Many executives in the Indian information technology (IT) industry are accustomed to living out of a suitcase, but suitcases were particularly in evidence at this year’s National Association of Software and Service Companies (NASSCOM) India Leadership Forum held in Mumbai in mid-February. On the third and final day, participants arrived packed and ready to leave for the airport once the formal program was over, forgoing the usually well-attended evening parties in order to save on one night’s hotel stay. Delegates at the forum numbered close to 1,000 this year versus 1,500 last year, and top-level sponsors dropped from seven to four.

There are reasons for the lack of festivity and the falling numbers. In early February, NASSCOM lowered its projections for export revenues in India’s IT and business process outsourcing (BPO) sector for the fiscal year ending March 2009. The target originally had been set at US$50 billion with a growth rate of 21% to 24%. Now, NASSCOM is projecting US$47 billion at a growth rate of 16% to 17%.

“We entered 2008 with uncertain headwinds and high volatility,” says the recent NASSCOM report. “The first half of 2008-09 had 24% growth, on track with the industry forecast. [But] the second half was impacted by the worldwide economic downturn. The additional challenges were cross-currency fluctuation, terror attacks, corporate governance, the U.S. elections and protectionist sentiments.”

A closer look at the customer profile of the Indian IT sector shows why the industry is hurting. The U.S. accounts for 60% of the market and the UK another 18.5%. This is not too different from the respective values of 68.2% and 14.5% in financial year 2003-04. The current global financial problems began in the U.S., and it has been among the hardest hit countries so far. Analyzing the numbers along another parameter — the verticals — shows that the banking, financial services and insurance (BFSI) industry accounts for 41% of the business. The percentage has actually gone up marginally since 2003-04. And this sector is at the epicenter of the crisis.

During the NASSCOM forum, participants agreed that it was time for some belt-tightening and soul-searching. According to many, the long-term future still seems bright. But opinion was divided on the prognosis for the next few years. The “glass-is-half-empty” school of thought felt that business would dry up as IT budgets in the West were cut. Add to this the protectionist undercurrent of the new rules concerning H-1B visas that are part of the recently passed U.S. stimulus package, and the future looks distinctly gloomy, they said.

The new regulations on H-1B visas are still shrouded in a certain amount of confusion. The stimulus package that U.S. President Barack Obama signed into law on February 17 says that all companies and banks that receive federal funding under the Troubled Asset Relief Program (TARP) will be considered “H-1B dependent” — a category that so far included only businesses where more than 15% of the workforce were such visa holders. (H-1B visas apply to non-immigrant workers with specialized skills.) Companies within this category have to attest that they have made “good faith” attempts to recruit equivalent U.S. workers before hiring H-1B visa holders, that they haven’t displaced any U.S. workers, and that they are paying the prevailing U.S. wages to any H-1B hires.

While this has led some right-wing activists in India to threaten boycotting a range of American products, the “glass-is-half-full” proponents at the forum suggested that one should not make too much of U.S. politicians playing to a domestic gallery on H-1B visas. “There won’t be any immediate impact,” said NASSCOM chairman Ganesh Natarajan. First, existing H-1B visa holders in the U.S. who want to renew their visas don’t seem to come under the purview of the new rules. Second, it is unclear if the law affects Indian IT companies working on projects for federally bailed-out U.S. companies. NASSCOM believes the rules apply only to direct employment by U.S. companies. According to BusinessWeek, quoting data released by the U.S. Citizenship and Immigration Service (USCIS), for fiscal year 2008 (ended September 20), the top four firms on the H-1B employment list were Infosys (4,559 visas), Wipro (2,678), Satyam (1,917) and Tata Consultancy Services (1,539). The top U.S. company on the list — which is not in line for government assistance — was Microsoft (1,018).

False Analogies?

“Perhaps now is the mother of all recessions,” Infosys chairman N.R. Narayana Murthy said at the forum. On a more positive note, he added: “But we have seen such times earlier, like the recession in 1989-1993, or the tech bubble bursting in 1999-2002. This is also a time when best-quality leadership is called for. We also have to tell our youngsters not to lose heart.”

Keynote speaker John Chambers, chairman and CEO of Cisco, was singularly upbeat. He predicted a timeframe for the global crisis to start easing — the end of 2009. He also identified the countries where the recovery would start — India and Germany. “One economy that I’d bet on right now is India,” he said.

“Indian companies are making a false analogy to the 2001 crisis and the tech bubble [bursting] and have assumed a ‘we have seen it before’ attitude,” noted Harvard Business School professor Pankaj Ghemawat in an interview with business daily Mint. “I think this crisis is different, and ‘mother of all crises’ is not even beginning to describe it. I’ve seen nothing like this before, and there is still a lot of uncertainty about when things will begin to get better.”

At a forum session titled, “Hard Times: Slow Economy, Sales Slump — Will It Get Worse? Will You Survive?” Tata Consultancy Services (TCS) CEO S. Ramadorai agreed that “it’s a challenging environment” and companies must speed up their learning process and become more nimble. Nandan Nilekani, co-chairman of Infosys, added that the crisis would likely weed out weaker firms. The industry had been used to 30% growth and allowed inefficiencies to creep into the system, he said.

Jim Champy, chairman of U.S.-based IT solutions firm Perot Systems, said that the crisis should be viewed as a learning process. “It’s a period of long-term restructuring, and for the IT industry it is a big opportunity to use technology and innovations. During the slowdown, the changes in business models will help to restructure and consolidate the business for the next three to four years. Those companies that are able to change their business models will survive the tough times and have a bright future.”

“We feel that this is a time of learning and optimization for the industry. We would urge our member companies to see this as a silver lining,” said Som Mittal, president of NASSCOM. “India offers the best solution to manage resources and IT budgets and improve competitiveness, even in today’s difficult environment.”

Looking Inward

Union Minister for Commerce and Industry Kamal Nath started one debate by suggesting that the Indian IT industry turn to the home market now, instead of focusing primarily on exports. “We have for long looked outward; it is time to look inward…. The domestic market in India is huge and the Indian IT industry needs to accept the challenge to focus on this market.”

Not everybody agreed this is a viable option. Nilekani, for example, said that the domestic market could not replace global growth. The reality in India is that the multinationals have captured large swathes of the domestic market. For them, it’s a seeding operation, and they are prepared to work at bargain rates while building up operations in India to service their global clients. According to research firm Gartner, IBM is the leader in the domestic market. Indian companies, used to high margins abroad, will have to change mindsets before they can make inroads at home.

Others felt it was not just the Indian market but also the entire region that should be the focus of attention. China was represented at the forum, one among 22 participating countries. The old story of the combination of Chinese hardware and Indian software didn’t find too many takers; several participants questioned whether a market for the combined wares exists. What’s new is a collaboration to tackle the Asia-Pacific markets. The Asian-Oceanian Computing Industry Organization (ASOCIO) has been acting as a bridge in this regard. According to Ashank Desai, chairman of Mastek and president of ASOCIO: “Asia is the place to make ICT [information and communication technology] happen…. There is so much variation [in the region that] there is a huge opportunity to synergize.”

Considering Consolidation

Another undercurrent in the forum discussion was the scope for industry consolidation. There was near unanimity that the big players would thrive. The boutique firms (specializing in niche technology areas) would also cope with the downturn. But the mid-tier companies would have to redefine themselves. In any mature industry, a spate of mergers & acquisitions (M&A) would have happened by now. But IT is a first-generation sector; most of the original company founders are still at the helm, and they are not about to let go easily.

“This is a good time to go in for M&A,” Vineet Nayar, CEO of HCL Technologies, told the forum participants. “Values are very low.” Ramadorai of TCS offered a different opinion: From his perspective, organic growth was best. But Chambers of Cisco countered that in challenging times, collaboration and partnerships become more important. Incidentally, apart from the NASSCOM forum, Chambers was in India to announce a strategic alliance with TCS to build next-generation data centers.

Entrepreneurs may be wary of collaborations and M&A. But business groups that have IT companies in their fold recognize the need for scaling up. This explains why the beleaguered Satyam — whose financial position and liabilities are still unknown — is a hot property. Engineering giant Larsen & Toubro (L&T) has picked up a 12% stake in the company through market purchases. The idea is to merge it with L&T Infotech. At one point, the Mahindras were also looking at Satyam for a possible merger with group company Tech Mahindra. In fact, there are seven suitors for Satyam currently, according to the company’s new government-appointed board.

Other companies hit by the downturn are also rumored to be up for grabs. Even as the NASSCOM forum was taking place, the shares of mid-tier company Hexaware rose 73% in one day. Founder and executive chairman Atul Nishar dismissed rumors that the company is looking to be sold. “We are committed to Hexaware,” he said. As with Hexaware, shares of many IT companies have turned volatile. The consensus at NASSCOM 2009 was that some degree of consolidation is inevitable.

On the final day of the forum, Harvard professor Ghemawat brought Satyam — which several speakers had decided to ignore or dismiss — back to center stage. “For many U.S. companies, the Satyam episode is not a one-off,” he said. The scandal affects the entire sector. In this context, he praised NASSCOM’s setting up of a corporate governance and ethics committee under Narayana Murthy of Infosys. But he warned against overdoing it: If you are too open, you hand a competitive advantage to rivals, he said. Indian IT companies must avoid what he called a “collective striptease.”

NASSCOM, meanwhile, is not participating in any such over-exposure; it plans to be more conservative about revealing its projections and data. “The uncertain economic environment will prevail in 2009,” the February NASSCOM report says. “World growth is projected to fall 0.5%, the lowest for 60 years, and recover to 3% in 2010. In that context, NASSCOM has taken a two-year view [instead of yearly targets] to factor in the volatile environment, and estimates the Indian IT industry to grow at 15% [compounded annual growth rate] to achieve exports revenues of US$60 billion to US$62 billion by financial year 2010-11.” Said Mittal of NASSCOM: “Recession is a time when expectations are reset.”