At times, market opportunity could fast transform into a major worry for those focused on to it. Take the case of the financial services vertical, which was seen to be powering the stupendous growth of the Indian IT software and services industry. Unfortunately, the US financial crisis has re-ignited investor concerns about the exposure of the Indian IT services market. While it is difficult to assess the final impact of recent developments, concerns are being raised in industry circles and for valid reasons.
For the time being, the top Indian IT software and service companies have resorted to strictly adhere to the age-old phrase of ?silence is golden?. For, they are in no mood to comment on the ongoing financial crisis in the US and the silent period just before the second quarter results has saved them from commenting on the looming crisis, at least for a few more days. It has also given them some more time to estimate the depth of the crisis.
Here?s a sampler. While companies like Tata Consultancy Services (TCS) did not respond to queries on the US financial crisis, others like Wipro, Infosys and Cognizant Technology Solutions refrained from commenting, citing the silent period. In fact, none of them agreed to speak even informally. ?Since we are in our quiet period, we would not be able to give out any of the specifics that you have asked for. We could take this up post our results sometime towards the end of next month,? was the cryptic response from Satyam Computer Services.
In fact, three overbearing statistics have made the scene more complex for the Indian IT software and services export industry. Firstly, a major chunk of the Indian IT software and services revenue comes from the US market?around 61% of the total export revenue of $40.4 billion in 2007-08. Secondly, banking, financial services and insurance (BFSI) segment constitutes around 40% of the total Indian software and services export revenue. Thirdly, more than 80% of the BFSI export revenue comes from the US market.
The statistics highlight the crucial fact that a substantial portion of revenue for the top Indian IT software companies comes from the BFSI segment. Hari Rajagopalachari, executive director, PricewaterhouseCoopers (PwC) says, ?The dependence on the US market will make the Indian IT software and services export market fairly turbulent in the next 24 months.? According to him, the consolidation and search for more efficiency in the BFSI sector will force banks, financial services and insurance majors in the US market to opt for more outsourcing in the long-run, which will ultimately benefit the Indian IT industry.
At the same time, the Indian IT industry will not be the same again. ?We can expect some major structural changes in the functioning of the Indian IT industry. For instance, by moving away from the developed English speaking countries to oil rich economies in the Middle East, where there is plenty of cash available,? says Rajagopalachari. However, there are complexities associated with such a move, he insists, perhaps referring to the kind of corporate governance being practiced in the oil rich countries, unlike in the US and UK markets.
Another structural change could be with respect to high wage rates. At present, a top grade Indian IT company charges between $80 to $160, depending on the kind of job and experience of the employee. And, an offshore employee company charges anything between $28 and $35. Therefore, it is quite possible that high wage rates may take a hit.
Deepak Ghaisas, who was the ex-vice-chairman of iFlex?the core banking solutions company later acquired by Oracle?says for companies like AIG or for Goldman Sachs and Merrill Lynch, the issues are not to look for specialised applications in the investment segment. Rather, they would like to continue with the existing applications and platforms. ?For the traditional banks, attractive solutions will be more in areas like anti-money laundering, treasury management and better delivery channel to lower the cost of delivery,? he informs.
Few might be aware but when the sub-prime crisis was in its infancy in the early months of the current year, Indian software companies were not sure how deep the crisis might be in the times to come. While the US regulators, banks and financial institutions were closely following the events, global investment banks in their quarterly and annual results were declaring their billions of losses, due to the foreclosure of sub-prime loans.
Predictably, all hell broke loose when giant mortgage lenders like Fannie Mae and Freddie Mac tumbled. This was followed by the announcement of bankruptcy by the investment bank behemoth Lehman Brothers. Soon, other investment banks like Merrill Lynch, Morgan Stanley and Goldman Sachs announced their incapability to run their existing business.
With each passing day, the crisis is becoming overbearing for the Indian software companies whose clients are either declaring themselves bankrupt (Lehman Brothers), or merging with other entities (Bear Stearns and AIG) or converting into regular banks (Morgan Stanley and Goldman Sachs).
Nevertheless, IT industry captains are putting up a brave face. Reflecting the general mood of the IT industry, Wipro chief financial officer and executive-director Suresh C Senapaty says things will ease out soon and it is a matter of few quarters before banks and financial institutions come out from the slump. Referring specifically to his company, he informs that Wipro has a wide portfolio of services in the banking and financial sectors. ?We don?t think there will be much impact on our growth,? he adds.
Infosys Technologies CEO Kris Gopalakrishnan has a similar response. ?We are not seeing any trends towards driving prices down. Pricing pressure by some clients is only occasional and sporadic in nature.? A more cautious approach comes from Francisco D?Souza, president and CEO of Cognizant Technology Solutions. In a conference call held last month, he said that there could be a slowdown in the economy, which will have an impact on all industry segments. ?When we look at our actual results in Q2, the good news is that our financial services portfolio saw an improved stability, actually growing slightly above the company average on a sequential basis. However, as the quarter progressed, we began to see the impact of the economy affecting clients across other industries. While this trend in Q2 was most clearly evident in the healthcare segment, anecdotal evidence that we have from conversations with customers outside healthcare and financial services indicated that the effects of the slowing economy will impact other industry groups during the back half of the year,? says D?Souza.
Given these kind of changes, analysts feel that Indian software companies will face stiff economic and operational issues. Kapil Dev Singh, who is the country manager of International Data Corporation (IDC) in India, feels that in general there will be impact on the various sectors of the economy. More so in the IT industry, he insists.
?It is certain that banks and financial institutions in the US will spend less on applications development. They will not be in a hurry to introduce new technology. Rather in the next few years, they will try to rationalise cost on both hardware and software,? says Singh. According to him, the margins will be under severe pressure for at least the next few years and software professionals have to be ready for being laid off. ?Indications are that 2009 will not be great and the chances are it is going to be widespread. Maybe in 2010, we may see some recovery,? says Singh.
On the other hand, another IT research company Gartner recently said that the crisis will provide opportunities to Indian IT companies in terms of integration of merged entities and outsourcing. However, it has little to say on the margin pressure that IT companies may face.
In such a scenario, Rajagopalachari of PwC feels that there are some ways in which the workforce would be rationalised. For one, there would be less recruitment and there would be revaluation of the quality of labour force. In addition, IT companies will resort to guided retrenchment and flat rate wages for some time. ?All this will happen as there would be fewer earnings for the companies in the real term,? he feels.
Bikram Dasgupta, who heads Globsyn Technologies, says that unlike in the past, Indian IT companies will find consumer banking located in the mid-west region of the US more attractive, as the east coast investment banking companies are on a roll. ?The situation is pretty grim, but there are interesting changes happening. First of all, banks will look for applications which will provide information on how the money is traveling from one point to another. With this, banks will increasingly look for better risk management software,? Dasgupta says. According to him, Indian software companies will look for more business in the European and Japanese markets.
However, English language could be an issue, believes Rajagopalachari. ?Application software development is highly language dependent. This is the reason why Chinese are not successful as against their success in embedded software, where language requirement is less,? he says.
