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Indian IT services vendors see no slackening of pace on the US tech highway for now, despite talk of a possible slowdown or the emerging political scenario.

Vishwanath Kulkarni

At this point of time, almost all the top-tier vendors are chasing over a dozen deals on an average, with sizes in the $50- 100 million range.

There's so much fog on the windscreen that driving is very tough." So said Infosys Technologies' Chairman and CEO, N.R. Narayana Murthy, announcing quarterly results post-9/11 in 2001, when the downturn had set in, in the US, the largest IT market.

Five years later, when concerns are being voiced in several quarters over a possible economic slowdown in the US, the IT services vendors in India are sounding pretty upbeat about the future outlook as they continue to clock growth rates in the 30-50 per cent range.

The language used by IT managements in recent post-earnings calls has been full of optimism, in sharp contrast to the apprehensive and pessimistic comments one heard half-a-decade ago.

So, what has changed in the past five to six years?

Dominant offshore destination

Definitely, outsourcing has become mainstream and India has clearly established itself as a dominant offshore destination. Add to this, Indian vendors have scaled their operations, broad-based their offerings in terms of adding new and high-end services, such as consulting, testing and business process management and are better placed to absorb shocks of the likes of an economic slowdown.

During the 2001 slowdown, US customers slashed their discretionary `non-mission critical work' budgets substantially, which in turn impacted the Indian vendors heavily. Discretionary spends were mainly on projects relating to bug fixing, feature enhancement and product engineering, among others.

"After that, what took off was critical IT offshoring, where budgets could not be slashed," says Avinash Vasistha, CEO and global managing partner of Tholons, an investment, advisory and management firm.

"Offshoring has become a significant avenue to cut costs and customers have accepted that IT outsourcing has to be predominantly offshore."

Of the estimated annual global IT spend of $450 billion, approximately $20 billion is outsourced to India at present, resulting in a huge gap, says Vashistha. "This gives room for more companies to outsource and offshore," he adds.

Cost advantage holds good

Outsourcing and offshoring especially to countries such as India offers a very compelling proposition for global corporates who can get their IT development and maintenance done at one-fourth or one-fifth of the costs in the US.

Despite rising wages in India, which are seen growing at 15-18 per cent annually, the cost advantage still holds good.

"Even in case of a slowdown, while the IT budgets of US firms may stay flat, the pie that's being off-shored is expanding, which should significantly benefit the Indian vendors," says Eugene Kublanov, Managing Director and Chief Operating Officer of neoIT, an IT advisory firm.

Moreover, the fact that cost benefit gains precedence over external influences such as economic slowdown or changes in the political scenario seems to be well-established now.

The Indian IT industry is unruffled by the recent success of the Democrats in the run-up to the battle for White House. The momentum gained in the services globalisation is expected to remain strong ahead of the forthcoming US Presidential elections, industry experts say.

The run-up to previous elections in 2004 did see a rise in anti-outsourcing rhetoric and the Democrats did bring about certain legislations to prevent outsourcing of federal work.

The rising rhetoric last time was mainly a fallout of the worsening employment situation then, industry sources say.

"Business in the US goes independent of who is in power. Even if there is rhetoric, it won't have any impact on the market this time as offshoring and outsourcing, which was a new phenomenon a few years ago, is now accepted as part of the package," says Siddharth Pai, partner of TPI, an advisory firm.

Deal pipeline

Interestingly, Indian IT vendors, especially the Top Tier firms, never had it so good, especially in terms of visibility where deal pipeline is concerned, which in turn has prompted companies such as Infosys, Satyam and Cognizant, among others, to raise their full year-outlook.

At this point of time, almost all the top-tier vendors are chasing over a dozen deals on an average, with sizes in the $50-100 million range. While TCS, Infosys and Wipro are chasing about a dozen deals, Satyam is chasing over two-dozen deals and the companies are in various stages of the bidding process.

As outsourcing gains momentum, IT services vendors are seen compelled to stretch their employee utilisation levels to service the increased order flows. The scramble for experienced staff is further compounding the problem.

In a bid to meet sudden order flows, IT services vendors are seen proactively talking about having a strategic bench now. Companies such as Infosys and Cognizant, among others, are looking at building a strategic bench.

Further, the dynamics of the global outsourcing market itself is undergoing a change. The billion-dollar mega deals that one witnessed over the past couple of years seem to have vanished as companies prefer to split the deals into smaller pieces and processes, and prefer to go with multiple best-of-breed vendors.

TPI report

If one goes by the recent quarterly TPI Index, which tracks the outsourcing deals, the effect of the US `slowdown' seems to have begun to reflect in the deals emerging from the region.

The TPI Index reveals that the size of the global outsourcing market has shrunk for the first time in the third quarter of 2006, considered worst for outsourcing deals since 2002.

The TPI report said Q3 2006 saw a decline in contracts by volume and value for the same quarter last year.

However, Pai says, for Indian vendors, this development is not a cause of concern as they continue to grab market share in challenge to traditional multinational players. Indian vendors have gained market share and currently possess about 25 per cent of the ADM (application development and maintenance) market value.

"There's no impact of the slowdown seen on the Indian firms and the next 24 to 36 months look good for them," says Pai.

"The value of offshore is recognised and clearly established today," says Atul Nishar, chairman, Hexaware Technologies Ltd.

"There are no signs of any slowdown and we see a clear growth with a large number of clients," says Nishar.

Illustration: P. Manivannan

(This article was published in the Business Line print edition dated November 20, 2006)
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