India turns east for more tech success

Indian outsourcing companies are facing stiff competition from other low-cost markets like Mexico, Philippines and Ireland, compelling many to consider rejigging their business model and exploring new geographies to sustain double-digit growth.
Engineering recruits at the Tata Consultancy Services training centre in Trivandrum.
Engineering recruits at the Tata Consultancy Services training centre in Trivandrum.

For several years, India's US$76 billion (Dh279.11bn) information technology sector rode the outsourcing wave of the 1990s to become a pivotal high-margin business that galvanises the country's fast-growing economy.

US and European businesses were lured to India by the promise of access to a well-educated talent pool of English-speaking engineers demanding only a fraction of the salaries offered in Western shores.

But amid increasing competition, a chronic shortage of trained labour - which has led to high attrition and wage inflation - Indian outsourcing companies are facing stiff competition from other low-cost markets such as Mexico, Philippines and Ireland, compelling many to consider rejigging their business model and exploring new geographies to sustain double-digit growth.

"To build on its phenomenal success, the IT industry will have to reinvent itself," says Kiran Karnik, the former president of India's National Association of Software and Services Companies (Nasscom). "A focus on innovation - in products, processes and business models - as a differentiator will have to be the cornerstone of a new strategy."

Tata Consultancy Services, India's largest software exporter owned by the $70bn Tata Group, is one of the few companies in the country expanding its application software business using the software as a service (SaaS) delivery model. Through this model, software is owned, delivered and managed remotely using cloud technology without any hassles for the customer to install and maintain it.

The global tech research firm Gartner says revenue from SaaS in the application software market is expected to touch $10.7bn this year, a growth of 16.2 per cent compared with last year.

Sridhar Mitta, the former chief technology officer at India's third largest IT company Wipro, co-founded NextWealth Entrepreneurs, a social entrepreneurship organisation, in 2009. The company's "distributed delivery model" - a business mantra that envisages a large number of small delivery centres in small towns and in rural India, results in a lower cost of operations and provides access to a diversified talent pool willing to work at lower wages.

The Associated Chambers of Commerce and Industry of India (Assocham) says the sector is struggling with a high rate of attrition, which peaked at 65 per cent over the past two years, as employees frequently switch jobs for even more lucrative pay packages.

In a bid to retain talent, salaries in the field are expected to grow by 30 to 40 per cent this year, India's National Association of Software and Services Companies says, eroding the sector's overall cost advantage.

Overseas clients of IT companies have boosted technology spending this year. The technology and market research company Forrester said in April the US technology market - which makes up the largest client base for Indian tech companies, contributing more than half of their earnings - is expected to expand 8 per cent this year, exceeding their earlier forecast of 7.4 per cent.

"The market is very dynamic right now … but this is not a party-time for sure," said Vineet Nayar, the vice chairman and chief executive of HCL Technologies, India's fourth-largest technology company. Mr Nayar made the comment in April, soon after reporting a 33 per cent rise in the January-March quarterly profit to 4.68bn rupees (Dh386 million).

"The US economy is in a post-recession phase, some European countries are still struggling with a slowdown," he said. "The overall IT spending is expected to be flattish this year."

Mr Karnik says companies need to adopt a "look east" policy, to explore geographies beyond its traditional markets - US, UK and western Europe, which together account for 80 per cent of India's IT exports.

Mr Karnik points out a recent study Nasscom conducted with McKinsey, which revealed that the exports are expected to more than quadruple from $50bn to more than $225bn by 2020. But more than 80 per cent of this incremental growth will be derived from customers in new markets - mainly China, Brazil, and Russia.

 

business@thenational.ae

Published: August 5, 2011 04:00 AM

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