Sep 30, 2003|
Software: Uncle Samís still calling!
Of the US$ 9.5 bn in revenues that the Indian software services exports clocked in FY03, almost 71% (67% in FY02) came from the US markets. This rise in the US share comes despite the fact that the US economy has been in the grip of a slowdown for the last two years. The consequences of slowdown in the US economy can very well be judged from the fact that the US market contributes to around 40% of global IT spending (Gartner research). Even at the present, no signs of sustainable improvement are to be visible. In this light, let us discuss Indian software companiesí performance as far as their clients in the US are concerned.
As seen from the graphs above, almost all of the Indian software services majors (with the exception of Hughes Software) have increased, or have kept stable, their share of revenues from the US markets. In times when the pressure on billing rates came mostly from their US clients (because they are at the forefront of driving the move towards outsourcing), these Indian companies continued to strive on getting larger deals from them (the clients). However, they (the Indian companies), with the exception of a few, were not majorly successful in getting big deals. In anticipation of these Ďmuch-awaitedí deals to flow to them, Indian software companies continue to add to their employee base and invest in widening their selling and marketing network globally (especially in the US).
The slowdown in the US economy has, however, benefited the Indian software services companies. This is because of the fact that companies in the US have been rationalizing their costs and have been on the forefront of outsourcing their jobs to India. Even in the future, the need to remain competitive in the face of ever increasing competition would force those companies in the US to outsource more of their jobs to low-cost destinations like India. While, off late, there have been campaigns in certain US states because of job losses in government departments due to outsourcing of jobs to India, this is not likely to spread to the private sector companies. In fact, the economical sense that outsourcing makes would prevent this backlash from spreading too far.
Also, the concern that the appreciating rupee is making our exports to the US uncompetitive seems overplayed. This is because of the fact that software exports from India are competitive enough to negate effects of the rising rupee. While this is not to say that the appreciation has not had any effect on the financial performance of Indian software companies, what we are trying to put forward is that this is a short-term phenomenon. As Indian software companies (like Infosys and Wipro) continuously upgrade their offerings and move up the software value chain, competitiveness in export markets would be more defined by quality then by the value of the rupee.
On a final note, while Indian software companies are waiting for the US economic recovery to happen, this wait is more concerned with the size of the orders they are expecting to garner. This slowdown has ensured that Indian software companies now desist from giving overly optimistic guidance figures. And this has shifted investorsí focus from promised performance to actual performance. Also, the fact that these companies have improved on the operational fronts in times of increasing global competition would help them in sustaining in times of hardship. Thus, investors in the Indian software sector need to keep in mind that, over the long-term, despite all kinds of pressure, quality companies would provide them with adequate returns.
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