Indian IT sector clicks up a gear

India's technology industry has traditionally focused on the United States. But consultancies are now expanding their approach in response to problems in Europe.

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In a business park on the outskirts of the Indian city of Pune, in a vast, five-storey building, about 3,500 IT workers are developing technology solutions for some of the world's biggest investment banks.

When it comes to trading stocks, speed is of the essence and seconds really do count when making multimillion-dollar transactions. At the centre in Pune, they are working on developing crucial, cutting-edge software to speed up these trades.

Over the years, India has evolved from doing very basic, mundane IT outsourcing work for companies to taking on more and more complex functions. Increasingly, there has also been a diversification in geography, with companies from continental European looking to cut costs by farming more work out to India, while the business growth for India from the US - where the majority of overseas business for IT firms comes from - has slowed.

Reflecting the trend, there has been a flurry of acquisitions recently, with India's Tata Consultancy Services last month buying Alti, an IT services company in France, for €75 million (Dh357.8m). This followed a deal by Infosys, headquartered in Bangalore, which acquired the Swiss company Lodestone last September for US$350m.

"Europe is more of a long-term play in my opinion," says Faisal Husain, the founder and chief executive of Synechron, a global IT company, which has development centres in Pune.

"The IT consulting companies have been historically more focused on the US because the US has embraced outsourcing more readily than Europe. In Europe, there have been many challenges. Europe, until the economic downturn happened, has not appreciated the cost advantages that we get in India but the current economic situation has made that more appealing.

"And the Indians have not had the energy or patience to invest in building the right local and cultural teams, which are more important in Europe because of the language and cultural differences," Mr Husain says.

"What has happened lately is that everybody has realised that they have to build more substantial business in Europe and they have been looking for companies that want to partner and grow together. In Europe, there have been many local, sort of boutique, firms, but what they now realise is that they need to be part of a more global entity because their clients - the European companies - are increasingly more global."

Synechron last month acquired Double Effect, a company based in Amsterdam and Singapore, as part of its own push into Europe and Asia/Pacific.

"From the Indian side, there's the realisation that they have made very, very strong headway in the US but it's now time to focus on growth in Europe," says Mr Husain.

The Indian IT sector's revenues are estimated to have reached $108 billion in the last financial year, with exports of $75.8bn, up 10.2 per cent on the previous year, according to data from Nasscom.

Direct employment in the industry has reached almost three million, an increase of 188,300 employees on a year earlier, while indirect job creation is estimated to be 9.5 million, the figures show.

"The Indian IT-BPM [business process management] industry has exhibited rapid evolution - in terms of expanding their vertical and geographic markets, attracted new customer segments, transformed from technology partners to strategic business partners imbibing a shared vision, offering considerably wider spectrum of services over the years," Nasscom said in a recent report. "The year was characterised by healthy growth in Europe [including the UK] and Asia/Pacific. US, the biggest market for IT-BPM exports, also continued its growth momentum albeit at a slower pace. As the European market is becoming more amenable to offshoring, growth in this region is expected to firm up further."

Samir Yajnik is the president of global services and the chief operating officer Asia/Pacific for Tata Technologies, which provides engineering and product development IT Services.

"The European business for us is growing," says Mr Yajnik. "Overall, the kind of work that is coming to India now is no longer dependent on labour arbitrage. It is much more about innovation and partnerships with organisations to enable them to build and develop better products.

"In the past, as an example, French companies have used India either for doing some lower-level activity or just for access to the Indian market. That's completely changing because Europe has a huge shortage of talent. Europe, if they want to compete with the rest of the world, they've got to increase the percentage of global resources. That's the cost factor."

The global macroeconomic environment is, of course, a concern for all Indian technology firms. "The IT industry is primarily export-driven and dependent on global markets and some recovery has already happened in the US, which is better for the IT industry, but overall growth is still muted," says S Gopalakrishnan, the co-founder and executive co-chairman of Infosys. "Hopefully, as the situation in the US and Europe improves, the growth will improve."

There remain looming risks for the sector, analysts warn.

"The ongoing global recession is having a fairly big impact on business sentiments and customer confidence, particularly in the main markets of US and Europe," Nasscom says. "With challenging labour market conditions in these geographies, governments are increasingly resorting to protectionism to boost their economies."

Changes in their policies are affecting availability of work permits and visas. The threat of taxation on outsourcing firms is another challenge. "India's competitiveness as the foremost outsourcing destination is being threatened by wage inflation, the rise of other locations, particularly the Philippines and China as alternative sourcing destinations and also the customers' desire to de-risk geographic concentration," Nasscom says.

The focus for outsourcing companies in India is expanding from the United States to Europe. Here, Faisal Husain, the founder and chief executive of Synechron, a global IT firm with development centres in Pune, India, talks about the sector.

q It seems that Indian labour in the information technology sector is becoming more expensive. What have you noticed?

a Yes, general costs are going up in India. They have been for a long time, but firms have found some way or another to manage that and compensate for the increased costs by being better or more efficient operationally. The other is just to live with the fact that margins and profitability will be lower in the long term. It's a maturing industry.
Do you think that other markets such as the Philippines and China are potential threats as alternative outsourcing destinations?
I would not say that either one of them is a threat at a bigger level. But in certain areas, for example voice-based BPO [business process outsourcing] services, Philippines has taken the lead from India. Luckily, we as a business are not in that. We're in the business of IT outsourcing, not business process outsourcing. Philippines has taken the lead because of the  language skills advantage that it has. China has not been much of a threat to India-based services because they have a time zone advantage and a language disadvantage.

Have you managed to achieve continued growth every year for the past few years?

Yes, and longer. We’ve been growing very well. We have a very strong franchise in the US. We’re looking very strongly at Europe and Asia, Abu Dhabi, Dubai, Europe, London, Singapore and Hong Kong. We’re trying to make sure that we plant the right seeds in each of these geographies.

Rebecca Bundhun