Software buoyancy

The results of Indian information technology (IT) services companies announced so far testify to one thing: the robustness of the industry’s basic business model. For all the scrutiny that domestic software companies have invited in recent times, their core operations — centred on application development, maintenance of IT systems and other outsourcing services — have exhibited a continued resilience. The top three — TCS, Infosys and Wipro — saw their annual revenues go up between 16 and 30 per cent in rupee and 6.4-16.2 per cent in dollar terms. This wouldn’t be bad in normal times; in these difficult times, it is excellent. Their net profit margins averaged over 21 per cent in 2013-14, which not many industries can dream of after more than two decades of existence. TCS’ consolidated profits after tax of ₹19,117 crore for the fiscal were not significantly behind Reliance Industries’ ₹22,493 crore, despite a turnover that was not even a fifth of the latter’s. Also, it isn’t just the top three; HCL and mid-tier firms such as Mindtree and CMC have also done well.

Two things are at work here. The first is that the business of designing and building software applications or managing the IT infrastructure for large multinationals has not suffered any huge dent, even in an uncertain global macroeconomic environment. Clients in North America and Europe may have cut down on ‘discretionary’ IT spends, but they still need to keep existing systems running. To the extent these routine application development and maintenance operations are outsourced or off-shored, Indian IT firms, with their massive, relatively low-cost engineering workforce, will continue to get business. The pressure to outsource as a cost-saving measure is, indeed, higher in a general downturn. This explains why Indian IT exports rose by 13 per cent in 2013-14, despite worldwide IT spending clocking a niggardly 0.4 per cent growth. With technology research firm Gartner projecting that global IT budgets will grow by 3.2 per cent this year, the outlook for domestic software vendors can only get better. They could benefit both from an expansion of the outsourcing pie as well as revenues from more ‘discretionary’ sources such as product engineering, testing, package implementation and consultancy services.

The second aspect relates to the industry’s own efforts at reworking internal cost structures. This has involved not just controlling salary increases, but also emphasising productivity and better utilisation of human resources — by reducing ‘bench’ staff not assigned to active billable projects and engaging only specialised staff (as opposed to entry-level hires) for onsite jobs. Besides, there has been an increased focus on Europe as an outsourcing market to insure against a possible tightening of US immigration laws. These proactive measures, without significantly changing their basic outsourcing model and sacrificing profit margins, have helped IT firms weather challenges. Other industries should follow this lead.

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