?IT to boot up again as meltdown freezes in 2010?

The Indian IT sector?s hopes of a bounce-back in 2010 will become a reality. The recruitment market will swell again and salary hikes will return to pre-recession era when the calendar closes, says tech research company Gartner India?s regional research director and vice-president Partha Iyengar. On the outsourcing front, 2010 would be marked primarily by a volume of low-end projects like application maintenance projects coming to Indian vendors. IT outsourcing would continue to remain cost centric, he adds. Speaking to FE?s Reema Jose, he says the year would be marked by consolidation in the software industry and increased IT spending by Indian enterprises. Excerpts.

What kind of projects do you see being done out of India when the recovery in global markets is complete?

The offshoring industry will see what I call going back to the future syndrome. In the next 12 months, growth for the industry will be driven by cost-saving centric outsourcing, where it all originally began. There will be no major shift in quality of work being done out of India by way of going up the value chain. The work initially will be application development and maintenance support, the trend in 2008 and before. In the next six months, I don?t expect any transformation deal. For any average company, outsourcing application development work gives 80% of total cost savings. So clients will initially try to shift low-end work to India for cost savings. After the first 12 months, transformation projects will kick in.

With the markets bouncing back, there is speculation that the sector would consolidate and smaller players would be up for a grab. Give us a sketch of mergers and acquisitions in 2010.

The year will be marked by M&As of different flavours. We are likely to see top Indian companies acquiring in Europe to get onsite capability and hiring more employees in Europe as against the US. Global companies, especially the Tier II players that did not build offshore capability will be acquiring in India and other offshore locations. Also, Japanese service providers will make acquisitions in India. One will see an expansion of the Japanese market and some Japanese players who are pressed to have offshore capability will drive acquisitions here. After 18 months even India will consolidate, even when it does not have an inherently M&A-driven culture.

How will the domestic market fare during the year? Do you expect more Indian vendors to launch domestic market-centric business arms?

The domestic market did not completely go down during the slowdown. Given that Indian vendors are chasing the offshore markets in the wake of the recovery, there is a concern that players here are fairly short sighted about the domestic market. Even during the boom in the IT industry, companies were after larger offshore deals. This was when smaller Indian clients were struggling to find service providers.

Beneficiaries will be global companies (the multinationals) that would have a better balance of domestic market focus. It will offer an opportunity to smaller Indian service providers?for Tier II and high-end Tier II companies?if some of them can say focus exclusively on the Indian market. In terms of deal sizes and margins, Indian services deals are not so bad. IT budgets in India during the last year to early this year were seen to have grown by close to 16%, which was the highest in the world. The budget numbers that led to this growth were finalized before the downturn had set in. I will not be surprised if we see similar kind of growth this year as well. There is a lot of catching up on spending that Indian enterprises have to do, to have more effective use of IT.

What kind of expansion will the software job markets undergo?

By Q3 2010, the recruitment environment in the global markets would go back to what it was before the down turn. Attrition levels would go up again to 15- 20% level, and the industry would see salary escalations of 15-20%. By the year-end, hikes would go back to pre-slow down era.

How about the concerns that escalating manpower costs could take away from a slice of the cost advantage India offered to outsourcers? Will the threat of other emerging outsourcing destinations become real?

Downturn has reduced the risk appetite that clients have had when they consider outsourcing. The number of risk averse countries has gone up. Companies outsource to firms that are known to be able to deliver services and quality. There are still not enough vendors outside India who can offer that kind of stability. According to companies, the cost associated with the risk of attrition and high manpower costs is lower than the cost of non-delivery from competing destinations to India.

Competition to India is emerging from places like Malaysia, Philippines, New Zealand, China, Brazil, Argentina, Chile and South Africa to give a few examples.

Will mutlinational companies in India be able to beat Indian competition when outsourcing deals begin to flow?

There is a clear distinction between MNCs. Tier I companies like IBM and Accenture have offshore capabilities that are in line with that of Indian providers. However, their onshore capabilities are superior to that of the Indian contemporaries. But they face a challenge of how to integrate functions of the front-end while they ramp up the offshore presence. The next set of companies will try to grow their offshore capability. They may make acquisitions and ramp up hiring in India.