Risk-averse IT clients may find ‘familiar’ comforts in India

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Short-term breathing space for Indian IT cos.

In times like this, predictability is very important, and the comfort of companies with India is very high. – Mr S. Gopalakrishnan, CEO, Infosys

Shamik Paul

Bangalore, Nov. 2 Contrary to expectations, the economic downturn could actually help the Indian IT industry in the short term. The industry is not only under pressure from a slowing business environment but also due to rising competition from other emerging IT destinations.

Crisis-hit customers would prefer to offshore work to India, which is already a proven offshore destination, rather than to other emerging IT destinations such as Latin America or South-East Asia, industry experts said. Risk-averse clients prefer to work with known vendors rather than make fresh investments in newer geographies. However, it is not clear to what extent this would benefit India.

“People are very risk aversive, and in a climate that is challenged, they would send work to known destinations,” said Mr Sudin Apte, Senior Analyst and Country Head, India Operations, Forrester Research Inc.

“I think this is a benefit for India in a way. It would give them breathing time for the next two years or so,” Mr Apte added.

Limiting costs

At a time when most clients have less money to spend, keeping a curb on the cost of transaction becomes very important. “Offshoring to new destinations would include reviewing and auditing and that would increase the transaction cost,” said Mr S. Gopalakrishnan, Chief Executive, Infosys Technologies Ltd. In times like this, predictability is very important, and the comfort of companies with India is very high, he added.

Investments needed to start operations in a new geography are also working against the emerging destinations.

Investments could either mean setting up a captive unit or engaging with a third-party vendor.

“Some of our clients are hesitating in evaluating new geographies mainly because of this business challenge,” said Mr Vinu Kartha, Principal, Tholons Consulting, an offshoring advisory company.

If they have operations in India, they would ramp-up the existing presence in India rather than go to a new destination for the work they are already doing in India, Mr Kartha added.

“In the next 6 to 8 months, this could be a breather for the Indian IT companies,” said Mr Chandramouli, Engagement Manager, Zinnov Management Consulting Pvt Ltd. He said clients are more comfortable with existing vendors. They are postponing decisions, and any decisions taken are to do with expansion with Indian service providers, he added.

However, many feel this is a short-term phenomenon, and the long-term plans of offshoring work to other geographies will not be impacted. “Long-term sentiments have not changed,” said Mr Kartha. It would not stop the flow of work to the new destinations. Clients have a 3 to 5-year horizon. It is a short-term phenomenon, driven by investment constraints, he added.

Mr Nikhil Rajpal, Principal, Everest Research, said people go out of India as part of the de-risking policy. Therefore, if the growth in business is less, the need to diversify will be less.

But it will not make a material difference for the Indian vendors, he added.

Mr Chandramouli said that in the long term, the companies will not take a bias. New locations will emerge if they gear-up to meet client requirements, he added.

Related Stories:
Of slowdowns and blind IT budget cuts
Tech sector growth to drop sharply: Forrester

(This article was published in the Business Line print edition dated November 3, 2008)
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