Tech tactics in troubled times

Written by Diksha Dutta | Diksha Dutta | Updated: Nov 1 2011, 02:11am hrs
Salaries in the $67 billion Indian IT industry are increasing at 15% year-on-year. Real estate cost is booming too. Customers are keen to squeeze their IT budgets. On the other hand, IT players do not want to minimise their margins to bear this cost. A look at the math: the industry has witnessed an annualised inflation of 5-8 % in several offshore delivery locations such as India. On the contrary, in the last 24 months, vendors had to decrease their prices by 6-8% to keep their customers intact, reveals a recent report by Everest Group. Though the past few months of 2011 have brought some good news on increased pricing, quite a few Indian IT providers sustained revenue and margin growth in the middle of the recession too.

Reducing cost has been the agenda of Indian IT brands like Infosys, TCS or Wipro, since recession hit them last time. As their business strategies helped them survive previously, they continue to stick to changed delivery models.

A quick look at what is helping them get going now and what helped them in the past: In the recessionary period of 2008-2009, leading Indian IT service providersWipro, TCS, HCL Technologiesstarted doing more of low-end maintenance and transactional work at low-price points as per the customer requirements. Sarthak Brahma, practice director at Everest Group says, The traditional application development management (ADM) providers bullishly entered the infrastructure space with models such as remote infrastructure management (RIM) and internet-as-a-service (IaaS). RIM contribution to Indias IT services exports increased significantly over the last three years. He further explains that RIM investment usually does not require high capital expenditure and helps in reduced price points and cost.

Ganesh Natarajan, CEO at Zensar Technologies says, For Zensar, revenue from services like infrastructure management has increased from 15% last year to 35% now. On similar lines, Vineet Nayar, vice-chairman and CEO of HCL Technologies refers to maintenance work as run the business (RTB) deals. After significant spending by the US market on RTB deals, the European market is investing in RTB deals, he says.

More freshers, more utilisation, more delivery locations

Another important trick which has helped Indian IT providers manage cost is bulk fresher hiring rather than depending on laterals. At present, 60% population in the IT industry is of freshers, as compared to 45% in 2008. Natarajan from Zensar explains that processes like RIM do not require experienced professionals and can be handled by freshers. For instance, there has been a total of 10% inflation in the industry. We have recently seen a 2-3% hike in pricing and the rest 8% inflation is balanced by cost deduction. We balance it by recruiting young people and newer processes like RIM etc, he informs.

Even an exceptional company like HCL Technologies which concentrated on hiring laterals in the past, is now looking at hiring more of freshers. Says Nayar, At present, we are pumping in freshers to work on existing projects. Today, our ratio of freshers and laterals is 50:50, which was more inclined towards laterals last year.

More freshers automatically means increased utilisation rates of companies. Sarthak from notes, Vendors have increased utilisation rates to cope with increasing costs. Pre-2007, there used to be 35% population on bench and rest was being utilised. But now the average utilisation rate in the industry has reached 75%.

Vendors are also looking at Tier II-III cities more seriously as the talent is cheap and hard working in locations like Bhubaneswar or Nashik. As a plus point, salaries are 60% lower and real estate costs are as low as 85% in such cities. Companies moved as much as 20% of their offshore headcount to smaller cities in the last two years. For the future, 80% of the new upcoming seats of IT vendors are expected to be in tier II-III towns. Thus, in the next three years the split of headcount between metros and small cities will be 50:50.

The Everest research highlights that in the last two years, Indian IT providers started to aim for value at the bottom of the economy stack. Be it the impetus to drive business in emerging markets such as Latin America, Asia and Eastern Europe, or the willingness to target small enterprises across geographies, these providers led the pack. There was a steady increase in revenue contribution stemming from local deals and from the aggregation of the long tail of small deals. For the first time, the share of non-US countries has contributed more than 50% to our funnel. The share of US is only 45%, while that of other countries dominated by Europe is 55%, said Nayar after the company's quarterly results.

The recession period also saw important acquisitions like Dell-Perot, ACS- Xerox, HP-EDS, Tech Mahindra-Satyam. The companies were chosen on the basis of complementary services or scale, completely new service lines or simply to buy out the competition at low prices.

Sarthak from Everest concludes aptly, The vendors have to either keep on increasing price or reducing cost. Buyers are pushing for lower price, thus it is natural for IT players to believe in low cost.

Golden steps during recession

Offering a service mix which suits buyer requirements including RIM, ADM and consulting

Shifting focus to emerging markets

Acquiring complementary companies at low valuations

Increase in hiring of freshers, increasing utilisation rates

Entering tier II-III cities to lower cost

Signing fixed price contracts and sticking to maintenance services