Causes for IT recession in India

1. Global economic slowdown
and its impact on the Indian
IT industry
April 2009

2. Contents
Executive summary 3
1. Current global scenario & the uncertainties involved 4
2. Structure of the global IT industry 5
3. Structure of the Indian IT industry 7
4. Impact of the recession on the IT sector of the Indian economy 9
5. Future outlook 14
6. Conclusion 18
Contacts 19
2

3. Executive summary
The current global economic slowdown has its epicenter Interestingly, the Indian IT / ITES sector has so far been
in the United States (US) but the contagion is being resilient in spite of the global slowdown. Part of this is
witnessed in all major economies of the world. Several due to the segmentation in the Indian IT / ITES sector
countries are experiencing rapid contraction in their whereby some of the firms are the back office support
Global Domestic Product, rising unemployment levels service centers of large global multinationals while the
and an overall slowdown in the pace of investment other is the indigenous IT service companies of Indian
activity. What started as a shock in the financial markets origin. While the current slowdown has impacted the
has spread to all sectors of the world economy and the indigenous IT companies business in India, a part of
exact depth and breadth of the impact is still unclear. this has been offset by a greater amount of business
flowing to the captive units of foreign companies
India’s economy has been fuelled by the growth in operating in India owing to the pricing and margin
the technology sector in the recent past. A large part pressure in their local markets.
of this growth is dependent on the “outsourcing” or
“off shoring” of key business processes and software The indications are also that the next decade will be
development activity (and related services) by large very different from the last one, with structural shifts
global corporations and other organizations. Hence, the in demographics that will reflect more prominently in
global slowdown has also affected the business climate international trade and economics. Technology evolution
within India and the growth rate of the Information and adoption is expected to witness some disruptive
Technology (IT) and Information Technology Enabled changes as the Internet generation takes over the
Services (ITES) sector is also experiencing the tremors workforce.
of the global recession. The Indian IT software and
services industry which has seen a Compounded Annual Experts suggest that the performance of the Indian IT
Growth Rate (CAGR) of around 30% over the last three software and services and ITES industry, while impacted
or four years is now projected to grow at 20%. Indian by US economic slowdown, will be catalyzed by a
IT sector’s derives approximately 61% revenues from revival in technology spending during the first half of
the US based clients. The revenue contribution from US 2009. There are some offsetting factors softening the
clients to the top five Indian IT companies (who account revenue slowdown - favorable Rupee-Dollar exchange
for 46% of the IT industry’s revenues) is approximately rate expected to lead to higher INR revenue growth
58%. Hence, the impact of the slowdown in the US is figures during the year, growth de-risking through other
likely to have a deep impact on the prospects of the emerging markets, growth in non-financial verticals,
Indian IT sector. and growth through countercyclical new business
initiatives.
Moreover, about 41% of the IT industry revenues
in India are estimated to be from financial services.
Since this sector has been affected most severely in
the current climate, the impact on Indian companies
catering to this sector has been (and will continue to be)
more acute. The margins are prone to be challenged on
account of the slowing growth in the US and European
Banking and Financial Services Industry (BFSI) sectors.
3

4. 1. Current global scenario and
the uncertainties involved
As 2008 ended, predictions of where the world • All stock exchanges across Asia / Pacific have been
economy is heading turned dire. The World Bank directly impacted in a significant way, with an average
projected world output to grow by a mere 0.9% in 2009 loss of 45% from November 2007 through October
(as compared with 2.5% in 2008 and a high of 4% in 2008
2006) and world trade to contract by a significant
2.1% (compared to positive rates of growth of 6.2% Impact on exchange rates
in 2008 and a high of 9.8% in 2006). Asia Pac is likely • Currency exchange rates have been affected, but
to witness a sharper fall in the growth rate, i.e. from on a more-isolated basis. Australia, China, New
13.4% in 2007 to 5.5% in 2010E in comparison to the Zealand and Singapore are experiencing drops in their
world growth estimated at 6.3% in 2010E from the currency against the U.S. dollar
2007 figures of 9.7%.
• In addition, India has seen its currency increase
The overall impact of the global financial crisis has substantially and later fall against the U.S. dollar
been felt in Asia / Pacific in terms of the local stock
exchanges and currency exchange rates and lower • As a result, there is an assumption that there will be
GDP growth forecasts for 2009. some impact on IT spending across Asia / Pacific due
to the increase in the cost tied to the technology
Impact on stock market spending
• The year 2008 saw the credit crisis push several major
economies, with banks particularly being badly hit The global outlook is bleak and recovery is still far.
- many requiring government bail-outs. Shanghai The current global financial turmoil has hit almost all the
which had soared more than 300% in 2006 and 2007 economies around the world deeper than anticipated.
had its share values wiped nearly by $3 trillion (£2.1 Industries globally are impacted by the slowdown. The
trillion) turmoil is taking a toll on the global IT industry – one
of the leading contributors to the global GDP, led by
• Japanese shares also suffered their biggest yearly uncertainties in the demand environment in both
decline, with the Nikkei dropping 42% as world’s new and existing businesses. Hence, there appears to
second-largest economy slid into recession be a reason to fear that the crisis will swamp emerging
markets and other developing countries, cutting into the
• India’s main index sensex plunged nearly 50% during considerable economic progress of recent years.
the year. All global markets saw record falls in 2008 as
the financial turmoil and economic slowdown ended
the stock market boom
Indian equity market on a ‘free fall’
600
500
400
300
200
100
0
04 04 05 05 05 06 07 07 08 08
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
Brazil China Chile
India Argentina Hungary
Source: Forrester report
4

5. 2. Structure of the
global IT industry
Growth of global IT economy The Western and Central Europe markets will have
The global IT industry has matured over the years and growth in local currency that is closer to 1%. By 2010,
has emerged to be a chief contributor to the global the US market will shift to 7.3% growth, not far behind
economic growth. The global IT sector, constituted the 9.5% growth in the other Americas, well ahead of
by the software and services, Information Technology the 5.5% growth in Asia Pacific and 5.3% growth in
Enabled Services (ITES) and the hardware segments, has Western and Central Europe.
been on a gradual growth trajectory with a steady rise in
revenues as witnessed in the past few years. 2008 was
a strong year as the number of contracts; the total value
and the annualized contract values exceeded that of the
preceding year. Among all users above average growth
The global IT sector, constituted
was witnessed in the government, healthcare and the
manufacturing segments.
by the software and services,
The global software and services industry touched
Information Technology Enabled
USD 967 billion, recording an above average growth of
6.3% over the past year. Worldwide ITES grew by 12%,
Services (ITES) and the hardware
the highest among all technology related segments.
Hardware spend is estimated to have grown by 4% from
segments, has been on a gradual
USD 570 billion to nearly USD 594 billion in 2008.
growth trajectory with a steady
Currently, the global IT industry is experiencing a slump
with the recessions in the US and many industrial
rise in revenues as witnessed in
countries with the level of impact varying by country /
market and industry.
the past few years
Forrester in its recent report has predicted that the US
IT market will dip to 1.6% in 2009, down from 4.1%
growth in 2008 (see figure below). The Asia Pacific
region, using a weighted average1 of local currencies,
will do a bit better in 2009, with 3.1% growth.
16.0%
14.0%
12.0%
10.0%
8.0%
8.0%
7.3%
6.0% 5.3%
5.5%
4.0% 5.3%
4.8%
2.0%
0.0%
2005 2006 2007 2008* 2009* 2010*
US in US dollars
Western and Central Europe in euros
Asia Pacific in weighted averages of currencies
Source: Forrester report
5

6. Global scenario - IT purchases The global IT purchases are expected to plummet as
As it stands, the US market accounts for majority of strong dollar would hurt dollar-denominated growth
the global purchases of IT goods and services. The US rates for IT purchases going ahead. The British pound
market which represented 37% of the global market was 23% lower in Q4 2008 from the year-ago level, the
for IT goods and services in 2005 had shrunk to 33% Indian rupee is down 20%, the Canadian dollar is 19%
share in 2008. Western and Central Europe would see weaker, and the euro is down 9%. Only the Japanese
its share of global IT purchases fluctuate between 26% yen and the Chinese yuan renminbi have gained in value
and 28% between 2008 to 2010; Eastern Europe, the against the US dollar. While these currency swings are
Middle East, and Africa and Asia Pacific are expected to likely to reverse in 2009 as the financial crisis fades, the
hold their share positions. dollar is still likely to remain above 2008 levels for
most of the year. That will dampen global IT market
Total IT purchase (by value) 2008* growth measured in dollars and hurt the reported
revenues of US vendors like Accenture, Hewlett-Packard
(HP), and IBM with large overseas operations.
With global tech market in US dollars likely to shrink,
global IT vendors’ revenues is expected to equal $1.66
Asia Pacific trillion in 2009, declining by 3% after an 8% rise in
26% United State 2008. The Asia Pacific region has been a major
33% growth engine for the tech industry. Its total purchases
of IT goods and services of $448 billion in 2008 were
almost as large as Western and Central Europe’s.
Countries like Hong Kong, India, Malaysia, Singapore,
Others
South Korea, and Taiwan, have seen growth slow as
13%
exports to the US and Europe slowed.
Western and
Central Europe
28% Asia / Pacific would experience a delayed impact of the
global financial crisis. Gross Domestic Product (GDP)
growth is expected to slow in most countries / markets
in 2009, which will affect IT spending. Asia / Pacific is
Source: Forrester report still growing more aggressively than other regions in
GDP and in IT. As a result, vendors would be looking to
this region for growth and stability.
Asia / Pacific is still growing more
aggressively than other regions in GDP and in
IT. As a result, vendors would be looking to
this region for growth and stability
6

7. 3. Structure of Indian IT industry
The IT-ITES industry in India has today become a growth • Ease of scalability
engine for the economy, contributing substantially to The vast and trained labor pool of technically
increases in the GDP, urban employment and exports, competent, English speaking people has made it
to achieve the vision of a powerful and resilient easy for the Indian companies to enter and exit this
India. While the Indian economy has been impacted industry. Moreover, the ease with which a company
by the global slowdown, the IT-ITES industry has can scale its operations (up or down) has been a great
displayed resilience and tenacity in countering the value driver for the success of the Indian IT / ITES
unpredictable conditions and reiterating the viability service sectors growth story
of India’s fundamental value proposition.
Performance of the Indian IT-ITES industry
Value proposition The information technology sector has been playing a
The main reasons for the successful establishment of key role in fuelling the Indian economic performance
software companies in India and its strong performance which has been stellar with robust GDP growth. India’s
can be attributed to the following: total IT industry’s (including hardware) share in the
global market stands at 7%; in the IT segment the
• Cost advantage share is 4% while in the ITES space the share is 2%.
Given the labor market conditions in India, there The industry is dominated by large integrated players
exists substantial scope of cost arbitrage for consisting of both Indian and international service
performing services from India. This, along with a providers. During the year, the share of Indian providers
large pool of talented and English people labor force, went up to 65-70% due to the emerging trend of
was the genesis of the IT sector’s dominance in the monetisation of captives. MNCs however, continued to
world IT services industry make deeper inroads into the industry and strengthened
their Indian delivery centres during 2008.
• Breadth of service offering and innovation
Service offerings have evolved from low-end The continuing contribution of this sector to the
application development to high-end integrated IT Indian economy is evident from the fact that revenue
solutions generated from this sector has grown from 1.2% in FY
1998 to an estimated 5.8% in the FY 2009. The net
• Quality / maturity of process value added by this sector to the economy is estimated
Having made its mark as a center of low-cost and at 3.5-4.1% for FY 2009.
wide range of service offerings, the Indian IT / ITES
sector has also proved its mettle in the quality of the
service offerings, as demonstrated by the fact that it
hosts more than 55% of SEI CMM level five firms and
the highest number of ISO certified companies
7

8. Some of the key highlights2 of the Indian IT / ITES target destination for multinationals to back end their IT
industry for FY 2009 are enumerated below: operations in India owing to its strong value proposition.
We have witnessed an increased use of offshoring by
• The export revenues are estimated to gross USD 47.3 global and European outsourcers, and the emphasis on
billion in FY 2009, accounting for 66% of the total productivity and delivering value by select Indian players.
IT-ITES industry revenues
• IT services exports grew substantially on account of The Indian IT / ITES sector can be viewed from two
increasing traction of the industry in emerging markets perspectives - Indian global IT and Indian IT offshorer.
such as remote infrastructure management and The globally IT companies are increasingly looking
traditional segments such as application management inwards and focusing on process benchmarking,
• Domestic market continued to gain momentum, enhanced utilisation of infrastructure and talent,
growing at 26% in INR terms on account of the increasing productivity and greater customer
overall positive economic climate, increased adoption engagement. global companies with roots in India are
of technology and outsourcing increasingly ‘offshoring’ work in order to cut cost, as a
• Engineering services and software product exports result of which India is witnessing a revenue growth.
increased by 29% (USD)
• Direct employment reached nearly 2 million - with On the other hand, as the offshore market is getting
1.5 million in the exports segment, a YoY increase tighter, the Indian IT offshorers are facing hard times in
of 26% in 2008. The indirect employment multiplier getting contracts or replenishing their orders. The crisis
suggested that the industry created between 6-8 in the U.S. financial services sector will have an impact
million additional jobs in the short term on Indian outsourcers, as new projects
• US and UK together constituted 79% of the global may get delayed. This has impacted the revenue flows
exports in FY 2008 thereby dominating the export and would need a substantial increase in SG&A to
markets ramp up their volumes.
• BFSI remained the largest market followed by Hitech
/ Telecom which together accounted for more than In spite of the negative effect of the outsourcing
60% of exports business, there has been relatively lesser impact on
the Indian IT growth due to the offsetting effect of
Global IT and Indian IT offshore the favorable revenues on account of the global IT
Today’s escalating, competitive and demanding offshorers.
environments have forced companies to be more
efficient, operate leaner and continuously create new
procedures to keep ahead of competitors - adding final
consumer value to a product or service in the form of
lower prices, quality and better service has become
an essential requirement in the global marketplace.
Corporations are trying to adapt with increasing
India has become a target
competitors’ innovations to find global opportunities
and resources, focusing on core competencies and
destination for multinationals to
mutually beneficial relationships, and finally, outsourcing
those activities which can be performed more quickly
back end their IT operations in
and at lower costs by subcontractors. In a globally
integrated economy, outsourcing is leading to overall
India owing to its strong value
benefits for the source economies, providing significant
monetary and employment benefits. India has become a
proposition
8

9. 4. Impact of the recession on
IT sector in the Indian economy
The current global economic slowdown has made it a
roller coaster ride for the world economies.
Asia / Pacific is experiencing a deferred impact due
to the “domino effect” of the current crisis. With the
expectations of a sluggish GDP growth and consequent
reduction in IT spending, countries / markets which
have a higher dependency on the export markets are
expected to be affected more than other countries /
markets with stronger domestic demand.
India being one of the world’s fastest-growing tech
markets, thriving mainly on exports is also experiencing
the tremors of the global economic crisis. IT spending as
a percentage of revenue normally varies from 3.5% in
manufacturing companies, 5-6% in global retail chains
to about 9.5% in the banking industry. These could see
marginal decline as companies will tend to hold spends
on new IT deployments.
A recent study by Forrester reveals that
• 43% of Western companies are cutting back their IT
spend and nearly 30% are scrutinizing IT projects for
better returns. Some of this can lead to offshoring,
but the impact of overall reduction in discretionary IT
spends, including offshore work, cannot be denied
• The slowing U.S. economy has seen 70% of firms
negotiating lower rates with suppliers and nearly 60%
cutting back on contractors. With budgets squeezed,
just over 40% of companies plan to increase their use
of offshore vendors
• The IT services and outsourcing market is currently
undergoing a structural transformation that will have
a profound effect on how IT service providers will
have to conduct their business
Customers have started to reduce project scope and /
or postpone new development. However, they are
also trying to move more work to lower cost offsite
locations, which could increase IT budgets towards
tangible cost saving measures.
9

10. The impact is likely to be higher for discretionary This clearly indicates the adverse effect that the US
outsourcing expenditures rather than for critical, recession is likely to have on the Indian IT sector. The
ongoing Application Development and Maintenance industry has been constantly seeking to diversify its
(ADM) services. Indian IT companies3 which are focused markets to offset its reliance on the US, which remains
more on providing basic ADM services, and with long the largest outlet for India’s software sector.
term outsourcing contracts, could exhibit more stable
earnings in this environment. Furthermore, whilst The impact has been more severe in the case of the
discretionary expenditures are being reduced, ongoing Banking, Financial Services and Insurance (BFSI),
projects will likely continue, at least in the near term, which accounts for around 40% of the industry’s export
especially those which are in the more advanced stages revenues, and in retail and certain manufacturing
of progress. Fitch expects IT services companies to sectors. Other verticals like telecom and automobile are
report marginally positive revenue growth (in dollar also likely to have a delayed budget process and budget
terms) over 2009. cuts. However, the industry focus is likely to shift to
areas such as manufacturing, healthcare, retail and
With decisions on IT budgets being deferred and utilities. Healthcare industry is likely to witness increased
sales cycles having elongated from 3-6 months to 6-9 IT investments due to increased focus on public health.
months, companies are seeing a significant drop in client Other industries that will see growth include telecom,
additions. Moreover, the number of targeted large deals retail and utilities.
has more or less dried up. According to TPI4, mega deals
have fallen to levels lower than those seen in 2001. Some vendors who have a greater exposure to BFSI
segment will be more impacted when compared to their
Verticals counterparts with less significant exposure (table on next
The current US-led crisis parallels the 2001-2002 page). The effect of this crisis would be more evident in
Dotcom Bubble burst especially for India’s IT (export) the coming quarters. The overall revenue impact on the
sector. Approximately 61%5 of the Indian IT export’s IT and ITES industry, as a result of the BFSI meltdown,
revenues are from US clients. If we consider the top five could be anywhere between $750 million and $1 billion.
India players who account for 46% of the IT industry’s
revenues, the revenue contribution from US clients is
approximately 58%.
45%
40% 40%
39%
35%
30%
25%
22%
20%
19%
15% 15%
13%
10%
8%
5%
5% 4%
3%
1%
0%
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
BFSI Manufacturing Healthcare Construction and utilities
Hi-tech / telecom Retail Airlines and transportation Others
Source: NASSCOM
10

11. BFSI share Exposure of BFSI (in USD million)
Companies Key BFSI client
(%) * Jan-Mar 2008 Apr-Jun 2008 Change (%)
American Express ,Citigroup, Credit Suisse ,
Cognizant 46 292.4 314.2 7.46
JP Morgan, Metlife
ABN Amro, Bank of America ,JP Morgan,
Infosys 34 387.1 398.5 2.94
Washington Mutuals ,UBS
AIG, American Express ,Bank of America, Citigroup,
TCS 42 664.4 648.2 -2.44
Deutsch Bank, Fortis, JP Morgan, Merrill Lynch
Wipro 25 256.8 271.1 5.57 Credit Suisse, Lehman Brothers, UBS
*As a percentage of total revenue; BFSI contribution sourced from company reports ,BFSI clients from equity analysts
• Infosys - The revenues from BFSI that were at 37% in Impact of exchange rate on revenues
June 2003 have stayed more or less unchanged as a In IT sector, the margins are likely to be challenged
percentage of total revenues. In the December 2007 on account of the slowing growth in the US. Rupee
quarter, Infosys got close to 37% of its revenues from depreciation seems to be the only tailwind that the
BFSI. This slipped to 34% of revenues in the March sector enjoys. This can be evident from the fact that the
2008 quarter. In the quarter ending December 2008, out of the increase in the IT export revenues for FY 2008
BFSI showed a sequential growth of 4% in volume over FY 2007, almost half of the increase could be
attributed to the rupee depreciation during the same
• Wipro - India’s third-biggest software exporter, and period.
Cognizant, ranked sixth, have seen revenue from the
key Banking, Financial Services and Insurance (BFSI) Pricing poised for decline in favour of volumes
vertical rise by about a fifth between Oct-Dec 2007 Pricing has been difficult in this sector compared to
and July-Sept 2008 other sectors: On an average, the US financial sector has
driven bulk volumes through lower onsite pricing, higher
• April-June 2008, Cognizant recorded the highest offshoring and aggressive volume discounts. It is safe to
growth from financial services vertical among the infer that BFSI application business margins especially in
offshore peers. This was mainly due to the type of the top companies are a few percentage points below
financial services clients in the portfolio and the the higher margin verticals like, say, energy. Hence,
multiple operating levels (table above) a replacement of financial services business with
business from other verticals is likely to positively
• Tata Consultancy Services, for example, earned 42% impact the bottom line. A speedy replacement is
of its revenue in the second quarter of CY 2008 from however, easier said than done.
the BFSI
11

12. Volumes are expected to remain weak over the next Volume Price
three quarters for most players forcing further price
7500 15
cuts. The reduction in pricing is expected to be lower in
13
magnitude compared to FY 02-FY 03. This is because Pricing poised for a fall as volumes decline
7000 11
the current pricing has not touched the FY 02-FY 03
9
bubble proportions. Infosys has already reported 1.8%
decline in blended pricing (constant currency) in Q3 FY 6500 7
09 while HCL Tech announced free transitioning for 5
deals amounting to $1billion bagged during the quarter 6000 3
as a strategy to garner volumes. TCS and Wipro too 1
Volume growth aided by a declining pricing regime
have acknowledged pricing pressures and the impact 5500 -1
would be more visible in the coming quarters. -3
5000 -5
Fitch Rating expects the sector to face margin
Q1 FY 02
Q1 FY 03
Q1 FY 04
Q1 FY 05
Q1 FY 06
Q1 FY 07
Q1 FY 08
Q1 FY 09
pressures over 2009 and 2010 due to the intensified
competition for new contracts, thereby putting pressure
on billing rates. Competition even for smaller contracts Blending pricing
has increased, as companies try to maintain utilisation Volume growth
levels. Customer cost pressures could also result in re- Source: Centrum research
negotiations of maturing contracts at lower terms. There
could also be an increased shift from traditional hourly
billings towards a new return on capita based price Fitch believes that the large Indian IT players will gain
contracts providing tangible savings, while variable market share. However, these risks to operating margins
time / material contracts could be renegotiated at lower are partly offset by the fact that Indian IT services
levels. Vendor consolidation will be the order of the day retains some flexibility in terms of their cost model.
in the current environment, as this would result in cost As the impact of the slowdown becomes more severe,
savings for customers. companies will increasingly look at cutting costs in the
form of overheads and reduction in variable pay / annual
increments. The industry has also been reducing its
hiring, as well as changing the hiring profile to ensure
that operating costs are in control.
The US financial sector has driven bulk
volumes through lower onsite pricing, higher
off shoring and aggressive volume discounts
12

13. Hiring trends
The Indian IT industry witnessed plunge in all the three
segments – IT Services, ITES and domestic market, as
depicted below:
80%
69.81%
70%
60%
50%
40%
30%
20.59%
20% 15.74% 12.83%
10.09% 11.11%
10%
0%
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
IT services
ITES
Domestic market
Source: NASSCOM
The above graph depicts the decline in the employee
numbers over the years in all the three sectors viz. IT
services exports, ITES exports and the domestic market.
The ITES segment witnessed the greatest plunge from
69.81% in FY 2003 to 12.83% in FY 2009. The high
attrition rate coupled with the current gloomy economic
scenario can be the reasons attributed to the massive
fall in the numbers.
13

14. 5. Future outlook
Fogged out The current situation however looks fogged out, with
2008 was a transformational year for the Indian no clear visibility. Some hitches faced by the IT industry
Information Technology-Information Technology are;
Enabled Services (IT-ITES) sector, as it began to
re-engineer itself to face the challenges presented • Uncertainties high: Churn in client base, elongated
by a macroeconomic environment which witnessed sales cycles and headwinds from a harsh currency
substantial volatility in commodity prices, inflation, environment render high uncertainties for IT
and decline in GDP rates, cross-currency movement, companies
finally culminating in the economic downturn. In an
increasingly globalised world, significant complexity and • Signs of revival in the US appear bleak, at least
uncertainty is getting attached to this unprecedented in the near future: Conference board’s 10 Leading
economic crisis. The Indian economy has also been Economic Indicators (LEI) continue to be negative,
impacted by the recessionary trends, with a slowdown showing no signs of near term revival
in GDP growth to 5%. The focus and exponential
growth in the domestic market & presence of global • Price cuts to hit margins: With volumes drying up,
IT offshorers has partially offset this fall, resulting companies are expected to cut pricing in favour of
in net overall momentum. The slowdown is expected volumes
to persist, as lead indicators of US economic health
(the US accounts for 40% of global IT spend) continue • Revenue visibility fogged out: IT companies
to be extremely negative. That being said, India may normally have a one year revenue visibility of >60%.
be better positioned for a quick recovery and for However, with an already stressed client base, given
future growth than many of the other developing the prevailing tough environment, revenue visibility
economies. There is a sense that the international appears fogged
institutions will be remade to reflect the current balance
of power, and that India may be able to turn this crisis • Uncertainties weigh on valuations: Current
into “a permanent place at a new high table”. valuations factor in the rapidly deteriorating
environment and the same is expected to remain
depressed until companies improve revenue and
volume growth
14

15. • Powerful forces are driving change in the IT The belief is that there is a strong correlation between
services market, including: India IT sector revenue growth and US GDP growth,
• The current tough economic condition is driving which implies that a revival in revenue growth would
many companies to look to outsourcing as primarily coincide with an uptick in US economic growth. The 10
a cost-cutting initiative. To meet their needs the possible indicators in this sector to track are:
providers are now investing in delivery centers
around the world beyond India, although it remains 1) Working hours
as the leading offshore services destination 2) Jobless claims
3) New orders for consumer goods
• The current economic condition spares no vendor. 4) Vendor performance
Even the growth of the once highflying Indian 5) New orders for capital goods
providers has moderated considerably, driving many 6) Building permits
to further their efforts and focus on the European 7) S&P 500
market 8) Money supply
9) Interest rate spread
• Cloud computing and SaaS paradigms are 10) Consumer expectations
redefining how computing resources can be
accessed and paid for An economic downturn / recession places high stress
on the business and the IT organization. There are
• The boundary between software and IT services different stages to a downturn, and there are ways
business models are blurring, leading to each to foresee them and manage them. The first stage
encroaching on the other’s space experiences decline in economic output numbers like
GDP, corporate earnings, asset values and diminishing
Signposts to a revival return on investments, as markets start to slow. In
The IT market is currently undergoing a structural the second stage although the signals are marked
transformation that will have a profound effect on how by denial, fear and pessimism, the regulators of the
IT service providers will have to conduct their business. economy try to pump in measures to tide over the
Market forces of commoditization, miniaturization, negative sentiment and manage the crisis, with the
industrialization, and globalization, along with changing result of gradual improvement in customer expectations,
buyer sentiments, would accelerate a shift in the increase in demand and resultant rise in employment
dominant form of IT delivery in the coming years - from levels. The following stage is characterized by the
buyers self-integrating technology to outside providers increased confidence and growth in customer orders,
assembling and managing it for them. As service increase in consumption and rate of earnings which
providers prepare for these changes, they are looking to provides breathing room to invest in growth projects.
redesign their solutions portfolio.
15

16. The major changes organizations must make between • India is also fast becoming a hot destination
stages are a focal point of risk and opportunity for the for outsourced e-publishing work. As per a
business. Figure below illustrates the recovery cycle Confederation of Indian Industry (CII) report, the
with productivity on the y-axis and time on the x-axis. industry is growing at an annual rate of 35% and
Productivity decreases during a full blown recovery India’s outsourcing opportunities will help make the
as companies start piling up their work force and publishing ITES industry worth US$ 1.46 billion by
capacities in anticipation of demand. The chart shows 2010
a recovery after Q2-Q3 FY 10.
• With growing interest in utility type models, software
and IT services business models are converging
Employment with software companies, incorporating IT services
growth
and software as a service (SaaS), while IT services
Increasing
working hour providers are architecting and selling asset-based
offerings that do not rely solely on leveraging labor
Interest rate as the underlying ingredient for revenue and profit
Productivity
spreads show margins
a bull steeping
• Virtualization will tend to be a growth catalyst in
Improving data on new the software market and open source software a
Improving consumer orders for consumer
possible alternative to the proprietary software which
expectations and goods, capital
new building permits, goods and vendor is still perceived as the more-expensive option
expanding money supply performance
Looking Ahead
Recession
As we look ahead India would recognize need for
03 FY 08 03 FY 09 02-03 FY 10 transformation and change. Indian IT services industry
Time landscape has graduated from being a low value
Source: Centrum research long term services provider offering cost and labour
arbitrage to provider of high value one time /
Few emerging trends long time services such as discrete and end to end
• Verticalisation of IT services is a definitive emerging outsources facilitated by its scalability.
trend and users are demanding services tailored to
their needs. Mature IT customers are today looking Expansion into tier 2 / 3 cities can reduce pressure.
for total solutions that can solve their business Currently there are seven centres that account for over
challenges rather than at IT hardware, software, and 95% of exports. By 2018, it is forecasted that 40% of IT
services as discrete elements / ITES exports will originate from non-leader locations.
The potential of near shoring needs to be tapped fully,
• The sector is also eyeing remote infrastructure as customers are on the lookout for the geographically
management services “as the next big opportunity” close and culturally similar centres.
after the success of ITES. India is “well positioned
to capture a disproportionate share of this growth Key global sourcing drivers will continue to be cost,
by 2013 that is about $ 13 to $ 15 billion out of the access to talent, business improvements, increasing
total potential annual revenue of $ 524 billion, from speed-to-market and access to emerging markets. The
the current share of $ 6 to $ 7 billion”, a report by future outlook for all these drivers is positive, leading to
Nasscom and McKinsey said increased momentum for global sourcing.
16

17. India’s exports have been hit due to the global financial The BFSI sector one of the largest spenders on IT and
crisis. India has a large domestic market that can help one of the worst hit in the current economic slump.
to offset the export business. Gartner expects some With the trouble brewing in the BFSI sector, the industry
impact on IT services providers that rely on offshore focus is likely to shift to areas such as manufacturing,
discrete projects coming in from the U.S. and Western healthcare, retail and utilities.
Europe where projects are being scaled back or cut.
To counterbalance the offshore work, these IT services Indian service providers are increasingly engaging in
providers will most likely focus on India. M&A activity as they seek to expand their customer
base into new geographies. India-based providers
India’s burgeoning domestic market, fuelled by the demonstrated in H1 2008 an appetite for making
economic growth will be a one of the focal points acquisitions, particularly in geographies or countries
for the IT sector in the coming days. As the Indian where they wanted to grow their customer base.
economy further opens up, other verticals including Companies like Wipro, TCS, and Infosys were all near
manufacturing, travel and tourism, healthcare and the top of the list of most actively partnering service
entertainment will increasingly look towards IT to providers; between them, they account for 41% of all
increase competitiveness. For both new and existing the partnerships.
verticals, the Small and Medium Business (SMB) segment
will represent an important source of growth for the Sustained demand, robust fundamentals and a
domestic IT services market. supportive business environment will help realise the
significant potential the IT-ITES industry offers, both for
While the 2009 outlook for global technology related exports and the domestic market. The Indian IT-ITES
spending is affected by the recessionary environment, industry is now at a critical point in its evolution. Behind
a rebound is expected from 2010 onwards. The it stands a decade of stellar performance which has
opportunity for India is tremendous since currently it left a deep imprint on the Indian economic and social
accounts for just over 4 % of worldwide technology landscape. Moving forward, it faces a transforming
related spend. Additionally, growth in global sourcing macroeconomic environment, rapidly changing
is estimated to be almost four times that of technology customers and needs, evolving services and business
related spend. India currently generates the bulk of its models, and rising stakeholder (employees, investors)
IT-ITES revenues from the US, and the BFSI sector, while aspirations. These forces are expected to redefine the
accounting for a miniscule part of technology spend in nature of demand and supply for the industry, and also
other geographies and verticals. redefine the strategic imperatives for businesses in 2009.
Indian economy further opens up, other
verticals including manufacturing, travel and
tourism, healthcare and entertainment will
increasingly look towards IT to increase
competitiveness
17

18. 6. Conclusion
While there are growth-related challenges in the short- All in all, the environment looks weakest in a long while,
to-medium term, there seem to be some opportunities and yet there remain pockets of opportunity. These
for managing the bottom line for the rest of the year. areas, if tapped intelligently, would enable the IT firms
The macroeconomic environment is depressing and to ease the blow of this financial crisis and help them
has impacted the overall confidence in the sector from tide through the tough times. The crisis has now spread
a market perspective. A US recession, in all probability, globally, and further reduces room to maneuver.
will last through 2009 and more, in making this period a
challenging one for growth. To conclude, we are tempted to use a popular aphorism;
the Chinese character for “Crisis” represents two
Despite the foreboding financial crisis, the opportunities symbols “Danger” and “Opportunity“. The choice is
are massive. Making the growth vs. profitability trade-off ours.
early on during the slowdown is just one of them.
Profitability levers are still available if growth is sacrificed
where required, and managed well.
Endnotes
1
The weighted average of local currencies has been used considering a basket of local currencies in the Asia Pacific
region, weighted for each region’s share of the global IT market to neutralize the impact of currency changes
2
As per NASSCOM factsheet updated Feb 2009
Mindtree Limited, IBM India Private Limited and Tech Mahindra Limited
3
4
TPI is a leading global sourcing advisory firm
5
As per NASSCOM factsheet updated Feb 2009
18

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