BRAINSTORMING FOR INDIA'S SOFTWARE INC.: (from left) Giga Group's Mike Dodd, Deutsche Bank's Alfred Elbrich, Nasscom's Kiran Karnik, Som Mittal, and Phiroz Vandrevala, Infosys' Nandan Nilekani, and McKinsey's Noshir Kaka at Nasscom's International IT Conference in Mumbai

It was India's great hope, but now it is flagging. Is it truly the end of the road for India's prized software industry, or merely a trough that it will soon ride out of? In any case, what should be the way ahead for the $11-billion industry? To find answers to these and some more questions, Business Today brought together some of the best names in India's Software Inc. and global experts at Nasscom's four-day International it Conference in Mumbai. Moderated by BT's Associate Editor Brian Carvalho, the panel comprised Nasscom's Chairman Phiroz Vandrevala; Som Mittal, Vice Chairman, Nasscom, and President & CEO, Digital GlobalSoft; Kiran Karnik, President, Nasscom; Noshir Kaka, Principal, McKinsey & Co.; Mike Dodd, Vice President, Giga Group; Nandan Nilekani, MD, Infosys; and Alfred Elbrick, MD (Technology and Investment Banking), Deutsche Bank (London). Excerpts from the exclusive brainstorming session:

BT: Welcome to you all and thanks for making it to the BT-Nasscom Round Table. You'll all agree that we are going through some challenging times and I need not go into the reasons. But instead let's start by getting a grip on really how bad the situation is.

Phiroz Vandrevala: The reality is that as an industry we are projecting a 30 per cent growth for the year that is a combination of everything we do in this business-it, it-enabled services, and others. So, if you look at the pack and take two simple dividing lines, which is it and it-enabled services, you will perhaps witness an 18-20 per cent growth in it and a 70 per cent growth in it-enabled services. That blended will give you the 30 per cent growth. This is a fact and not fiction. And a large part of that growth rate is being fuelled by the top five it companies in India. The top five will be in excess of the 30-35 per cent, some companies in the middle will be close to 18-20 per cent, and some of the smaller and very focussed companies will show some growth. So if we are looking at some 800 constituents, nearly 700 will show marginal or even negative growth.

Phiroz Vandrevala: "The real value that we are creating will be in the offshore business. And that is where the sustainable future is for us."

Som Mittal: "(Sustaining growth) is not about scale alone; it's about how deep and long your relationship is with your clienhts."

Kiran Karnik: "Obviously, there are some constraints, but we need to look at what we can do in terms of pushing ahead in the domestic market."

BT: So are we looking at a shake-out kind of a scenario?

Noshir Kaka, Principal, McKinsey: We are clearly seeing a polarisation, but what you termed as a shakeout, I would rephrase it as differentiation. If the 700-odd companies that you mentioned continued to play the same game, i.e., generic onsite-led staff supplementation largely followed by some modest offshore projects, then you will see the negative growth. I think the intent should be to create newer opportunities. You need to change the focus of what you are doing and how you are doing it. If you do that then there are certainly some viable and sustainable strategies for smaller companies to grow in India.

Mike Dodd: I think there will be some consolidation, which we have seen in the markets elsewhere. That is simply the sign of a maturing market. Going back to the growth area, I think we've got to be very careful not to snatch defeat from the jaws of victory, so to speak. There is still much that is extremely positive. I emphasise, extremely positive. Yes, there has been a reality injection. The dotcom bubble burst. But the basic accounting and mathematics rules will not change. The fundamental positive issues should be on top of the agenda.

Som Mittal: It's just been around four quarters and we shouldn't spell doom. I think everybody, whether big or small, has been impacted. But it's not about scale alone, it's about how deep your relationships are with your clients. The big players had longer and deeper relationships and had annuity business that continues, whereas the small and mid-size companies who do project-based work have been affected.

Nandan Nilekani: Given the present economic scenario, the Indian industry has done extremely well. At the same time, we should not get complacent, as the competitive challenges of the future are quite different. All of us have to come up with strategies, big or small.

Vandrevala: Looking at the long term, the important statistic coming out of the results of the last three quarters is fantastic growth that has taken place as far as the off-shore business is concerned. As long as we are revenue-led and revenue-measured, the real value that we are creating for the country will be in the offshore business. And that is where the sustainable future is for us.

BT: And that sustainable future also involves looking at new opportunities, re-inventing oneself?

Elbrick: Before we move on to that, I would love to say something. I did a reflective sort of a poll on the round table last year. I remember Dewang was extremely bullish. Phiroz emphasised that maintenance of legacy systems is not going to go away as a business. The big companies would decline in a changing environment and the small companies would suffer. I think that has happened. But having said that, even today the opportunity is as great as it's ever been. The Indian component of the overall industry is most nimble.

BT: Geographically, where are the opportunities for the software industry, now that the US is not as attractive as it used to be?

Mike Dodd: "The basic accounting and mathematics rules will notchange. The fundamental positive issues should be on top of the agenda."

Alfred Elbrick: "Even today the opportunity is as great as it has ever been. The Indian component of the overall industry is most nimble."

Nilekani: I think Europe is emerging as a very attractive opportunity. Japan, because of its stagnant economy for the last 10 years, doesn't have the same momentum. But, there are opportunities to be explored. Asia looks very interesting. But I think there is opportunity all over. All said and done, you can't ignore the United States market. It is still growing. It still spends the highest percentage of its gross domestic product on technology.

Kiran Karnik: I think we need to look at what we can do in terms of pushing ahead in the domestic market. Obviously, there are some constraints.

BT: That's a good point. What do we do in the Indian market?

Kaka: There are two or three things that could make the market take off. Some of which are the initiatives that the government can take such as hiking its it spend, and pushing ahead with digital signatures that will give a boost to e-commerce. On the industry side, there needs to be more emphasis on vernacular content and local language software.

Mittal: In the couple of years there was a resource constraint and every resource we had was more valuable in the export market because realisations were better. Now that there is availability, (focusing on India) is the solution for smaller companies.

Vandrevala: On Europe, the other important thing you must understand, as Nandan was saying, is that the whole business process in Europe is changing. Large corporations in Europe have understood that they will survive only if they are globally competitive. And in Japan, we need one large marquee deal of around $70-80 million. Then I'm willing to bet that within 18 months there will be more deals.

BT: Who are you betting on then for that deal?

Vandrevala: Chances are that it will be one of our bigger companies.

Elbrick: Wipro's latest deal in the UK and Infosys' deal with the National Health Service there-these are the trophy deals that will have a remarkable impact on the ongoing businesses in that region.

Nandan Nilekani: "Give the present economic scenario, the Indian industry has done extremely well. At the same time, we should not get complacent. All of us have to come up with strategies, big or small."

Noshir Kaka: "The intent should be to create newer opportunities. If you do that then there are certainly some viable and sustainable strategies for smaller companies."

Kaka: There are different ways to enter and play in a market. We've used the offshore option quite effectively in the English-speaking areas. There are better ways or as effective ways to do that. For example, in Japan, we know that China and Japan are very close and a lot of companies are setting up bases in China to serve the Japanese market. So Indian companies should do something proactive to enter a region like China or Eastern Europe.

Nilekani: The not-so-good news is that bigger US or Euro-centric players have no choice but to build offshore capability in their delivery. So, they will have to come here, and that will mean that the thing that gave us differentiation in the market is liable to be appropriated by the others.

BT: But is being local still an advantage?

Vandrevala: At the entry level, yes. Today what's happening in BPO (business process outsourcing) is a great example. Everyone who is coming into the information technology-enabled services space is coming on the cost bandwagon. But now, when we look at the actual results achieved by the likes of British Telecom or British Airways, there is an increase in productivity of between 60 per cent and 70 per cent.

Kaka: This is an important point. It's not about costs alone, but availability, production efficiency, and quality. Now we'll see a (third) phase where companies will look at India as a platform of growth. GE is a classic example.

BT: A quick word on competition. What countries can do what we are doing, better and cheaper?

Vandrevala: Countries that could approach us in a guerrilla fashion could be many. Philippines or one of the CIS (Commonwealth of Independent States) countries. But if you look at scalability, China is the only country that comes up.

Nilekani: Each company has to develop its own view on China, whether it poses a threat or is an opportunity. We've chosen to look at China as an opportunity. We look at it as a potential development resource centre.

BT: Som, would you go to China?

Mittal: I think we don't have the right size at the moment. But a lot of Asian countries are trying to become self-sufficient, and that should certainly be viewed as competition.

Vandrevala: As far as China is concerned, the sheer servicing that you need to do to an international customer drives a lot of companies. If today I'm servicing JP Morgan, or Citi, or GE, they are saying ''hey, chum, you are not servicing us in China''. So some companies may be drawn into China simply because of the fact that you need to service your global clients globally.

BT: There is a lot of talk about domain expertise as well. What domains are best suited for the kind of expertise that is available in India?

Vandrevala: Traditionally, if you do an analysis of the industry verticals, almost 50 per cent of what this country does is in the banking and financial services sector. So that emerges as the domain in which significant amount of work is being done by some of our companies. The customer end of telecom is likely to be another area in which there is a significant amount of leveraging skills that we've built.

But on the product side, my belief is that it will be many years before an Indian company comes out with a very large volume, low-priced product because the name of the game there is marketing and distribution. Even Microsoft has to go out and spend a billion dollars on a product launch. So when we have a billion dollar Indian company, we may see a $20-million launch.

BT: A quick word on consolidation in the software industry.

Nilekani: There are different kinds of acquisitions that are possible, but cross-border acquisitions could be important for our company because we feel we need things at the front-end that will make our story fuller, and we need to do that rapidly. At the same time, the acquisitions we go in for would have to be digestible.

Mittal: Also, a lot of small and medium companies feel the lack of a consolidated front-end so they can combine themselves.

Elbrick: Inevitably, there is going to be some pressure from venture capital funds on these small companies to have a viable scale of operations where they are better off owning 20 per cent of their company rather than the whole of it.

BT: One last word on the 30 per cent target for this year. Do you see that happening?

Vandrevala: Year-on-year, we are growing 31 per cent. We will be around 30 per cent. Basically, we believe we have a sustainable growth model and that's something to feel proud about.