Casual visitors to the NASSCOM (National Association of Software and Service Companies) India Leadership Forum 2008, held in Mumbai from February 13-15, could be pardoned for thinking that a celebration was in progress. Bonhomie was in the air, the speakers were upbeat and the large number of panel discussions and seminars reflected much optimism.
“The Indian IT industry has been evolving rapidly,” noted NASSCOM president Som Mittal. “Growth is on track to achieve, if not exceed, the targets for 2010.” Lakshmi Narayanan, NASSCOM chairman and vice-chairman of the NASDAQ-listed Cognizant, added: “The robust growth of the Indian IT-BPO (information technology-business process outsourcing) industry by more than 33% in the current fiscal year reinforces the confidence of global corporations in India.”
This sunny outlook contrasts sharply with the somber mood a couple of months ago at the TiE Entrepreneurial Summit 2007 held in New Delhi in December (see “Reversal of Fortune“). While debating how Indian IT and BPO firms would cope with a global slowdown, pessimism ruled. The Summit attendees concluded that big firms might escape with a few bruises, but the small and medium firms would be badly affected.
Have things changed so fast? Several IT industry leaders who attended the NASSCOM event told India Knowledge at Wharton why they are upbeat about the future — and also about the rising potential of India’s domestic IT market.
Their optimism may seem contrary to external developments. Stock markets around the world have tanked, driving down the valuations of IT companies. And the recession in the U.S., which could hit tech spending, seems much closer.
But, viewed from NASSCOM’s perspective, the worst is probably over. The rupee appreciated against the dollar by a whopping 12.3% during the past year, and this wreaked havoc on the margins and finances of IT firms. But the Indian IT brigade is now prepared. It has begun deploying the standard tools — currency hedging, geographical diversification, pegging tariffs to the rupee and cost-cutting.
Additionally, few expect the rupee to keep rising so dramatically in the future. “As long as the appreciation is gradual and about 3% to 5% a year, we believe it can be managed through methods like pricing, offshore leverage, productivity and so on,” says S. Ramadorai, CEO of Tata Consultancy Services (TCS), India’s largest software and services company.
Finding Opportunity in a Recession
The possible recession in the U.S., too, is seen more as an opportunity than as a threat. “If the U.S. were to go through a slowdown or even a mild recession, it may be advantageous for the Indian IT industry as customers will want to offshore more to reduce costs,” says Ashok Soota, chairman and managing director of the Bangalore-based MindTree Consulting. Mittal adds, “We believe the demand is still strong.”
“If there is a slowdown, we will be the ultimate beneficiaries as companies will look to move work offshore and take advantage of the productivity improvements that go along with it,” says Ramadorai, speaking of TCS. “This will help our bottom line and profitability as offshore work provides us with higher margins.”
While the rupee and the recession are the two major concerns confronting the industry, perceptions differ about their impact on IT firms. Various views were offered on the sidelines and in the networking events.
The summit appeared to have too much on the agenda often at the same time. For instance, on the first morning you could attend a session on “Building ICT Trade in Asia Pacific” or one on “Shifting Sights from America to Europe.” The second morning, there was even a Track C. Track A was the Thought Leaders Conclave, Track B was the Global CIO Conclave and the Insights Conclave brought up the rear.
Two issues, however, seemed to dominate the attention of the 1,500 participants of the NASSCOM Leadership Forum. The first was the removal of benefits for the IT sector. In the 1990s, the federal government had introduced the Software Technology Parks of India (STPI) program, which gave software firms located in such parks a tax holiday until 2010. NASSCOM has been lobbying for an extension of this program.
“The proposed withdrawal of tax benefits under the STPI scheme is an issue that we think the government should reexamine,” says Soota of MindTree. The government seems to be inclined to agree. Thiru Raja, Minister for Communications and IT, told the summit: “Based on feedback from the Indian IT industry, we are looking into the issue of extending the STPI program on a priority basis.”
There was one loud voice against the extension of the program: the flag-bearer of the Indian IT industry, N.R. Narayana Murthy, chief mentor of Bangalore-based Infosys. A short while ago, Murthy told business channel CNBC-TV18 that companies should not ask for tax exceptions when they did not need them. “We have to rise above the interest of our own company and say that we have to do what is good for the country,” he said. “I believe that what is good for the country is that we should pay taxes.” Murthy was similarly dismissive about the brouhaha over the rising rupee. “It is silly for the industry to say that we will be viable only at Rs. 40 per dollar,” he said.
The War for Talent
While differences persist on continued tax benefits for the IT industry, there are none on the other big issue of the day — the shortage of suitable talent. Speaker after speaker at the summit pointed out that this was the real crisis area.
“Current projections indicate that, by 2010, the IT industry may face a shortfall of 500,000 professionals, unless proactive steps are taken,” says Ganesh Natrajan, CEO of Zensar Technologies. “Of the large number of engineering and other graduates being churned out every year, only 10% are employable in the IT industry. Most are unsuitable because of a lack of soft skills, particularly communication skills, which are essential for industries like IT.”
“However many people we have, we are always short of good people,” says Jerry Rao, chairman of Electronic Data Systems (EDS) Asia-Pacific. Rao is co-founder of MphasiS, which merged with EDS in July 2006. “This is a challenge of staying in business,” continues Rao. “There has been a tremendous increase in the number of engineering colleges in the country during the past 10 years. We now need to focus, not just on quantity, but on upgrading quality.” Companies need to be proactive in this context. Rao points to the EDS Learning and Leadership Academy in Mangalore, which opened last year and provides 75-day courses for engineering graduates.
“NASSCOM has proposed setting up a chain of finishing schools for IT professionals, who can be made more employable with three-four months of honing technical skills and imparting soft skill training,” says Mittal. “This will help bridge the manpower supply-demand gap by at least 30% to 40%.”
TCS, the country’s oldest IT firm, has a multi-pronged approach to this issue. Says Ramadorai: “To develop talent, TCS is working towards creating an ecosystem that nurtures talent and enhances suitability of the talent pool in the country. As part of our Academic Interface Program (AIP), we conduct student development and faculty development workshops; set up labs and provide internships; sponsor academicians to sabbaticals at TCS; conduct an annual meeting, called ‘Sangam,’ of heads of institutes; and sponsor awards at the institutes. TCS has developed a Faculty Development Program to collaborate with select universities in conducting custom-made courses to be taught to students in engineering colleges in smaller towns in India. We encourage students to go through certification programs in software technologies; when they join the company, the cost of the certification is reimbursed.”
During the past fiscal year, Ramadorai notes, “396 institutes in India benefited from our ongoing AIP initiatives. In addition, we signed MoUs (memoranda of understanding) with 45 institutes in India. And 60 institutes from across the U.S., Canada, Brazil, APAC (Asia-Pacific), Europe and the UK have benefited from our Global Academic Interface program.
“We have also begun an intensive seven-month program to transform science students into software professionals. This is proving successful and will help us increase the talent pool for the industry,” Ramadorai adds. This is the TCS way of answering criticism that the IT industry is hampering India’s economic growth by poaching all available engineering graduates, when what they need are science or commerce grads.
Reorganizing for Change
TCS also announced a couple of days before the NASSCOM conference that it would reorganize itself to face the changing times. Operations will be split into five verticals — industry solutions, major markets, new growth markets, strategic initiatives and organization infrastructure. Under the earlier structure, there were three groups focused on industry, geography and service practices. The restructuring will be effective April 2008.
Infosys went through a similar reorganization late last year. A New Growth Engines strategic business unit was set up to look beyond the Americas, and a separate business unit was formed to concentrate on the domestic market. “There is a need to realign to create a structure that can meet the new challenges, increased customer expectations and higher levels of competition,” Infosys CEO Kris Gopalakrishnan said while announcing the changes. The exercise has been called, “One Infy.”
Almost all IT companies are reorganizing to cope with the changing environment. (MindTree Consulting has even dropped the word Consulting from its name, and chief operating officer Subroto Bagchi has a new title — Gardener; he is supposed to “grow minds.”) They are also preparing for inorganic changes brought about by mergers & acquisitions (M&A).
At a special session at the NASSCOM conference titled, “India M&A Wave: Making Acquisitions Work, Sharing Experiences,” speakers were united in their belief that the pace of mergers would definitely increase. “Going forward, we are going to see more efforts at consolidation,” said Ananda Mukerji, CEO of Firstsource, an Indian company that has orchestrated a string of international takeovers in the BPO space over the past few years.
According to a Grant Thornton study, there were 175 IT and ITeS (IT enabled services) deals involving Indian companies in the first nine months of 2007. The total value was $3.59 billion, which puts the average deal size in the little league. The bigger portion of this pie ($2.19 billion) came from cross-border deals and $2.03 billion of this was for outbound deals. Indian IT companies have been spreading their wings.
But foreign takeovers have been happening too. In addition to U.S.-based EDS’ acquisition of MphasiS in 2006, noted above, Capgemini has acquired the U.S.-based Kanbay International, which had most of its operations and personnel in India. And the Nasdaq-listed Covansys has merged with a wholly-owned subsidiary of Computer Sciences.
An M&A orientation, however, has its dangers. Speakers at the NASSCOM conference repeatedly warned against this. “No matter how careful you may be, there could be surprises in store,” said Sid A. Pai, partner, TPI India, the local arm of a global firm that specializes in transforming business support operations. “More often than not, there are skeletons in the cupboard. It’s a lot like an arranged marriage. You have all these people playing matchmakers yet, inevitably, there could be something that was missed. But once you tie the knot, you just have to swallow hard and make it work.”
At a different session, though on the same theme, Leo Puri, managing director of Warburg Pincus, a private equity firm, said the IT industry was far too concerned about protecting its margins than making investments for the future through M&A activity. “The industry has been growing fat and happy based on the labor-arbitrage model,” he said. “This has to change to move on to the next phase.”
The NASSCOM summit ended with fresh hope on the horizon. Rao of EDS said that the industry could look forward to a rewarding five-year period ahead. NASSCOM chairman Narayanan noted: “The journey through the next five years is not without its share of challenges. Key among them are increasing the employable talent pool in the country, sustaining growth momentum in an uncertain tax-holiday structure, harnessing the promise held out by the domestic market, leveraging innovation as the next drawing point and ensuring better growth for the small- and medium-sized companies.”
Mittal spoke about the next big frontier — the domestic market. Revenues from the Indian IT market, including hardware, are estimated to reach $23.2 billion in the year ending March 31, 2008, up 43% from the previous year. Now that the low-hanging fruits — markets like the U.S. — have all been picked, IT firms are discovering that there’s no place like home. “We always looked outward — now there are also many domestic opportunities.”