BT-Gartner round table: (Clockwise from left) Dion Wiggins, Research Director, (China); Debashish Sinha, Principal Analyst, Gartner Research; Rita Terdiman, Director, Offshore Services (US); Bob Hayward, SVP, Research Fellow (APAC & Japan); Partha Iyengar, Research VP (India); BT's Priya Srinivasan; Craig Baty, Group VP & Chief of FResearch, Global IT Management, APAC & Australia

Looking for a fresh angle on the China versus India issue in it Services? Research and consultancy firm Gartner may just have one. In an exclusive round table discussion with BT at the recently held Gartner Summit in Mumbai, the firm's leading analysts for it services and BPO deliberated on a range of issues, right from India's competitors in it and BPO to the impact of the BPO boom on the Indian economy, the future of Indian it and finally the shape of things to come in the world of offshoring and global delivery platforms. The participants were: Bob Hayward, SVP, Research Fellow (APAC & Japan); Debashish Sinha, Principal Analyst, Gartner Research; Rita Terdiman, Director, Offshore Services (US); Craig Baty, Group VP & Chief of Research Global it Management (APAC & Australia); Dion Wiggins, Research Director, (China); Partha Iyengar, Research VP (India). Excerpts:

Business Today: Could Bob, Debashish and Rita begin by giving us a brief overview of where they see Indian IT and BPO in 2008?

"In five years time, Indian it services companies will be more global and tier-one'' Bob Hayward, SVP (Research Fellow), APAC & Japan

Bob Hayward: I don't claim to be a domain expert, but I think in five years time Indian it services companies will be more in the tier-one league, more global than they are today, and will have more global flavour rather than being so India-centric. People will think less of them as Indian companies and more as global providers of it services. They will be quite active in China by then and China will be the launch pad into other parts of the region. They will also be more established in other parts like Australia and perhaps Japan, through their China subsidiaries. Their operations will be much larger than what they are today. It will be competitive, their margins may not be what they are today, their growth rates may not be what they are today, but they will still be successful companies, and I want to stress that point because the media in India have a great ability to convert a silver lining into a dark cloud. I know this is a strong comment, but I think India's single largest problem is a very negative media. Hopefully, this will also change in the next five years.

Craig Baty: I feel the reasons for this are quite deep. Travelling across the region, I find developing countries actually go through a phase where they can't believe they are so successful. I mean Japan was incredibly successful for decades, but Japanese children were constantly told 'we are poor, we are a poor nation' and yet they were driving Mercedes and Rolls-Royces and had Louis Vuitton shops. India is also going through a phase that Singapore went through and Australia went through-'we're successful, but we are not used to it and we can't deal with it' and so they are negative about it. It's a cultural thing but it will take the media to turn that attitude around.

"The market is consolidating at the top and the big guys are going to get bigger" Rita Terdiman, Director (Offshore Services), US

BT: Point taken. Going back to the question, Rita, how do you think the Indian it services landscape will look in 2008?

Rita Terdiman: The vendors that you will see in 2008 are likely to be quite different from the current crop of vendors. They will be the tier-one global service providers, two or three will be Indian heritage vendors, although at that point they will be called global vendors. Today, there are hundreds of smaller Indian firms, but the market is consolidating at the top and the big guys are going to get bigger.

Debashish Sinha: We just had a meeting with TCS and they plan to be among the top 10 global it services players by 2010. That means they would have to be a $11 billion (Rs 50,995 crore) company by then.

Craig Baty: One thing we haven't mentioned is that Indian companies have been in the habit of winning business that just comes to them. You win the business, put some people on it and sell and now we are going through this recession where Indian companies are actually being forced to adopt real go-to market strategies. I've spoken to three companies in the last two days and they've all come and said hey, we have good brands, how do we deal with analysts? How do we deal with media? How do we develop a go-to market strategy? How do we do M&A? How do we go about partnering? Help us design the marketing department. They've never had to do most of these things in the past. They have had departments looking into things like sales, but very few Indian companies can compete with an EDS or IBM in the pure power of marketing and strategy. It's been an order-taking business so far for Indian companies as opposed to market generation and that has got to change.

"It's been an order-taking business so far for Indian companies'' Craig Baty, Group VP & Chief of Research, Global IT Management, APAC & Australia

BT: On growth rates for it services and BPO, can we have some numbers?

Partha Iyengar: In 2007, the growth for Indian it services projected is 29 per cent, CAGR between 2002 and 2007, which puts it services at about $30.1 billion (Rs 1,39,540 crore), the formal report will be out in September, but this number is based on initial trends.

Sinha: Today, the it services market is about $20 billion (Rs 92,718 crore) globally, about $12-15 billion (Rs 55,630 crore-Rs 69,538 crore) comes from the US, of that India generates about $10 billion or so today. This is likely to go up over the next five years to about $30 billion on a CAGR of between 28 and 30 per cent. The offshore BPO market today globally is about $1.8 billion (Rs 8,344 crore), which is likely to increase to about $13.8 billion (Rs 63,975 crore) by 2007.

BT: $13.8 billion by 2007 globally is vastly different from the nasscom-McKinsey prediction of a $21-24 billion (Rs 97,353 crore-Rs 1,11,261 crore) BPO industry in India alone by 2008....

Sinha: I am not quite certain what the McKinsey numbers are, I wouldn't be surprised if they are different, the definitions could be different. For instance, we don't include captive centres. So no GE Capital, Amex, HSBC, etc, it's just external service providers. This figure is just the potential for revenue based on the demand we have been able to track. There is a lot of work that the outsourcers need to do to generate the market from that potential and this is a more difficult sell than it services. The Indian BPO market is not necessarily comprised of Indian companies. I believe that about 65 per cent of the $13-odd billion will actually be global service providers who set up Indian operations like EDS and Exult and IBM and the rest of them and the other 35 per cent would be incumbent services providers.

"The offshore BPO market globally will increase to $13.8 billion by 2007" Debashish Sinha, Principal Analyst, Gartner Research

Hayward: Now even on this point you will see every other country that I work with in the Asia Pacific will consider the fact that they have foreign companies in their country exporting to the world as an amazing success story. In fact, many of them devote tremendous amount of effort and money to make that happen, but in India that will be seen as a failure since they are not Indian companies. It's totally wrong.

Sinha: I do believe, however, as a counterpoint that a lot of the success of India as a supply base comes out of the entrepreneurialism shown by Indian service providers, and the acceleration of the country comes out of that unlike some of the other countries who face a challenge because they have to get foreign investors to come in and set up shop, which is a longer process.

BT: What about falling growth rates in the Indian information technology services segment?

Hayward: It's totally unrealistic in any market to assume that high margins and 50 per cent growth rates can continue. When people start to get shocked by that, it's just a sign to me of unsophistication. It's a normal part of market development. I read an article just the other day that occasionally pundits in India say that it services and BPO is not doing much for the Indian economy since it's a very small percentage of GDP and not contributing much to exports. I believe that you have a problem with the way you count things. It's very easy to count a tonne of steel manufactured and sent to China, it's hard for the Indian customs I would imagine to measure the value of some of these deals that are being done today. The real benefit to the economy is more significant and profound than most people in India realise.

"Our findings were very simple: China needs India and India wants money" Dion Wiggins, Director (Research), China

BT: Craig earlier alluded to the importance of marketing and cultivating differentiators. Finally what we're starting to acknowledge is that competition is hotting up. Could you name the competitors-countries or companies?

Baty: The competition is individual vendors with individual competencies no matter where they are.

BT: But there are inherent country strengths that lend themselves to the business, right?

Terdiman: Yes, I have to slightly disagree with Craig on this because I think that for the next two-to-three years in the minds of the customers, it is a country choice.

Iyengar: Today's view is country over company, but that will change as the industry matures. We track 11 countries today in the it services, BPO market with very different risk profiles, very different capability profiles, resource availabilities.

Terdiman: On a country basis, there's Ireland, Northern Ireland, the Philippines who have had an industry for several years, and what you need to look at over the next few years are a couple of characteristics-countries that have the scale to produce an industry en masse. And the only two other countries that can do that are China and Russia. Second thing you have to look at is some emerging countries, since all developing countries are looking to enter this market and want to be the next India.

"Today's view is country over company, but that will change as the industry matures" Partha Iyengar, VP (Research), India

BT: Now for the all-important country competitor question-what about China?

Dion Wiggins: We published a lot of research early last year that was not received well in India at all, comparing India and China. The findings were very simple: China needs India and India wants money. We expect the opportunity for India to be 40 per cent of the Chinese export market in four years time. In China, by 2006, it services exports alone will go to $27 billion (Rs 1,25,169 crore). They are currently growing at 120 per cent plus year-on-year. But it's not about competition. As Indian companies get global, China will be another delivery location. While salaries are comparable, the difference is in billable rates. Last year in India, for a developer of two years experience, the standard billable rate was $24 (Rs 1,112) an hour, for a project manager it was $30 (Rs 1,390) an hour. In China, it was $50 (Rs 2,318) per hour for project managers since there is a critical shortage of project managers in China and this is where India can help and they (the Chinese) are also weak in processes.

Hayward: We, in fact, refer to ICT not as Information and Communication Technology, but India and China together. The combination is powerful and scary for all other countries since you have a combination of scale, cost arbitrage, the hardware engineering skills of Chinese, the software skills of Indians and you can blend that into a powerful combination. I already see a core set of hardware companies in China using software developed in India and these companies will soon go regional and then global. Huawei, for instance, has 900 software engineers in Bangalore-it's a Chinese hardware company, which is saying, we will do Indian software, Chinese hardware and go to the world-fantastic strategy.