Analysis of IT Industry: Indian Perspective

Posted in Operations & IT Articles, Total Reads: 6901 , Published on 20 May 2012
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India is known as the major IT enabled service provider in the world. It all started with success story of people with Indian origin in the United States of America. Their contribution was enormous in the IT revolution in US. With the emergence of IT hubs like Bangalore, India has occupied the dominant position in IT world. IT is playing a major role in Indian economic development.


While India still remains a poor country in terms of both Per Capita Income and Human Development Index, IT sector acts as the major hope economic growth. Though the year 2009 was tough due to Global financial meltdown Indian IT sector came back on track quickly and showed growth in 2010. It is expected that 2011 will be even more promising. Indian IT sector is poised to cross $70 billion-mark by the end of current fiscal.

Global IT scenario

Due to the presence of many players in the every sector, the environment has become extremely competitive. In India only we can find so many close substitutes from each sector. Hence, to remain competitive, the companies need to be operationally efficient and innovative. Value addition in the form of quality, service or price is absolute necessity now. Innovation, however, is considered as the best way to capture the global market. And to be innovative a company should focus on its core competencies.

There are some tasks which can be more easily done by some contractors at a much lower cost. These tasks are being outsourced. Outsourcing is a win-win situation where both the parties get benefits. Since all the companies have switched to extensive use of information technology within a very short period of time, most, if not all don’t have the proper IT infrastructure. So it has become a necessity for them to outsource all the IT related works. India is the favourite destination for all the multinational companies because of various reasons discussed later in the report.

So we can see that changing global business scene is acting as the key demand driver for IT sector. This change in global business is again driven by lots of other factors. As more and more people are becoming computer literate throughout the world, need for IT enable services are increasing everywhere. People find IT enabled service more convenient. Online banking, e-Commerce, Online trading etc have become integral part of our daily lives. Demand for IT enabled services can only increase unless some unexpected events take place.

Outsourcing jobs in India has become a major issue in US recently. As the works are being outsourced in India local people are not able to get jobs. Since outsourcing jobs are profitable for companies in every respect, US government is going for different strategies, like VISA restriction, to restrict outsourcing. If US government sticks to these rules, Indian IT sector will definitely be affected as the major revenues come from US.

The following factors have helped in raising the demand for IT industry:

  • There has been a tremendous improvement in computer technology. Evolution of high performing personal computers has made it an integral part of the people of developed nation and urban people of developing nation. Computer users prefer to use computer wherever possible.
  • Improvement of internet technology and internet speed has helped people to go for online method for payment, ordering, banking etc.
  • Increased competition among the MNCs has forced them to focus on operational efficiency. Enterprise Resource Planning or ERP has become an integral part of companies. A significant number of IT projects are ERP based.
  • Banks, Retailers and many other service sectors consider use of IT as the most effective way of customer care. Most, if not all, take the help of IT to remain competitive.

There are strong complementarities between IT and the rest of economy. IT can improve efficiency and productivity. This complementary nature makes IT sector dependent on other sectors and hence, the demand IT sector is hugely affected in case of any downturn of those sectors. Later we’ll see with the help of the incident of financial meltdown of 2008, how demand is dependent.

Value proposition of Indian IT sector

The reason for India’s success in IT sector can be attributed to various economic and socio-economic factors. Some factors are explained below in brief:

Low cost of labour: Cost of labour gives the major advantage to the sector. Large MNCs can outsource English proficient and technically competent workers from India at a very low cost. One important reason for low cost is that value of rupee is much less than most of the western countries. Employees also get the benefit of this especially when they get onsite.

Quality of service: Technical skill, high commitment towards job and language skill has helped IT companies to provide high quality service. Growth in technical education sector has contributed to the high skill of the labour pool. India’s colonial past naturally makes Indian people comfortable with English. So in all Indian IT sector provides high quality service at a very low cost.

Global delivery models: With a new global delivery model Indian IT companies focused on quality and innovation. Quality of service has now become the main reason overtaking the cost of service. IT companies have also entered into long time customer engagement. Effective cost management is another great tool for them.

Export and domestic market

Export accounts for almost 77% of total IT revenue. IT sector alone contributes 26% of total Indian export. Export revenue is expected to be around US$59 billion in FY2011 according to a research report published by NASSCOM. The Financial Service sector (Popularly known as BFSI), accounts for the largest share of Indian IT export followed by Retail, Manufacturing and Telecom sector. ITES-BPO segment has also become a major contributor of India’s export.

On the other hand domestic IT revenues are estimated to be US$17.35 billion for FY2011. The estimated growth rate is almost 16%. Consistent economic development, rapid advancement in technology, quick modernization of Indian organizations, incorporation of usage of computer technology in government organization and development of various web based business models that help provide IT to new customer segments are the key drivers for increased technology adoption in India. Number of internet users in India will reach 237 million by 2015, from 81 million registered in 2010, according to a report by the Boston Consulting Group (BCG).

According to BCG Internet penetration rate in India is expected to reach 19 per cent by 2015. The present penetration rate is only 7%. The penetration of the internet in rural areas will see an all time high in 2011. In a survey conducted by IMRB international for the IAMAI, the number of internet users in rural area will double by the end of 2011. Number of internet user was 12.1 million in December 2010. It is expected to reach 24 million. The survey said that the claimed internet user category is also set to grow by 96 per cent to reach 29.9 million by December 2011 from 15.2 million in December 2010.

So we can see that there has been a considerable change in domestic sector. Though export outweighs the domestic market, IT majors have high expectation from this sector. After the recession in 2008 and the present status of weak European economy, IT companies are concentrating on more stable economy and emerging economies. IT has become a means to improve the quality of service for many developing countries. IT can significantly reduce the high overhead cost of operation.

However, many systems implementations have produced less than satisfactory results. These implementations have not met expectations and in most of the cases have failed to perform the required objectives. The lack of financial resources, the lack of computer literacy and improper planning are some of causes that contribute to the failure of IT in the public sector. Lack of employee motivation in working for domestic client is also a major concern. Employees working for foreign client get an opportunity to earn in foreign currency. Having work experience in US, Europe and other developed nation make their CV look better. This exposure is very lucrative for most of the people. In fact many people are attracted to work in IT sector precisely for this reason.

A large proportion of IT workforce is young and hence they don’t have any problem traveling abroad and hence issue of traveling have never really been a major concern. So there are both tangible and intangible benefits attached to it. In many cases we see that within a particular organize also employees having experience of working for foreign clients get preference in terms getting selected for a project. But with the declining economic scenario of these developed nations scope of going abroad has reduced considerably. Restrictions over visa have further increased the complication.

So focusing on government projects has become an absolute necessity. According to NASSCOM report 2010-11 special attention to domestic IT market will be given. NASSCOM has partnered with the government to facilitate greater public-private partnerships for e-governance programs. An e-governance portal - `eGovReach' has been set up to create a one stop repository for e-governance solutions in the country. So we can see that in spite of all the problems, IT sector has started playing a major role in shaping modern India.

Impact of Global recession in 2008

Financial meltdown in 2008 had a huge impact on IT sector. In 2008, approximately 60% IT revenues were from US Major revenue for IT companies come from Banking and Financial sectors. The recession was a result of the collapse of financial sector in US. So, all such companies had to cut back their IT spending.  In all 43% western companies reduced their IT cost. Other sectors were also affected and decided to go for reduction in IT spending. Since Indian IT sector has very high dependency on export market had to go through some tough times. The following graph shows how growth was affected:


The total impact can be divided in terms of the following segments:

Verticals: Major vertical is Banking, financial services and insurance popularly known as BFSI. Other important verticals are retail, healthcare, manufacturing and telecom. Needless to say impact was severe on BFSI. The table below shows the dependency of Indian IT companies on BFSI:

Source: NASSCOM

Companies with greater dependency on BFSI were more severely affected. The after-effect of this was a shift of focus to other verticals. BFSI, however, remained the most important vertical.

Cost cutting: IT companies were forced to adopt various methods of cost cutting due to recession. The implementation of this strategy was easy because of the flexibility that is present for the cost model. Most of the cost cutting was done through reduction of annual increment or variable pay. In some cases underperformers were asked to leave.

Recruitment: Employee recruitment declined drastically due to the effect of the meltdown. Fresher recruitment was not as much affected as the lateral recruitment. In case of fresher recruitment joining got delayed in most of the cases. The below chart shows the change in hiring trend as a result of recession:


The above bar graph depicts the change in hiring trends in all the three sectors of IT. We can see how the recruitment for domestic market got importance in 2009. This also reflects the shift in focus from export to domestic market as a result of recession.

Future of IT industry in India

IT sector alone has the potential to take Indian economy to a higher level. IT has the ability to increase efficiency and productivity of every sector of the country. The demand for IT sector is likely to increase due to the following reasons:

  • Reduction in the price of semiconductor that in turn resulted in the reduction in price in electronic equipment enabled more and more people to buy computers and use it wherever possible.
  • There has been significant rise in the number of internet user and the number is likely to increase in future. This happened due to the lowering of broadband services and availability of large number of portable devices. The use of internet has definitely increased the number of online users of various services. And this will surely increase in future.
  • Rapid urbanization of developing countries like India has made computer household equipment. As a result computer literacy has increased. Since a large number of people still live in rural areas, there’s a high probability that the increase in the number of computer and internet user will increase exponentially.

But there are also some risks associated with this sector:

  • There is uncertainty in Global economy due to the slow recovery in many major markets. Moreover there is instability in major European nations. This could lead to cut in IT budget which will ultimately result in declining demand.
  • Rules and regulations that are being implemented in major markets like US will surely lead to a demand compression. The VISA restrictions in US are in fact targeted at the IT industry. This step was taken to curb outsourcing and will directly affect the demand in future.
  • Increased competition could result in price competition. Indian IT majors like TCS, Infosys, Wipro, CTS etc are close substitutes of each other. So there is increasing pressure on the IT majors to make their service different from others. This, however, will not affect the overall demand.
  • Wage inflation and overall increase in cost could reduce the profit margin. Appreciating rupee will further add to this problem. To deal with this companies have to focus on increasing productivity.

Conclusion

We’ve seen that there is some scepticism regarding the future. But as the companies are playing it safe it is expected that IT companies will continue to make profit and will act as the major contributor of India’s economic development.

This article has been authored by Sayak Gupta from SIMSR.

 


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