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Indian IT: Emerging trends
Feb 25, 2009

The Indian IT industry has grown significantly over last two decades. However, with the global economy slipping into a major slowdown, the sector is feeling the heat. The global scenario has changed significantly in the past few quarters. Several trends that are now emerging can have significant impact on the Indian IT sector going forward. In this article, we enumerate some of these trends which are emerging and which are going to shape the future of the Indian IT industry. IT budgets to be restructured: The downturn is denting profits and margins of clients of Indian IT companies. This is exerting tremendous pressure on the formerís IT budgets. As per Gartner, spending on hardware, software and technology services will be lower in 2009. Gartner estimated that technology spending could rise only 2.3% in 2009 (as against the earlier estimates of 5.8%) as businesses cut back on budgets following the spreading of financial crisis. The reduction in budget spends is likely to impact IT vendors negatively and would hamper growth going forward.

Vendor consolidation: Amidst slowdown, client organisations are looking for cost containment. In such a scenario, they will look towards consolidating their vendors (IT service providers). Earlier companies were outsourcing their work to multiple vendors but now they are looking at outsourcing to less numbers of vendors. This can help them save cost and enhance efficiency. This trend is likely to benefit large Indian outsourcing companies who have capabilities to execute large-scale and multi-skill contracts.

Domestic focus will increase: The Indian IT firms are expected to focus more on Indian market. Despite the global slump, Indian IT budgets are still expected to grow at a modest 5.5% (as per Gartner) in FY09. While a large part (around 60%) of this budget will be used to run day to day technological operations of businesses, around 23% will be utilised to grow the same and 19% will be used to transform it (the businesses). Also, the revenues from the government projects in India are expected to go up dramatically over the next two years. The governmentís IT spends is estimated to be around US$ 4 bn in FY11.

More regulations in banking post crisis: The collapse of some of the major investment banks and unraveling of multimillion dollars financial fraud has raised concerns over proper regulation of financial industry in the US. The financial crisis of 2008 has changed the face of the financial markets. Going forward, governments and regulators across the world will call for stringent regulations to avert this kind of crisis. Furthermore, government scrutiny of business will intensify in many developed countries. This will be a positive development for the IT industry, as it will generate demand for IT services led by growing demand of implementation of new regulation and stringent adherence to the current regulations.

New model of risk & reward sharing may emerge: At present, IT companies do not share either risk or reward of projects. They work on fixed cost basis or man material basis. Amidst the crisis, a new model of risk sharing can emerge. Going forward we may see this model helping IT firms develop new products and solutions that can bring in significant upsides. However, the potential downsides can also not be ignored.

Rural sourcing in the US: Smaller US firms are attempting to build a sustainable rural outsourcing model in the US to deal with growing unemployment rates that have touched an all time high. For instance, Xpanxion, an Atlanta-headquartered software firm, is among such firms seeking to create a more comfortable and cost effective alternative. There are numerous firms now looking at creating captive centres within rural areas as well as start-ups looking to offer services via this rural model. Furthermore, the political lobbyists such as Senator Chuck Grassley are leading a campaign against offshore outsourcing by American firms, some customers might prefer to outsource smaller projects to local providers and avoid being seen as supporting the outsourcing of US jobs. These developments are likely to adversely impact Indian outsourcing firms.

Diversified presence: Amidst global slowdown, Indian IT companies are trying to diversify their presence both in terms of geographies and verticals. These companies are now shifting focus to other emerging segments like retail and manufacturing where the presence of technology is just beginning to be felt. Indian IT companies are also focusing new geographies (like Japan, Eastern Europe and Middle East) to de-risk their revenue models. However, penetration levels in these domains and geographies are very low at this point of time. We believe that these measures will pay dividends in the long run.

Conclusion The broader outlook for the Indian IT industry remains weak in the short to medium term. In such times, organisations that are leaner, larger, and more vital will have new implications for business technology. Although the next two quarters are going to be tough for Indian IT companies, the value proposition that offshore outsourcing possess, will play a significant role in their growth over the long term. Notwithstanding the current slowdown, the industry will continue to grow and would create value for investors.

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