Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Software sector– Transition in progress - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 24, 2003

    Software sector– Transition in progress

    If the 90’s was a decade of rapid spending in new technologies by corporates, then the current decade is the period where spending is focused on services that enhance the value of their previous investments. Due to this, services like Systems Integration (SI) and Package implementation (PI) are garnering a larger chunk of global IT (Information Technology) spending. However one aspect that still remains apparent is the fact that the use of IT in running a business is as inevitable as ever. This has led to the emergence of IT consulting as another high growth area in the overall global IT spending sphere.

    Source: Gartner

    Due to the changing customer needs and in their search of sustainable growth, IT companies across the globe are widening their portfolio of service offerings. Indian companies are also on their move towards such territories. Also for companies in the IT services space, the continuing economic slowdown has brought into prominence the need to move up the value chain. This movement up the value chain is also likely to be a means for sustainable and predictable growth for such companies. While Indian IT companies’ existing offerings of application development and maintenance are increasingly facing weak demand, a shift towards more high-value offerings is not anymore an option for them, but has become a necessity going forward.

    This transition is likely to change the face of the Indian software services sector going forward. This article tries to outline the extent of this transition, and the offerings Indian IT companies will look to gain competencies in, in order to survive the global competition that is intensifying.

    As multinational competition drives deep into the strongholds of Indian software services companies, the way out for Indian companies is to move aggressively towards their (MNCs) areas of strength i.e. relatively high value services like package implementation (PI), systems integration (SI) and IT consulting. Cost-arbitrage, which has been the competitive advantage of Indian IT companies, is not likely to be sustainable going forward.

    One major reason for slowing down IT spending worldwide has been higher levels of scrutiny that such spending has been put under. Also, more than investing in newer technologies, companies worldwide are sweating out their existing IT investments, thus resulting into lesser revenues for IT firms from their bread-and-butter businesses of application development and maintenance. This realization, however, seems to be setting in slowly, yet steadily, into the minds of managements of the Indian IT companies. Indian companies, especially the majors, are attempting a transformation from being merely low-cost offshore service providers to players capable of providing a broad spectrum of services and expertise in more specialized areas of PI, SI and IT consulting.

    In recent times, top-rung Indian IT companies are witnessing a higher chunk of their overall revenues coming from such high-value added services. For example, package implementation (PI) is steadily establishing a foothold in Indian IT companies’ portfolio of offerings, and has started to account for a significant pie of these firms’ revenues. PI now forms a considerable part of Infosys' revenues. This service contributed over 11% to Infosys' FY03 revenues, up from 10% in FY02. Satyam Computers has seen a bigger transition in this regard as the PI revenues contributed over 21% (FY03) to revenues, up from 6% in FY01.

    The resurgence in the enterprise resource planning (ERP) market is supplementing the growth of PI. The increased focus on PI can also be seen from the growth in share of IT spending for this service over the past few years. The year 2002 witnessed a huge 81% growth over 2001, in PI’s share of global IT spending. And with this increasing usage of packages and improving focus on PI vendors, Indian companies like Infosys and Satyam offering PI service stand to gain a lot going forward.

    Satyam: Services’ contribution
    Satyam FY02 FY03
    Development 52.2% 49.1%
    Maintenance 29.6% 26.6%
    Packaged Software Impl. 13.9% 21.3%
    Engg. Design Services 4.3% 3.0%
    Total 100.0% 100.0%

    Systems Integration (SI) and, now, Enterprisewide Application Integration (EAI) is other area that is helping Indian companies tide over the slowdown in demand for its other, bread and butter services. Integration, put simply, is a combination of processes, software standards, and hardware resulting in the seamless integration of two or more enterprise systems (CRM, SCM, etc.) allowing them to operate as one. This involves implementation of technology to enable dissimilar systems to share data effectively.

    Two major issues driving this move towards SI and EAI are further proliferation of packaged applications and streamlined business processes. And as and when this task of integrating enterprise systems gets more complex as technology advances more rapidly, the competencies these services companies gain from this domain will give them greater benefits going forward. This service offering has consistently taken a large part of global IT spending for the past few years. For example, in 2001, around 23% of global IT spending was put into SI services and this pie increased to 26% in 2002. Global majors IBM, EDS, HP and Unisys are the major players in this league. Indian IT companies like Infosys, Wipro and TCS are fast catching up on competition with global system integrators. For example, in 2001, Wipro Technologies bagged a US$ 70 m SI outsourcing contract from Lattice, UK’s largest gas-pipeline group.

    IT consulting is another domain where the Indian IT companies are trying to get a foothold. For the past few years, Indian IT companies have consistently talked about moving up the consulting space. But as numbers indicate, revenues from consulting still form a negligible amount of total revenues. Indian software majors – Wipro, Infosys, TCS, HCL Tech and Satyam – have been trying hard to make a mark in the consulting domain, which has been one of the major areas of strength of competitive global IT companies. The movement towards providing consulting services is likely to be a tough task for Indian companies but, leveraging on their ability to acquire competencies in different domains and technologies faster than their Western counterparts, Indian companies are in a better position to provide value-added services going forward.

    Infosys: Services’ contribution
    Infosys FY02 FY03
    Development 32.0% 32.1%
    Maintenance 29.0% 28.2%
    Package Implementation 9.8% 11.0%
    Consulting 4.2% 4.3%
    Total 75.0% 75.6%

    Although, contribution from consulting services still accounts for a miniscule part of total revenues for Indian IT companies (in FY03, Infosys earned 4.3% of its revenues from consulting), this contribution is slowly, but steadily, increasing (in FY01, Infosys had earned just 1.6% of its revenues from consulting services). In comparison, IBM, in the March quarter of 2003, derived around 30% (or US$ 3 bn) of its Global Services’ revenues from the consulting segment. Also, CSC’s consulting and SI practices contributed around 49% (or $5.6 bn) to the company’s total revenues in 2002. Despite such small contributions from consulting business, going forward, we are likely to see a higher contribution to the bottomline from this service offering, as Indian companies become more mature in this space. Also, Indian companies’ existing technical expertise and their competencies in understanding complex business models will open doors for them into specialized domains that have been the stronghold of global IT majors like IBM, HP and Microsoft.

    Customers increasingly want to work with companies that are reliable, and are more mature in their service offerings. Therefore, there is a flight towards such companies that offer a wide range of integrated services. Understanding the ever-evolving needs of customers, Indian software companies are slowly expanding their service offerings. Although, when compared to their global peers, Indian IT majors are still in nascent stages of growth, but given adequate time they could make a major mark on the global IT scene through their competencies and performance.



    Equitymaster requests your view! Post a comment on "Software sector– Transition in progress". Click here!


    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Ankit Shah's First Five Insider Recommendations (The 5 Minute Wrapup)

    Aug 5, 2017

    How to get exclusive insider recommendations from Ankit Shah.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE IT

    Aug 18, 2017 (Close)