because of the backlog on account of travel advisories issued in May and June, or do you see it as a sustainable trend?

Top Indian vendors are increasingly bagging large multi-year offshore contracts, which are around 300 man years. This goes to say that Indian vendors are now competing with global players for large-scale outsourcing deals. The Wipro-Lattice deal, United Utilities with

TCS, TRW deal with Satyam and Hewlett Packard deal with Patni are some instances of these.

There has also been an increased interest from customers, as we are witnessing, on an average, four customer visits in a week. While some of them could flow because of the backlog we may have had due to the travel advisories, this trend should continue, as customers are convinced about India's value proposition as an offshoring destination. We do not see any direct impact of the US-Iraq tensions but there might be some spill over effect in terms deferred decision-making or customer visits. There is always a need to address the geopolitical risk, but the industry has done well in terms of investing in disaster management and business continuity plans to address the concerns of the customer to a large extent.

Do you think that demand visibility has improved over the past few months, notwithstanding the continuing profit warnings issued by tech majors in the US? From the market intelligence and research done by you, do you think that sales/decision cycles have declined in recent months?

It would be early to comment; however, anecdotal evidence does suggest that sales cycles are declining. For instance, Wipro Spectramind has recently stated that they expect sales cycle to decline by up to 50 per cent. Another indicator is the firm quarterly guidance issued by companies which suggests confidence in size and timing of order flow. This trend is concomitant with the growing awareness of offshoring in global corporations, especially in the US.

It is a well-established fact that the first quarter (April-June) quarter witnessed the highest number of project starts by select frontline companies (such as Infosys initiating nearly 400 projects compared to 260-270 in the previous quarter). Have client ramp-ups (for existing and new clients) been taking place at a fairly brisk pace, or are they slowing down in line with overall global economic trends?

Nasscom is cautiously suggesting that the pace of ramp-up is increasing. For instance, the number of $1 million and above accounts of most companies is growing.

Till the first quarter, the growth has been volume-led for practically all the frontline companies in line with the trend in the last two to three quarters.

However, for the first time, there are indications that billing rates are beginning to stabilise. Is that borne out even in the second quarter, or do you think that sustainable volume growth alone will be the driver in the coming quarters?

Billing rates are stabilising in the $22-25 per hour range due to strong volume growth and this will continue.

Increasingly Indian vendors are also getting into new service lines such as packaged software implementation, consulting and IS outsourcing, and targeting new verticals such as retail and healthcare which will drive more growth.

Can the recruitment made by frontline majors, particularly Infosys and Wipro, be treated as a sustainable trend (that is, as an indicator of revival in demand growth)?

The high momentum in recruitment and rise in utilisation rates (70 per cent) is a good sign of growing business flowing to Indian vendors. With high interest in offshoring from customers to India, this trend should continue.

Do you think the progression of the software majors towards fixed price contracts (as opposed to the traditional time and material contracts) indicates that offshore outsourcing in India is becoming a mainstream activity? At the same time, the associated risks are also likely to go up for the industry as a whole. How do you think the industry needs to manage them?

Definitely. Vendors who enter into fixed price contracts should look at maintaining profitability by better project management and re-using existing components that they may have been already developed to maintain their competitive edge.

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