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SOFTWARE The Road To Xanadu Look beyond the bad news, the US slowdown could actually help the Indian software industry build risk free business models and rational business processes. By Suveen K. Sinha
There's enough melodrama: like the incident of the couple that worked for a large Bangalore-based company and was ready to leave for the US to work on a project, its first visit to that country. On the morning of the day the two were to leave, their company informed them that not only was the project no longer there, they didn't have their jobs anymore. There's enough dark humour: like another Bangalore-based company that discovered its employees consumed toilet paper worth Rs 34 lakh every year and is now devising ways (let's say no more) to bring that down. There's enough of the mundane: like shuttle services being withdrawn, increments being revoked, and those flying first- and business-class now flying economy, and those flying economy either taking the train or not travelling at all.
And there's enough of the positive to constitute a significant silver lining: business models are changing; new markets, notably Europe and Japan, are becoming important; business processes are becoming more rational; and attrition rates are dropping. ''Talent is careful about jumping (ship) now,'' says Vivek Paul, Vice-Chairman, Wipro. That's right, the Masters of the Universe are realising that they are mortal after all, and companies used to 100 per cent growth, quarter on constant quarter, are waking up to the reality of a pedestrian-by-comparison 40-50 per cent one. Caveat: Although there's more vicarious pleasure in reading about the rationing of tissue, this story will look at the silver lining; enough has been said about the rest. Offshore It Is In spirit, most software services companies adopted the offshore business model-work for international clients done out of development centres in India-some years ago. The typical IT-company's annual report had a camera-friendly chief executive extolling the virtues of the company's business model, and offshore was one of them. But almost everyone was speaking about a desired state and, in practice, the on-site component of their revenues wasn't insignificant. In 2000-01, it was 53 per cent for Wipro; 70 per cent for Hyderabad-based Wilco International, a wholly-owned subsidiary of Automatic Data Processing Inc; and 51 per cent for Industry gold standard Infosys. If companies knew about the merits of the offshore model, but persisted with the offshore-and-onsite one, there was good reason for them to: revenues. Last year for instance, Infosys' billing rates for offshore work was $32.3 a hour. For onsite work, it was $68.7 a hour. For HCL Technologies, the corresponding rates were $36 and $67.3. ''US companies can buy more for less from offshore centres and the only losers are apartment owners in the US,'' says NIIT Director P. Rajendran. Surprisingly, profit margins, thanks to the low costs of operating in India, are higher in offshore business, than onsite. Thus, the offshore-shift that will now happen should see the profits of most software companies increasing even as their revenues shrink.
Wilco's Managing Director Shakti Sagar, sees the quantum of offshore work jump to 70 per cent over the next 18 months. And Wipro's Paul sees IT increasing to about 50 per cent of its revenues. ''Wherever possible, we would like to increase the offshore component of our revenues; offshore work is much more lucrative.'' HCL Technologies, which has revised its revenue projections for 2000-01 upwards to Rs 480 crore against Rs 430-440 crore that analysts were expecting (the company closes its books on June 30), already generates 70 per cent of its revenues offshore. It has 29 Offshore Development Centres (ODCs), units dedicated to working with a particular customer. Nine of these have been set up in the past six months. Still, the equation won't be as simple as falling revenues and rising profits. Maintaining a considerable onsite presence helped companies win more contracts from existing customers and find new customers as well. Marketing costs, typically about 10 and of revenues for Indian IT services companies, will increase to about 20 per cent. Says R. Suresh, the chief executive of head-hunting firm Stanton Chase: ''We will see an increasing incidence of companies locating their marketing heads in the US.'' De-risking The Business Focus, companies caught in the grip of a slowdown have realised, doesn't pay. ''It is essential to offer broad-based services,'' says Vineet Nayar, Executive Vice-President, HCL Technologies. Over the past year, Infosys has reduced its exposure to dotcoms from 11 per cent of the revenues (1999-2000) to 4 per cent (2000-01). ''We have made a conscious attempt to reduce our exposure to start-ups, be it in the dotcom space or the telecom,'' says S.D. Shibulal, Director, Infosys. But choosing the right industry segments (verticals, as jargon has it) could still be tough. The contribution of the telecom-vertical to Infosys' revenues has dropped from 6.3 per cent in 1999-2000 to 3 per cent in 2000-01, but telecom, says Anil Tewari, an analyst with Goldman Sachs, isn't a business that is going to vanish in a hurry. ''Telecom remains the highest paying vertical. It is seeing less pricing pressure; TELCOs need to be doing things in technology to stay in business.'' Companies are also looking at domains like insurance, financial services, manufacturing, transport, utilities, retail, and government.
The simplest way to de-risk a business is to, of course, diversify geographically. Europe, which accounts for 25 per cent of the software industry's revenues, and Japan, which accounts for 5 per cent, are ideal candidates for this diversification. ''For companies like us, opportunities exist in Continental Europe, especially Germany, the Benelux countries, and Switzerland,'' says N. Lakshmi Narayanan, the President and coo of Cognizant Technology Solutions. Adds Arun Kumar, CEO, Hughes Software Systems: ''More Indian software companies are concentrating on Europe and as these regions continue to grow in terms of size and sophistication of software outsourcing activities.'' The focus on Europe and Japan is backed by great economic logic. The US-slowdown has shrunk American billing rates, reducing the differential between these and the rates in Europe or Japan. And since Indian software companies have traditionally focused on the US market, there is still enough low hanging fruit waiting to be plucked in the new regions.
The Value-chain Dilemma It took a slowdown for Indian software companies to realise that not all high-end work is necessary. ''In a recession, the first thing to be cut is consulting and other, non-discretionary spends,'' says Tewari of Goldman Sachs. To keep their bench-strength (read that as the equivalent of the manufacturing sector's idle capacity) companies may be forced into taking on work that they would otherwise have refused, like low-end coding and processing. But they cannot abandon their value-chain aspirations: profit margins are highest in areas like R&D and consulting. HCL Technology claims one reason it doesn't see itself being impacted by the slowdown is because it focuses on the 'technology services' domain. ''Our work is the core of the client's business processes,'' boasts the company's chairman Shiv Nadar. Thus, even as they prune costs-an all new experience for an industry given to living and working well-and scramble for business, Indian software companies will keep an eye open for mission-critical high-end business, the kind that will provide them a buffer against the next slowdown. -additional reporting
by Venkatesha Babu, |
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If
the Indian film industry were given to adopting contemporary themes for
productions, it may find it worth its while to look at the impact of the
US slowdown on Indian IT services companies.
