IT Recession 1

8/3/2019 IT Recession 1

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Global economic slowdownand its impact on the Indian

IT industry

April 2009


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2

Contents

Executive summary 3

1. Current global scenario & the uncertainties involved 4

2. Structure of the global IT industry 5

3. Structure of the Indian IT industry 7

4. Impact of the recession on the IT sector of the Indian economy 9

5. Future outlook 14

6. Conclusion 18

Contacts 19


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Executive summary

The current global economic slowdown has its epicenter

in the United States (US) but the contagion is being

witnessed in all major economies o the world. Several

countries are experiencing rapid contraction in their

Global Domestic Product, rising unemployment levels

and an overall slowdown in the pace o investment

activity. What started as a shock in the nancial markets

has spread to all sectors o the world economy and the

exact depth and breadth o the impact is still unclear.

Indias economy has been uelled by the growth in

the technology sector in the recent past. A large part

o this growth is dependent on the outsourcing or

o shoring o key business processes and sotware

development activity (and related services) by large

global corporations and other organizations. Hence, the

global slowdown has also aected the business climate

within India and the growth rate o the Inormation

Technology (IT) and Inormation Technology Enabled

Services (ITES) sector is also experiencing the tremors

o the global recession. The Indian IT sotware andservices industry which has seen a Compounded Annual

Growth Rate (CAGR) o around 30% over the last three

or our years is now projected to grow at 20%. Indian

IT sectors derives approximately 61% revenues rom

the US based clients. The revenue contribution rom US

clients to the top ve Indian IT companies (who account

or 46% o the IT industrys revenues) is approximately

58%. Hence, the impact o the slowdown in the US is

likely to have a deep impact on the prospects o the

Indian IT sector.

Moreover, about 41% o the IT industry revenuesin India are estimated to be rom nancial services.

Since this sector has been aected most severely in

the current climate, the impact on Indian companies

catering to this sector has been (and will continue to be)

more acute. The margins are prone to be challenged on

account o the slowing growth in the US and European

Banking and Financial Services Industry (BFSI) sectors.

Interestingly, the Indian IT / ITES sector has so ar been

resilient in spite o the global slowdown. Part o this is

due to the segmentation in the Indian IT / ITES sector

whereby some o the rms are the back oce support

service centers o large global multinationals while the

other is the indigenous IT service companies o Indian

origin. While the current slowdown has impacted the

indigenous IT companies business in India, a part o

this has been oset by a greater amount o business

fowing to the captive units o oreign companies

operating in India owing to the pricing and margin

pressure in their local markets.

The indications are also that the next decade will be

very dierent rom the last one, with structural shits

in demographics that will refect more prominently in

international trade and economics. Technology evolution

and adoption is expected to witness some disruptive

changes as the Internet generation takes over the

workorce.

Experts suggest that the perormance o the Indian IT

sotware and services and ITES industry, while impacted

by US economic slowdown, will be catalyzed by a

revival in technology spending during the rst hal o

2009. There are some osetting actors sotening the

revenue slowdown - avorable Rupee-Dollar exchange

rate expected to lead to higher INR revenue growth

gures during the year, growth de-risking through other

emerging markets, growth in non-nancial verticals,

and growth through countercyclical new business

initiatives.


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1. Current global scenario andthe uncertainties involved

As 2008 ended, predictions o where the world

economy is heading turned dire. The World Bank

projected world output to grow by a mere 0.9% in 2009

(as compared with 2.5% in 2008 and a high o 4% in

2006) and world trade to contract by a signicant

2.1% (compared to positive rates o growth o 6.2%

in 2008 and a high o 9.8% in 2006). Asia Pac is likely

to witness a sharper all in the growth rate, i.e. rom

13.4% in 2007 to 5.5% in 2010E in comparison to the

world growth estimated at 6.3% in 2010E rom the

2007 gures o 9.7%.

The overall impact o the global nancial crisis has

been elt in Asia / Pacic in terms o the local stock

exchanges and currency exchange rates and lower

GDP growth orecasts or 2009.

Impact on stock market

Theyear2008sawthecreditcrisispushseveralmajor

economies, with banks particularly being badly hit

- many requiring government bail-outs. Shanghaiwhich had soared more than 300% in 2006 and 2007

had its share values wiped nearly by $3 trillion (2.1

trillion)

Japanesesharesalsosufferedtheirbiggestyearly

decline, with the Nikkei dropping 42% as worlds

second-largest economy slid into recession

Indiasmainindexsensexplungednearly50%during

the year. All global markets saw record alls in 2008 as

the nancial turmoil and economic slowdown ended

the stock market boom

AllstockexchangesacrossAsia/Pacichavebeen

directly impacted in a signicant way, with an average

loss o 45% rom November 2007 through October

2008

Impact on exchange rates

Currencyexchangerateshavebeenaffected,but

on a more-isolated basis. Australia, China, New

Zealand and Singapore are experiencing drops in their

currency against the U.S. dollar

Inaddition,Indiahasseenitscurrencyincrease

substantially and later all against the U.S. dollar

Asaresult,thereisanassumptionthattherewillbe

some impact on IT spending across Asia / Pacic due

to the increase in the cost tied to the technology

spending

The global outlook is bleak and recovery is still ar.

The current global nancial turmoil has hit almost all theeconomies around the world deeper than anticipated.

Industries globally are impacted by the slowdown. The

turmoil is taking a toll on the global IT industry one

o the leading contributors to the global GDP, led by

uncertainties in the demand environment in both

new and existing businesses. Hence, there appears to

be a reason to ear that the crisis will swamp emerging

markets and other developing countries, cutting into the

considerable economic progress o recent years.

600

500

400

300

200

100

0

Q104

Q304

Q305

Q306

Q307

Q308

Q105

Q105

Q107

Q108

Brazil

India

China

Argentina

Chile

Hungary

Source: Forrester report

Indian equity market on a free fall


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2. Structure o theglobal IT industry

Growth of global IT economy

The global IT industry has matured over the years and

has emerged to be a chie contributor to the global

economic growth. The global IT sector, constituted

by the sotware and services, Inormation Technology

Enabled Services (ITES) and the hardware segments, has

been on a gradual growth trajectory with a steady rise in

revenues as witnessed in the past ew years. 2008 was

a strong year as the number o contracts; the total value

and the annualized contract values exceeded that o the

preceding year. Among all users above average growth

was witnessed in the government, healthcare and the

manuacturing segments.

The global sotware and services industry touched

USD 967 billion, recording an above average growth o

6.3% over the past year. Worldwide ITES grew by 12%,

the highest among all technology related segments.

Hardware spend is estimated to have grown by 4% rom

USD 570 billion to nearly USD 594 billion in 2008.

Currently, the global IT industry is experiencing a slump

with the recessions in the US and many industrial

countries with the level o impact varying by country /

market and industry.

Forrester in its recent report has predicted that the US

IT market will dip to 1.6% in 2009, down rom 4.1%

growth in 2008 (see gure below). The Asia Pacic

region, using a weighted average1 o local currencies,

will do a bit better in 2009, with 3.1% growth.

The Western and Central Europe markets will have

growth in local currency that is closer to 1%. By 2010,

the US market will shit to 7.3% growth, not ar behind

the 9.5% growth in the other Americas, well ahead o

the 5.5% growth in Asia Pacic and 5.3% growth in

Western and Central Europe.

The global IT sector, constitutedby the sotware and services,Inormation Technology EnabledServices (ITES) and the hardwaresegments, has been on a gradual

growth trajectory with a steadyrise in revenues as witnessed inthe past ew years


16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

2010*

7.3%

5.5%5.3%

2005 2006 2007 2008* 2009*

8.0%

5.3%

4.8%

US in US dollarsWestern and Central Europe in euros

Asia Pacic in weighted averages o currencies


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Global scenario - IT purchases

As it stands, the US market accounts or majority o

the global purchases o IT goods and services. The US

market which represented 37% o the global market

or IT goods and services in 2005 had shrunk to 33%

share in 2008. Western and Central Europe would see

its share o global IT purchases fuctuate between 26%

and 28% between 2008 to 2010; Eastern Europe, the

Middle East, and Arica and Asia Pacic are expected to

hold their share positions.

The global IT purchases are expected to plummet as

strong dollar would hurt dollar-denominated growth

rates or IT purchases going ahead. The British pound

was 23% lower in Q4 2008 rom the year-ago level, the

Indian rupee is down 20%, the Canadian dollar is 19%

weaker,andtheeuroisdown9%.OnlytheJapanese

yen and the Chinese yuan renminbi have gained in value

against the US dollar. While these currency swings are

likely to reverse in 2009 as the nancial crisis ades, the

dollar is still likely to remain above 2008 levels or

most o the year. That will dampen global IT market

growth measured in dollars and hurt the reported

revenues o US vendors like Accenture, Hewlett-Packard

(HP), and IBM with large overseas operations.

With global tech market in US dollars likely to shrink,

global IT vendors revenues is expected to equal $1.66

trillion in 2009, declining by 3% ater an 8% rise in

2008. The Asia Pacic region has been a major

growth engine or the tech industry. Its total purchases

o IT goods and services o $448 billion in 2008 werealmost as large as Western and Central Europes.

Countries like Hong Kong, India, Malaysia, Singapore,

South Korea, and Taiwan, have seen growth slow as

exports to the US and Europe slowed.

Asia / Pacic would experience a delayed impact o the

global nancial crisis. Gross Domestic Product (GDP)

growth is expected to slow in most countries / markets

in 2009, which will aect IT spending. Asia / Pacic is

still growing more aggressively than other regions in

GDP and in IT. As a result, vendors would be looking to

this region or growth and stability.

Asia / Pacifc is still growing moreaggressively than other regions in GDP and inIT. As a result, vendors would be looking to

this region or growth and stability


Total IT purchase (by value) 2008*

United State

33%

Others

13%

Asia Pacic

26%

Western and

Central Europe

28%


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3. Structure o Indian IT industry

The IT-ITES industry in India has today become a growth

engine or the economy, contributing substantially to

increases in the GDP, urban employment and exports,

to achieve the vision o a powerul and resilient

India. While the Indian economy has been impacted

by the global slowdown, the IT-ITES industry has

displayed resilience and tenacity in countering the

unpredictable conditions and reiterating the viability

o Indias undamental value proposition.

Value proposition

The main reasons or the successul establishment o

sotware companies in India and its strong perormance

can be attributed to the ollowing:

Costadvantage

Given the labor market conditions in India, there

exists substantial scope o cost arbitrage or

perorming services rom India. This, along with a

large pool o talented and English people labor orce,

was the genesis o the IT sectors dominance in theworld IT services industry

Breadthofserviceofferingandinnovation

Service oerings have evolved rom low-end

application development to high-end integrated IT

solutions

Quality/maturityofprocess

Having made its mark as a center o low-cost and

wide range o service oerings, the Indian IT / ITES

sector has also proved its mettle in the quality o the

service oerings, as demonstrated by the act that ithosts more than 55% o SEI CMM level ve rms and

the highest number o ISO certied companies

Easeofscalability

The vast and trained labor pool o technically

competent, English speaking people has made it

easy or the Indian companies to enter and exit this

industry. Moreover, the ease with which a company

can scale its operations (up or down) has been a great

value driver or the success o the Indian IT / ITES

service sectors growth story

Performance of the Indian IT-ITES industry

The inormation technology sector has been playing a

key role in uelling the Indian economic perormance

which has been stellar with robust GDP growth. Ind ias

total IT industrys (including hardware) share in the

global market stands at 7%; in the IT segment the

share is 4% while in the ITES space the share is 2%.

The industry is dominated by large integrated players

consisting o both Indian and international service

providers. During the year, the share o Indian providers

went up to 65-70% due to the emerging trend o

monetisation o captives. MNCs however, continued tomake deeper inroads into the industry and strengthened

their Indian delivery centres during 2008.

The continuing contribution o this sector to the

Indian economy is evident rom the act that revenue

generated rom this sector has grown rom 1.2% in FY

1998 to an estimated 5.8% in the FY 2009. The net

value added by this sector to the economy is estimated

at 3.5-4.1% or FY 2009.


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Some o the key highlights2 o the Indian IT / ITES

industry or FY 2009 are enumerated below:

TheexportrevenuesareestimatedtogrossUSD47.3

billion in FY 2009, accounting or 66% o the total

IT-ITES industry revenues

ITservicesexportsgrewsubstantiallyonaccountof

increasing traction o the industry in emerging markets

such as remote inrastructure management and

traditional segments such as application management

Domesticmarketcontinuedtogainmomentum,

growing at 26% in INR terms on account o the

overall positive economic climate, increased adoption

o technology and outsourcing

Engineeringservicesandsoftwareproductexports

increased by 29% (USD)

Directemploymentreachednearly2million-with

1.5 million in the exports segment, a YoY increase

o 26% in 2008. The indirect employment multiplier

suggested that the industry created between 6-8

million additional jobsUSandUKtogetherconstituted79%oftheglobal

exports in FY 2008 thereby dominating the export

markets

BFSIremainedthelargestmarketfollowedbyHitech

/ Telecom which together accounted or more than

60% o exports

Global IT and Indian IT offshore

Todays escalating, competitive and demanding

environments have orced companies to be more

ecient, operate leaner and continuously create new

procedures to keep ahead o competitors - adding nalconsumer value to a product or service in the orm o

lower prices, quality and better service has become

an essential requirement in the global marketplace.

Corporations are trying to adapt with increasing

competitors innovations to nd global opportunities

and resources, ocusing on core competencies and

mutually benecial relationships, and nally, outsourcing

those activities which can be perormed more quickly

and at lower costs by subcontractors. In a globally

integrated economy, outsourcing is leading to overall

benets or the source economies, providing signicant

monetary and employment benets. India has become a

target destination or multinationals to back end their IT

operations in India owing to its strong value proposition.

We have witnessed an increased use o oshoring by

global and European outsourcers, and the emphasis on

productivity and delivering value by select Indian players.

The Indian IT / ITES sector can be viewed rom two

perspectives - Indian global IT and Indian IT oshorer.

The globally IT companies are increasingly looking

inwards and ocusing on process benchmarking,

enhanced utilisation o inrastructure and talent,

increasing productivity and greater customer

engagement. global companies with roots in India are

increasingly oshoring work in order to cut cost, as a

result o which India is witnessing a revenue growth.

On the other hand, as the oshore market is getting

tighter, the Indian IT oshorers are acing hard times in

getting contracts or replenishing their orders. The crisis

in the U.S. nancial services sector will have an impact

in the short term on Ind ian outsourcers, as new projectsmay get delayed. This has impacted the revenue fows

and would need a substantial increase in SG&A to

ramp up their volumes.

In spite o the negative eect o the outsourcing

business, there has been relatively lesser impact on

the Indian IT growth due to the osetting eect o

the avorable revenues on account o the global IT

oshorers.

India has become a targetdestination or multinationals toback end their IT operations inIndia owing to its strong valueproposition


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4. Impact o the recession onIT sector in the Indian economy

The current global economic slowdown has made it a

roller coaster ride or the world economies.

Asia / Pacic is experiencing a deerred impact due

to the domino eect o the current crisis. With the

expectations o a sluggish GDP growth and consequent

reduction in IT spending, countries / markets which

have a higher dependency on the export markets are

expected to be aected more than other countries /

markets with stronger domestic demand.

India being one o the worlds astest-growing tech

markets, thriving mainly on exports is also experiencing

the tremors o the global economic crisis. IT spending as

a percentage o revenue normally varies rom 3.5% in

manuacturing companies, 5-6% in global retail chains

to about 9.5% in the banking industry. These could see

marginal decline as companies will tend to hold spends

on new IT deployments.

A recent study by Forrester reveals that43%ofWesterncompaniesarecuttingbacktheirIT

spend and nearly 30% are scrutinizing IT projects or

better returns. Some o this can lead to oshoring,

but the impact o overall reduction in d iscretionary IT

spends, including oshore work, cannot be denied

TheslowingU.S.economyhasseen70%ofrms

negotiating lower rates with suppliers and nearly 60%

cutting back on contractors. With budgets squeezed,

just over 40% o companies plan to increase their use

o oshore vendors

TheITservicesandoutsourcingmarketiscurrently

undergoing a structural transormation that will have

a proound eect on how IT service providers will

have to conduct their business

Customers have started to reduce project scope and /

or postpone new development. However, they are

also trying to move more work to lower cost osite

locations, which could increase IT budgets towards

tangible cost saving measures.


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The impact is likely to be higher or discretionary

outsourcing expenditures rather than or critical,

ongoing Application Development and Maintenance

(ADM) services. Indian IT companies3 which are ocused

more on providing basic ADM services, and with long

term outsourcing contracts, could exhibit more stable

earnings in this environment. Furthermore, whilst

discretionary expenditures are being reduced, ongoing

projects will likely continue, at least in the near term,

especially those which are in the more advanced stages

o progress. Fitch expects IT services companies to

report marginally positive revenue growth (in dollar

terms) over 2009.

With decisions on IT budgets being deerred and

sales cycles having elongated rom 3-6 months to 6-9

months, companies are seeing a signicant drop in client

additions. Moreover, the number o targeted large deals

has more or less dried up. According to TPI4, mega deals

have allen to levels lower than those seen in 2001.

Verticals

The current US-led crisis parallels the 2001-2002

Dotcom Bubble burst especially or Indias IT (export)

sector. Approximately 61%5 o the Indian IT exports

revenues are rom US clients. I we consider the top ve

India players who account or 46% o the IT industrys

revenues, the revenue contribution rom US clients is

approximately 58%.

This clearly indicates the adverse eect that the US

recession is likely to have on the Indian IT sector. The

industry has been constantly seeking to diversiy its

markets to oset its reliance on the US, which remains

the largest outlet or Indias sotware sector.

The impact has been more severe in the case o the

Banking,FinancialServicesandInsurance(BFSI),

which accounts or around 40% o the industrys export

revenues, and in retail and certain manuacturing

sectors. Other verticals like telecom and automobile are

also likely to have a delayed budget process and budget

cuts. However, the industry ocus is likely to shit to

areas such as manuacturing, healthcare, retail and

utilities. Healthcare industry is likely to witness increased

IT investments due to increased ocus on public health.

Other industries that will see growth include telecom,

retail and utilities.

Some vendors who have a greater exposure to BFSI

segment will be more impacted when compared to theircounterparts with less signicant exposure (table on next

page). The eect o this crisis would be more evident in

the coming quarters. The overall revenue impact on the

IT and ITES industry, as a result o the BFSI meltdown,

could be anywhere between $750 million and $1 billion.

Source: NASSCOM

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%FY 2003

1%

5%

13%

22%

39%40%

19%

15%

8%

4%

3%

FY 2004 FY 2005 FY 2006 FY 2007

BFSI

Hi-tech / telecom

Manuacturing

Retail

Healthcare

Airlines and transportation

Construction and utilities

Others


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CompaniesBFSIshare

(%) *

ExposureofBFSI(inUSDmillion)KeyBFSIclient

Jan-Mar 2008 Apr-Jun 2008 Change(%)

Cognizant 46 292.4 314.2 7.46American Express ,Citigroup, Credit Suisse ,

JPMorgan,Metlife

Inosys 34 387.1 398.5 2.94ABNAmro,BankofAmerica,JPMorgan,

Washington Mutuals ,UBS

TCS 42 664.4 648.2 -2.44 AIG, American Express ,Bank o America, Citigroup,DeutschBank,Fortis,JPMorgan,MerrillLynch

Wipro 25 256.8 271.1 5.57 CreditSuisse,LehmanBrothers,UBS

*As a percentage o total revenue; BFSI contribution sourced rom company reports ,BFSI clients rom equity analysts

Inosys - The revenues rom BFSI that were at 37% in

June2003havestayedmoreorlessunchangedasa

percentage o total revenues. In the December 2007

quarter, Inosys got close to 37% o its revenues rom

BFSI. This slipped to 34% o revenues in the March

2008 quarter. In the quarter ending December 2008,BFSI showed a sequential growth o 4% in volume

Wipro - Indias third-biggest sotware exporter, and

Cognizant, ranked sixth, have seen revenue rom the

key Banking, Financial Services and Insurance (BFSI)

vertical rise by about a th between Oct-Dec 2007

andJuly-Sept2008

April-June2008,Cognizant recorded the highest

growth rom nancial services vertical among the

oshore peers. This was mainly due to the type o

nancial services clients in the portolio and themultiple operating levels (table above)

TataConsultancyServices, or example, earned 42%

o its revenue in the second quarter o CY 2008 rom

the BFSI

Impact of exchange rate on revenues

In IT sector, the margins are likely to be challenged

on account o the slowing growth in the US. Rupee

depreciation seems to be the only tailwind that the

sector enjoys. This can be evident rom the act that the

out o the increase in the IT export revenues or FY 2008over FY 2007, almost hal o the increase could be

attributed to the rupee depreciation during the same

period.

Pricing poised for decline in favour of volumes

Pricing has been dicult in this sector compared to

other sectors: On an average, the US nancial sector has

driven bulk volumes through lower onsite pricing, higher

oshoring and aggressive volume discounts. It is sae to

iner that BFSI application business margins especially in

the top companies are a ew percentage points below

the higher margin verticals l ike, say, energy. Hence,a replacement o nancial services business with

business rom other verticals is likely to positively

impact the bottom line. A speedy replacement is

however, easier said than done.


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Volumes are expected to remain weak over the next

three quarters or most players orcing urther price

cuts. The reduction in pricing is expected to be lower in

magnitude compared to FY 02-FY 03. This is because

the current pricing has not touched the FY 02-FY 03

bubble proportions. Inosys has already reported 1.8%

decline in blended pricing (constant currency) in Q3 FY

09whileHCLTechannouncedfreetransitioningfor

deals amounting to $1billion bagged during the quarter

as a strategy to garner volumes. TCS and Wipro too

have acknowledged pricing pressures and the impact

would be more visible in the coming quarters.

Fitch Rating expects the sector to ace margin

pressures over 2009 and 2010 due to the intensied

competition or new contracts, thereby putting pressure

on billing rates. Competition even or smaller contracts

has increased, as companies try to maintain utilisation

levels. Customer cost pressures could also result in re-

negotiations o maturing contracts at lower terms. There

could also be an increased shit rom traditional hourlybillings towards a new return on capita based price

contracts providing tangible savings, while variable

time / material contracts could be renegotiated at lower

levels. Vendor consolidation will be the order o the day

in the current environment, as this would result in cost

savings or customers.

The US fnancial sector has driven bulkvolumes through lower onsite pricing, highero shoring and aggressive volume discounts

Fitch believes that the large Indian IT players will gain

market share. However, these risks to operating margins

are partly oset by the act that Indian IT services

retains some fexibility in terms o their cost model.

As the impact o the slowdown becomes more severe,

companies will increasingly look at cutting costs in the

orm o overheads and reduction in variable pay / annual

increments. The industry has also been reducing its

hiring, as well as changing the hiring prole to ensure

that operating costs are in control.

7500

7000

6500

6000

5500

5000

15

13

11

9

7

5

3

1

-1

-3

-5

Volume

Volume growth aided by a declining pricing regime

Q1FY

02

Q1FY

03

Q1FY

04

Q1FY

05

Q1FY

06

Q1FY

07

Q1FY

08

Q1FY

09

Pricing poised or a all as volumes decline

Price

Blending pricing

Volume growth

Source: Centrum research


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Hiring trends

The Indian IT industry witnessed plunge in all the three

segments IT Services, ITES and domestic market, as

depicted below:

The above graph depicts the decline in the employee

numbers over the years in all the three sectors viz. IT

services exports, ITES exports and the domestic market.

The ITES segment witnessed the greatest plunge rom

69.81% in FY 2003 to 12.83% in FY 2009. The high

attrition rate coupled with the current gloomy economicscenario can be the reasons attributed to the massive

all in the numbers.

Source: NASSCOM

IT services

ITES

Domestic market

80%

70%

60%

50%

40%

30%

20%

10%

0%

FY 2003

69.81%

FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009

20.59%

15.74%

10.09% 11.11%12.83%


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5. Future outlook

Fogged out

2008 was a transormational year or the Indian

Inormation Technology-Inormation Technology

Enabled Services (IT-ITES) sector, as it began to

re-engineer itsel to ace the challenges presented

by a macroeconomic environment which witnessed

substantial volatility in commodity prices, infation,

and decline in GDP rates, cross-currency movement,

nally culminating in the economic downturn. In an

increasingly globalised world, signicant complexity and

uncertainty is getting attached to this unprecedented

economic crisis. The Indian economy has also been

impacted by the recessionary trends, with a slowdown

in GDP growth to 5%. The ocus and exponential

growth in the domestic market & presence o global

IT oshorers has partially oset this all, resulting

in net overall momentum. The slowdown is expected

to persist, as lead indicators o US economic health

(the US accounts or 40% o global IT spend) continue

to be extremely negative. That being said, India may

be better positioned or a quick recovery and oruture growth than many o the other developing

economies. There is a sense that the international

institutions will be remade to refect the current balance

o power, and that India may be able to turn this crisis

into a permanent place at a new high table.

The current situation however looks ogged out, with

no clear visibility. Some hitches aced by the IT industry

are;

Uncertaintieshigh: Churn in client base, elongated

sales cycles and headwinds rom a harsh currency

environment render high uncertainties or IT

companies

SignsofrevivalintheUSappearbleak,atleast

inthenearfuture:Conferenceboards10Leading

EconomicIndicators(LEI)continuetobenegative,

showing no signs o near term revival

Pricecutstohitmargins: With volumes drying up,

companies are expected to cut pricing in avour o

volumes

Revenuevisibilityfoggedout: IT companies

normally have a one year revenue visibility o >60%.

However, with an already stressed client base, giventhe prevailing tough environment, revenue visibility

appears ogged

Uncertaintiesweighonvaluations: Current

valuations actor in the rapidly deteriorating

environment and the same is expected to remain

depressed until companies improve revenue and

volume growth


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PowerfulforcesaredrivingchangeintheIT

services market, including:

Thecurrenttougheconomicconditionisdriving

many companies to look to outsourcing as primari ly

a cost-cutting initiative. To meet their needs the

providers are now investing in delivery centers

around the world beyond India, although it remains

as the leading oshore services destination

Thecurrenteconomicconditionsparesnovendor.

Even the growth o the once highfying Indian

providers has moderated considerably, driving many

to urther their eorts and ocus on the European

market

CloudcomputingandSaaSparadigmsare

redening how computing resources can be

accessed and paid or

TheboundarybetweensoftwareandITservices

business models are blurring, leading to eachencroaching on the others space

Signposts to a revival

The IT market is currently undergoing a structural

transormation that will have a proound eect on how

IT service providers will have to conduct their business.

Market orces o commoditization, miniaturization,

industrialization, and globalization, along with changing

buyer sentiments, would accelerate a shit in the

dominant orm o IT delivery in the coming years - rom

buyers sel-integrating technology to outside providers

assembling and managing it or them. As serviceproviders prepare or these changes, they are looking to

redesign their solutions portolio.

The belie is that there is a strong correlation between

India IT sector revenue growth and US GDP growth,

which implies that a revival in revenue growth would

coincide with an uptick in US economic growth. The 10

possible indicators in this sector to track are:

1) Working hours

2)Joblessclaims

3) New orders or consumer goods

4) Vendor perormance

5) New orders or capital goods

6) Building permits

7) S&P 500

8) Money supply

9) Interest rate spread

10) Consumer expectations

An economic downturn / recession places high stress

on the business and the IT organization. There are

dierent stages to a downturn, and there are ways

to oresee them and manage them. The rst stageexperiences decline in economic output numbers like

GDP, corporate earnings, asset values and diminishing

return on investments, as markets start to slow. In

the second stage although the signals are marked

by denial, ear and pessimism, the regulators o the

economy try to pump in measures to tide over the

negative sentiment and manage the crisis, with the

result o gradual improvement in customer expectations,

increase in demand and resultant rise in employment

levels. The ollowing stage is characterized by the

increased condence and growth in customer orders,

increase in consumption and rate o earnings whichprovides breathing room to invest in growth projects.


16/17

16

The major changes organizations must make between

stages are a ocal point o risk and opportunity or the

business. Figure below illustrates the recovery cycle

with productivity on the y-axis and time on the x-axis.

Productivity decreases during a ull blown recovery

as companies start piling up their work orce and

capacities in anticipation o demand. The chart shows

a recovery ater Q2-Q3 FY 10.

Few emerging trends

Verticalisation o IT services is a denitive emerging

trend and users are demanding services tailored to

their needs. Mature IT customers are today looking

or total solutions that can solve their businesschallenges rather than at IT hardware, sotware, and

services as discrete elements

Thesectorisalsoeyeingremote inrastructure

management services as the next big opportunity

ater the success o ITES. India is well positioned

to capture a disproportionate share o this growth

by 2013 that is about $ 13 to $ 15 billion out o the

total potential annual revenue o $ 524 billion, rom

the current share o $ 6 to $ 7 billion, a report by

Nasscom and McKinsey said

Indiaisalsofastbecomingahotdestination

or outsourced e-publishing work. As per a

Conederation o Indian Industry (CII) report, the

industry is growing at an annual rate o 35% and

Indias outsourcing opportunities will help make the

publishing ITES industry worth US$ 1.46 billion by

2010

Withgrowinginterestinutilitytypemodels,software

and IT services business models are converging

with sotware companies, incorporating IT services

and sotware as a service (SaaS), while IT services

providers are architecting and selling asset-based

oerings that do not rely solely on leveraging labor

as the underlying ingredient or revenue and prot

margins

Virtualization will tend to be a growth catalyst in

the sotware market and open source sotware a

possible alternative to the proprietary sotware which

is still perceived as the more-expensive option

Looking Ahead

As we look ahead India would recognize need or

transormation and change. Indian IT services industry

landscape has graduated rom being a low value

long term services provider oering cost and labour

arbitrage to provider o high value one time /

long time services such as discrete and end to end

outsources acilitated by its scalability.

Expansion into tier 2 / 3 cities can reduce pressure.

Currently there are seven centres that account or over95% o exports. By 2018, it is orecasted that 40% o IT

/ ITES exports will originate rom non-leader locations.

The potential o near shoring needs to be tapped ully,

as customers are on the lookout or the geographically

close and culturally similar centres.

Key global sourcing drivers will continue to be cost,

access to talent, business improvements, increasing

speed-to-market and access to emerging markets. The

uture outlook or all these drivers is positive, leading to

increased momentum or global sourcing.

03 FY 08 03 FY 09

Time

Recession

Productivity

02-03 FY 10

Interest rate

spreads show

a bull steeping

Increasing

working hour

Employment

growth

Improving consumer

expectations andnew building permits,

expanding money supply

Improving data on new

orders or consumer

goods, capital

goods and vendor

perormance

Source: Centrum research


17/17

Indias exports have been hit due to the global nancial

crisis. India has a large domestic market that can help

to oset the export business. Gartner expects some

impact on IT services providers that rely on oshore

discrete projects coming in rom the U.S. and Western

Europe where projects are being scaled back or cut.

To counterbalance the oshore work, these IT services

providers will most likely ocus on India.

Indias burgeoning domestic market, uelled by the

economic growth will be a one o the ocal points

or the IT sector in the coming days. As the Indian

economy urther opens up, other verticals including

manuacturing, travel and tourism, healthcare and

entertainment will increasingly look towards IT to

increase competitiveness. For both new and existing

verticals, the Small and Medium Business (SMB) segment

will represent an important source o growth or the

domestic IT services market.

While the 2009 outlook or global technology relatedspending is aected by the recessionary environment,

a rebound is expected rom 2010 onwards. The

opportunity or India is tremendous since currently it

accounts or just over 4 % o worldwide technology

related spend. Additionally, growth in global sourcing

is estimated to be almost our times that o technology

related spend. India currently generates the bulk o its

IT-ITES revenues rom the US, and the BFSI sector, while

accounting or a miniscule part o technology spend in

other geographies and verticals.

The BFSI sector one o the largest spenders on IT and

one o the worst hit in the current economic slump.

With the trouble brewing in the BFSI sector, the industry

ocus is likely to shit to areas such as manuacturing,

healthcare, retail and utilities.

Indian service providers are increasingly engaging in

M&A activity as they seek to expand their customer

base into new geographies. India-based providers

demonstrated in H1 2008 an appetite or making

acquisitions, particularly in geographies or countries

where they wanted to grow their customer base.

Companies like Wipro, TCS, and Inosys were all near

the top o the list o most actively partnering service

providers; between them, they account or 41% o all

the partnerships.

Sustained demand, robust undamentals and a

supportive business environment will help realise the

signicant potential the IT-ITES industry oers, both or

exports and the domestic market. The Indian IT-ITESindustry is now at a critical point in its evolution. Behind

it stands a decade o stellar perormance which has

let a deep imprint on the Indian economic and social

landscape. Moving orward, it aces a transorming

macroeconomic environment, rapidly changing

customers and needs, evolving services and business

models, and rising stakeholder (employees, investors)

aspirations. These orces are expected to redene the

nature o demand and supply or the industry, and also

redene the strategic imperatives or businesses in 2009.

Indian economy urther opens up, otherverticals including manuacturing, travel andtourism, healthcare and entertainment willincreasingly look towards IT to increasecompetitiveness

Documents

IT Recession 1