‘Growth rates of 2003-07 are a thing of the past'

The ever-changing landscape for Indian software services players means that interesting trends emerge from an IT outsourcing perspective.

Mr Sid Pai, Partner & Managing Director, TPI, throws light on these and the way forward for Indian software service providers during the course of a conversation with Business Line.

Excerpts from the interview:

Will it be a repeat of 2008 for the Indian IT industry? What is the outlook for outsourcing?

In 2008, there was a general ‘shutdown' as it were. Along with the financial crisis, we had events such as the near collapse of GM and so on. So the financial contagion spread to other sectors as well. This is not happening now.

The downgrade of US sovereign debt rating is just a commentary on the state finances and nothing else. From an outsourcing perspective, we have not seen any reduction in the pipeline. We feel there will be no early closure of projects for the next six-nine months.

But we are beginning to see some weakness in the second calendar quarter of this year. But much of this has to do with seasonality. It is also due to the fact that some of the contracts that have come for re-negotiation or were going to be renewed had slowed down, which we knew was coming.

In so far as there is reduction in the cost for an existing platform, clients will continue to consider outsourcing. There is a second wave of outsourcing, with some Fortune 500 and global 2000 companies considering outsourcing for the first time.

But, overall, we will not get to see the growth rates in IT outsourcing we saw in 2003-07. It is a thing of the past. It is a maturing market.

We have seen mega deals dry out over the past couple of years. Has there been a paradigm shift in clients' strategy of structuring large contracts?

Large deals have died out. This happened even prior to 2008. To illustrate from a TPI standpoint, seven-eight years ago, we were advising on contracts worth $25-30 billion annually in TCV (total contract value). That was done over roughly 30 transactions. So, on an average, it translated to a billion dollars a deal.

Now, we still advice on $25-30 billion annually. However, the number of transactions is 120-140. At a micro-level, we see that the $200-300 million deals are still a preserve of the global MNC players such as IBM.

In such large deals, even when they come up for renewal or re-negotiation, 89 per cent of the time, the incumbents get the contract. So even though Indian majors compete, such deals tend to go to global players.

Then, there is an entire $50 million-minus deal, which is a space that is almost completely owned by the Indian service providers. By a ‘penetrate and radiate' strategy, they gradually build good relationships with these clients. Now, the true battleground is in the $50-150 million deal space, which is what the average deal size is today.

How has vendor rationalisation affected the top-tier IT players?

Vendor rationalisation is actually not what most people think it is. To give you an example, one of our clients recently found that it was working with over 400 vendors! Apart from the usual suspects — IBM, Accenture, TCS, Infosys and others — there were also several ‘mom and pop' players with two, three or 10 people, and so on. It is this segment that is being taken out.

Rather than dissipating their buying power over so many vendors, clients are looking to concentrate it to about six players. It is the long tail that is being rationalised, not the cream.

Why are higher end services in larger deals awarded to MNCs? Is this likely to change?

The heritage and delivery model has a lot to do with the nature of deals won. Our Indian service providers are mostly focussed on low-cost destinations. They have built capabilities mainly in low-cost offshore destinations. For example, TCS has large capabilities in Brazil. But have they hired 5000 delivery people each in the US or the UK? No.

Forget consulting, even some simple technical work can at times be done only with local presence. Obviously, that would mean lower profitability, which is why Indian service providers are not doing it. Cognizant, Infosys, Wipro or TCS all have bulk of their workforce in India.

Higher-end services such as consulting, advisory etc will require significant local presence. So, Indian service providers cut themselves out of such deals.

Margins of 28-29 per cent are unthinkable in the global context! At some stage, the penny has to drop and they have to globalise their workforce, if they are to climb the value chain.

Will BFSI still be driving growth going forward? Telecom still seems in trouble and will the manufacturing segment continue to grow further?

BFSI will always be the biggest spender and consumer of IT services. Based on interest rate cycles, they step up and step down. So it tends to be lumpy at times. But the cycles are also shorter.

So the same bank that has fired 30,000 people will do a large outsourcing contract or hire 50,000 people within 24 months!

The investment cycles of telecoms are typically longer. It is around seven years, based on technology changes. Right now, we are seeing a down cycle, but we see it coming back in two-three years time.

It will be driven by computing on a mobile platform, devices such as tablets, and so on. Investment will happen from both equipment manufacturers as well as carriers. Semiconductor manufacturers would see a slower revival — they have a 7-10 year investment cycle.

In manufacturing, apart from the work done in Germany, which always has a technological edge, other services have become commoditised.

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