What should be the road ahead for Indian IT services companies? To answer this question, Business Today got together a panel of seven senior analysts from technology consulting major Gartner, who flew down to Delhi for Gartner's annual summit. Gartner's (India) Country Manager, Partha Iyengar, moderated the ensuring panel discussion that lasted well over 90 minutes. Excerpts:

Business Today: Thank you for taking time out of your schedule to be with us. This discussion comes at a critical time for the Indian IT industry. There's a general air of gloom in the industry. We'd like you to help us understand the dynamic changes that are happening in the global IT industry and how it will impact India. Second, who will win the race to be a software superpower, India or China? And third, how can India emerge as an outsourcing destination?

Bob Hayward: In my interactions in India, I have found that everybody is worried about the gloom and doom. But I feel that instead you should be excited about the opportunity that's coming your way. You have an economy that's growing faster than the Australian economy. India has one of the fastest growing IT markets in the world today. Hence, there's no reason to worry.

I was speaking to some people today, and everyone was asking me about the crisis (in the Indian IT industry). I asked, what crisis? They said, the slowdown in the US economy. But the US economy is not in recession. We believe that the slowdown will be shallow, and will be over reasonably quickly. It started in November last year and the cycle is usually 14-18 months. So, it will not be long before things are back on track. Moreover, the slowdown is fairly sectoral. There are a number of vertical industry segments that have not been affected by the slowdown. It is restricted to hi- tech companies that were highly dependent on business from dotcoms, telecommunication and PC companies. Cisco, Intel, Nortel had to face tough times, but companies like Seibel had a roaring year. Even in the technology sector, there seems to be a lot of growth and success. So let's not have a bleak view.

I don't understand why Indian companies are worried; it defies logic. I don't see the connection. There has been some impact on other Asian companies in Singapore, South Korea, and Taiwan. These are countries that are highly dependent on exports of hardware to the US. And hardware is one technology sector that has suffered a slowdown. But surveys that we have done in US consistently point to most industries investing more in technology, despite the slowdown. They show that companies will spend a lot more on software and services during this year. So India, I think, is somewhat more immune to the slowdown than some other Asian economies.

Then, there's the domestic demand. The domestic demand (in India) for IT services is growing at more than 50 per cent per annum. This is the fastest in any market in this region, with the exception of China. This, in itself, is creating more demand and I think Indian IT services companies should take notice of this seriously. I know American vendors are getting very excited about India; I don't know why Indian companies aren't.

However, the US slowdown is a lesson for some of Indian IT vendors to start diversifying into other markets, and not be so dependent on the US. I think it is forcing them to look at what they are already doing, and forcing them to concentrate on doing it better. They are now required to concentrate on branding and marketing and moving up the food chain, adding more value; not just body shopping, but moving into intellectual property, doing R&D, packaging some of their products. This is a great opportunity.

Let's say that you're the owner of a manufacturing company in Indianapolis; you've got 10,000 people working for you. When the times were good, when the business was booming and the economy growing, it hadn't even occurred to you to consider replacing some of that workforce by doing things in India. When times are tough, you start looking at costs seriously. Tough time demand tough decisions, and it is a tough decision to use business process outsourcing.

There was a time when India had rivals in terms of both investment and growth - countries like Indonesia, Malaysia, Thailand, and Philippines. They had their chance and they blew it. Now the attention is moving to North Asia, North East Asia and South Asia, particularly India, South Korea, China and Taiwan. But Korea, China and Taiwan are more focussed on hardware. They are a hardware engineering culture. They are not very good in software. When I was in Korea and Taiwan recently, I found that they all wanted to know what they could learn from India. When I come to India, the only thing Indians want to know is how they can emulate China, Taiwan, and Korea. You are in a better picture; there's much more potential to differentiate IT services and software, than hardware.

India is in the right market and at the right time, particularly when we look at the movement towards business process outsourcing. Companies are going to focus on core competencies and outsource everything else: Not just software development, but things like remote call centres, R&D, data entry, managing financial systems remotely, running human resources and payroll remotely, doing collections. We believe that globally, the business of business process outsourcing will be worth $180 billion per year by 2008, and there's no reason why Indian companies cannot have a significant share of it. That doesn't take into account the in-house business process outsourcing that large companies, like Citibank, British Airways, and Amex, are doing to India.

There is a danger of people talking India into a recession. They say there are only 1.5 million Internet connections in India and 5.8 per cent per 1,000 penetration of computer, and technology has not penetrated businesses. People in other countries are saying just about everybody has a PC, just about everybody has an Internet connection, everybody has an automated business, so where do we go from here. In India what I see is opportunity, opportunity, opportunity.

Craig Baity: There are certain instances that we know of where Indian companies have been affected by the slowdown. In some cases this impact may be because of overseas companies that have just cut their heads outside the US, due to the slowdown in the economy.

Hayward: Some Indian IT vendors have been over-reliant on few customers in the US, and hence, they will have to suffer. But for every situation you encounter like that, there will be two or three situations with more opportunity. Let's not concentrate on the bad news. A year ago, when I travelled around the region, and talked to senior executives in organisations across the Asia Pacific region, they had a very slim awareness about India as a market. They knew that India was doing a lot of interesting things with American technology companies, but they didn't know what exactly these interesting things were. They had never heard of Infosys, Wipro, and Satyam. If I were to meet the same companies today, they would know who Wipro, Infosys, and Satyam are. They would know about business process outsourcing to India. They'd know about AmericanExpress, Citibank and British Airways outsoucring business processes to India.

Geoff Johnson: There's some element of spring-cleaning going on. Companies are getting rid of some staff, the dead wood kinds. You will see inventory being written off, investments in dotcoms being written off the books. It happened in a quarter. Now, these companies are ready for business again. All the bad news is out of the way.

Sujoy Chohan: I think companies, in both the US and in India, are using this opportunity to do some spring-cleaning. But there is so much pressure on the Indian companies. Everyone believes they are in trouble. Some large Indian companies finally had to make a statement. Everybody was declaring good results, but they were forced into making a statement. So, just like the American companies, the Indian companies said, OK, this is an opportunity, let's sit back and look at the way we do business.

They reduced their figures; now, when they announce their next quarter results, they are certain to exceed expectations. They said they'd achieve a 30 per cent growth. I wonder why everyone is so negative. In fact, the numbers are on track and the positive thing is that now there's ample opportunities. Today, it is far easier for an American company to say I am going to cut so many jobs in the US and transfer that work to India.

A lot of people got into IT services to go public and make quick buck. What happened in US with dotcoms, happened in India with IT services. Those players are no longer in the business.

Another positive fallout is that the prices of IT professionals have stabilised. People are now willing to work for lower salaries. They are looking for stability. Companies that invested in creating large facilities and a brand image are going to win big. Infosys has not retrenched anyone; nor has Wipro; and TCS is hiring 2,000 people. Why are these people hiring? Perhaps because the so-called recession is actually not happening.

Craig Baity: Bob made a presentation this morning in which he said that the Indian IT services market will grow by more than 50 per cent this year. We haven't announced a final figure, but it is in that vicinity. That figure is conservative.

Chohan: And remember that we are talking about professional services. We are not even beginning to talk about the whole IT services economy. This doesn't include the domestic market, or IT-enabled services. The last is an acknowledged Rs 8,000 crore business.

Partha Iyengar: It seems that Indian companies are following the lead of the US companies, and are indulging in some spring-cleaning. It's possible that what has shaken the Indian market the most is the laying off of the people. Is it likely that more companies will feel the need to restructure the salary pool?

Chohan: Look who's being retrenched. All those people who lost jobs are in the dotcom and telecom companies. How many mainstream IT services companies have retrenched people? Companies that had a huge exposure to dotcoms, have lain off people.

Baity: We have first-hand evidence of companies that say, 10 per cent of our people don't do much, so we are just going to get rid of that 10 per cent. Some of that (proportion) is people in the wrong place at the wrong time, but most of them are people whom the companies would have loved to get rid of anyway.

Chohan: There are body shopping operations in India that used to get people to America on to the bench there, and then hunt for companies or projects where they could be placed. Those are the people who've come back and that's a good thing actually. It removes that kind of people, and that kind of companies from the marketplace. These companies would undercut prices, and there was no such thing as quality.

Baity: Another positive outcome is that a number of people who were working for the dotcoms in the US were Indians, and they are now coming back to India. That actually strengthens the talent pool, and they are not as expensive as they were in America.

Johnson: You must be meeting several Indian companies. What is Business Today's take on this?

BT: One of the factors why lot of people believe that a reason to panic exist is because onsite billing rates for some Indian software companies have gone down marginally. That is only to be expected as the primary market for these companies is the US and things are tight there....

Johnson: Is there an indication of how much they have fallen?

BT: We think it's less than five per cent.

Johnson: That sends a significant message to the markets to stop climbing.

BT: We have been speaking to lots of Indian companies. Their increments have been far more rational this year. Their employee-turnover rates are down and they aren't losing people as rapidly as they used to.

Hayward: This is the unique point of the Indian software market. You have a runaway market; you have customers who may or may not spend too much on IT; you have a little bit of an impact on India which slows the market down; you have more skilled professionals and more work; and you haven't had to pay them as much. You end up being more competitive in the billing, which is what's going to happen in the next couple of years.

Johnson: Do you see any difference in training, or in the hiring processes?

BT: Last year, Infosys hired close to 3,500-4,000 people primarily at the entry level. The company has said that this year, most of their hires will be in the middle-management level. If you look at the typical Indian software company, the middle is pretty thin.

But what's worrying us is this talk of the value chain. Some analysts claim India operates at the low-end of the value chain where IT-spending is discretionary. If the client does not wish to spend on a particular low-end project, it can be postponed indefinitely. Indian IT companies, these analysts say, are not doing the kind of mission-critical work that can insulate them from the slowdown.

The other fear is that Indian software services companies will increasingly face competition from China, Vietnam, and Philippines.

Hayward: I've heard this argument a million times, especially this comparison with China. I don't buy it at all. Which country in the world is producing the maximum number of highly skilled English speaking graduates? India. China is producing a large number of engineers. But they are all Chinese speaking hardware engineers, not English speaking software engineers. And hardware is a loser's business. There's always going to be a company that will produce cheaper components. Hence, China can't compete with India. It's not a 'China OR India' situation as many of you see it, but a 'China AND India' situation.

China will become increasingly strong in manufacturing of hardware. But I do not see it succeeding in software - just like I've never seen Japan succeed in software. The problem with China and Japan is that they will never finish software, it will always be only 90 per cent done. It's just a cultural thing. They have no tolerance for any error whatsoever. Unfortunately, software isn't like that. There isn't a Japanese company that will dare to release a product like Windows. There isn't a single Asian company that will ever release a product like Oracle database software. But American companies will dare to do that and so will the Indian and Australian companies. That's because we understand software.

But China has a lot of things going in its favour. It's the fastest growing IT market in the world. It has a huge number of Internet users; a huge number of mobile users. It has a command and control economy where things get done. When it comes to infrastructure, China beats India hands down. It's got the Olympics effect working for them. It's got the WTO effect working for them. The countries that should be worried about China are Indonesia, Thailand, Malaysia, Philippines, Korea, and Taiwan. India shouldn't be too concerned regarding the progress that China is making. In future, India and China will complement each other.

Chohan: To specifically answer BT's query, the share of revenues coming from low-end conversion jobs has reduced substantially, and that from high-end application development and R&D have increased substantially. It's a positive trend. Companies like Wipro and HCL Technologies are already moving up the ladder in core technology development. Fifty per cent of their revenues come from that. That's IPR stuff. That's not the kind of work you take away in a recession.

Johnson: In fact all this, especially what we've learned about experienced middle IT management professionals coming back (to India), means there are now people trained and with experience of working in Europe and America who can coach, train, put quality assurance into place.

Chohan: Another thing is that we are no longer dependent on body shopping and onsite work. Almost 75 per cent of revenues come from work that is being done in India. Three years back almost 90 per cent of software exports were to the US; today it is down to 60 per cent.

Partha Iyengar: A lot of Indian IT services companies are starting to talk about hedging their bets by trying to look at China as another offshore development centre for them. Is there a need for management bandwidth to do this? Or should they just forge ahead and ignore China?

Bruce McCabe: Most of the software development services are focussed on China. It's such a large domestic market and such a seductive market...

Johnson: To pick up Bruce's point, consider digital networks. Five years ago, there was less than 35 per cent penetration of digital switching in all plumbing and networks. Today, it is 95 per cent. Digital switches, Chinese switches, built to Chinese standards; mobile phones, 5 million phones installed every month this year. They have come up with their own standard, which the ITU has now accepted for mobile phones, TDSCMA...

Bruce McCabe: And the only way you can tap that market is to form a joint venture in China.

Baity:  But when it comes to outsourcing, even though China has the techno-capability and the infrastructure, it doesn't necessarily have the people to do it. A major German carmaker has a data-centre in China, but they're having problems staffing it. That's the issue. And that's an opportunity for India.

The second area that India has potential is Applications Software Packaging. You are great at developing software, but there isn't one Indian software brand in the world. Last time I was here, I met some cement companies. It turned out that they had what they believed to be one of the world's only applications for managing the supply chain for that industry. They had an application that was helping them shift cement from one end of the country to another, and they had a data-centre employing 2,000-3,000 people supporting the application. Why couldn't they work on packaging and branding it and selling it to companies that can't afford Oracle and Informix and SAP, which is most of Asia by the way.

John Roberts: I will just give you a framework of why you have got this gloom. Gloom follows from a boom. There is this misunderstanding that the dotcom boom was in terms of e-business. Gartner has a hype cycle where we have a pea of inflated expectations, and we predict that following that is a trough of disillusionment. Now it seems to me that a lot of Indian commentators, at this moment are saying, yes, we are in this trough of disillusionment. The expectation is almost over. The real issue is to transform business; so as to take advantage of what's happening. Streamlining the supply chain, collaborating with other companies, doing business process outsourcing - all of that is just about to start. And that fits perfectly with India's capability to deliver that kind of services. The gold rush of dotcoms came and went. But the next five years of major (transformation) initiatives, of companies moving into collaborative mode, needing enormous amounts of software, in many cases having to throw away some of their legacy software, will see the need for companies who can build these new solutions. That's a great opportunity for India, provided people are ready to take advantage of it.

Craig Baity: A couple of months ago, we had surveyed 700 CIOs across the region to get some idea on IT services. We asked them what are your top 10 technology issues over the next two to three years. And the top 10 were all related to 'e': infrastructure, knowledge, intelligence, business process outsourcing, services, everything wrapped around e.

The second thing is you have mobile business. IT isn't like other businesses. You can't create a mobile solution and roll it out across every country in the world; it just won't work. You can create a solution in Japan, for example, where you can walk past a vending machine, and through your mobile phone, pay for a Diet Coke. Why does that work in Japan? Japan has a culture where there are 10-15 vending machines in every corner. From those vending machines, you can get a Diet Coke, you can get some crisps or chips, you can get beer, you can buy a magazine (you can even get Playboy), you can buy cigarettes, and you can buy condoms. So, you can walk past these machines with your mobile phones, pick up all the stuff, go home and have a party.

But will that service work in Australia where they do not have too many vending machines? What we are really going to find is that different countries need different applications. That's a perfect opportunity for India to take advantage of its application development expertise and learn how to develop software for services that are country-specific.

Chohan: The Indian brand has finally made its mark in the US. It is recognised as something that is reliable and credible. It's taken us almost 10 years to come to a stage where Americans deal directly with Indian companies, and not through first-tier companies, that in turn dealt with Indian companies. That's something we can capitalise on, while creating these application service products.

Hayward: That's right. India has created a brand in the US. But I don't think it has created that brand in other markets.

Craig Baity: The Japanese, for instance, have always viewed India as a body shopping option. You bring in an engineer, and he works in your factory for 16 hours a day, he produces software, then he goes home, and you never see him again. But one of the things you need to do is to break into Japan and China. China is probably a long haul.

Chohan: Everything that Indian IT has achieved has been accomplished by the private sector. There's something that needs to be addressed or discussed at the political level. The Government of India has to step in and do something at that level between countries.

Hayward: There's no doubt that this whole IT revolution in India has happened despite the government. The only thing the government seems to have done is kept out of the way, which in the Indian context is actually quite a lot.

Roberts: I just wonder whether we are being a bit too positive about all the things that are working here in India. Maybe, one of the threats could be a loss of vision among leaders.

Hayward: There is also a fear that another party will come to power tomorrow and try to roll back the reforms process. There are sections of the political system that want to do this.

Chris Morris: Another inhibitor could be the current legislation on security and privacy. Some countries have very strong laws regarding these. If India is going to run applications for North American companies, it will have to address these issues.

John Roberts: The other inhibitor involves the issue of moving to business process outsourcing. So is India ready and able to deliver financial services? That's one of the things we see emerging. Can Indian companies move towards and become leaders in these sorts of areas? There is another challenge there.

Partha Iyengar: To conclude, what do each of you see as the opportunity for India?

Bruce McCabe: There is a wealth of opportunity in the B2B. There is tremendous opportunity in integrating internal and external systems. The other opportunity in the software services area, related to B2B, is content. All businesses are rapidly trying to work out and establish electronic catalogues for themselves and integrate them with the back end financial systems. Or they are trying to create and host electronic catalogues of their suppliers. Lot of people will look for cost effectiveness and will like to use sources like India, to do that.

Johnson:  I cover networking and enterprise networking. I have spent 30 years in the communications sector. I can't describe you the emotional challenge I had in August last year, when it finally looked as if there was a major change in the regulatory environment. I can't describe you the personal pleasure when the large companies in India worked through their billion-dollar investment in telecom. India is just going to leapfrog all intermediate technologies, straight to broadband. India will skip all the noise in-between and move rapidly to access networks, cable modems, DSL. Now, overlay Indian intellectual property, overlay the number of people equipped to do this, give them a tiny bit of networking, give them more connectivity, give them broadband... I'm blown away.

Morris: Observe couple of quick points on the Indian IT economy and the skills that are going to drive them. Make sure that you have the right skills. Beyond that there is also a bigger requirement in terms of project managers and people who manage contracts.

Hayward: Don't worry about the US slowdown, don't worry about China. There isn't any place as exciting as India. It's the Silicon Valley of year 2001. What more can you possibly ask for: You've the fastest growing IT market in the world; you have an global presence that's improving with each day; Indian companies are succeeding on the global stage; there's more awareness of what's going on in India; there's no competitor on the horizon; and you are strong in the very sectors of technology that will be the fastest growing sectors in world for the next 10 years. That's India.

Craig Baity: Hayward says India stop whining. Let me reiterate that India has an IT infrastructure and is using it everyday to develop software and services for other people. Why don't you use that infrastructure to create some really solid industry-related outsourcing capabilities, not just back office accounts. Do whatever you do to get some specialist skills. And also develop some Indian packages, based on software you have been running your industries on, and try to sell them. Brand them, that's the game.

John Roberts: I will reiterate what I said earlier about understanding a hype cycle. There was a boom; now there is gloom; but there is five years of solid business transformation work ahead.

Craig Baity: You've got about six months to get your act together, before the rest of the world starts noticing that their act is getting together; take advantage now.

Chohan: Everybody seems to have a lot of confidence in India and India's IT services' potential, except us. I feel very strongly about the opportunities before India. I feel that over the next five years we should do something to capitalise on these. I personally would like to see the government getting involved, creating inter-country dialogue and promote India as a destination for IT services and IT-enabled services.

BT: Thanks again gentlemen.