| The U.S.-based competitors depend on Indian subsidiaries to control costs, and their competitiveness will also be hit by the rupee rise |
With the rupee appreciation and the slowdown in the U.S. economy, the Indian IT industry will have to evolve. Innovation, new delivery model and building business beyond borders will help the industry to survive and become a global leader.
An escalating rupee has triggered the U.S. dollar to drop from Rs. 44-45 levels to Rs. 39.
Though stock markets have had their ups and downs, 2007 has remained predominantly a bull year for them. The Sensex has moved up from 13000 to breach the 20000-mark to hover around its present level.
The year is also a witness to some mega deals such as Arecelor-Mittal, Tata-Corus and Vodafone-Hutch, to name a few.
The U.S. sub-prime mortgage crisis appears to have impacted most global banks and affected stock prices all over. Indian markets, however, have had no or very low impact.
With the information technology (IT) industry growing at a galloping rate in the past decade, IT stocks have been the darling of markets.
Rupee appreciationThis year, however, most IT stocks have under-performed. With the appreciation of the rupee, most IT companies have reported profits below last year’s levels. Mega acquisitions in the news have been in non-IT space. With BFSI (banking, financial services and insurance) segment contributing to a large percentage of Indian IT exports, will a slowdown in the U.S. affect India adversely? Analysts are predicting that the global IT spends will slow down in 2008. Is the party over for Indian IT industry? And, will the sheen go off in the next few years? Unmindful of these pressures, the IT majors, however, are adding headcounts like there is no tomorrow (see graphics). Global majors such as IBM today have 20 per cent of their global workforce in India. Do these developments portent some new trends?
An appreciating currency is a natural corollary of a booming economy with rising exports. The high value of the deutschemark when Germany was the trendsetter for the world economy in the 1960s and the 1970s, the high value of yen in the 1980s when Japan Inc seemed set to take over the world and dollar’s high value in the later part of 1990s when the U.S. economy brooked no competition — these were sources of immense pride for their respective countries.
The rupee has not only appreciated against the dollar (12-13 per cent), but also against the pound sterling and euro, during the last six months. FDI (foreign direct investment) inflows, foreign portfolio inflows and growing Indian economy are among the reasons for the strong rupee. The heart-burn on the rupee’s appreciation against the dollar is due to the fact that most of the country’s external trade is invoiced in dollar and any change in the dollar’s rupee value has a disproportionate effect on various stakeholders.
“The rising rupee is likely to hit Indian mid-size software services’ providers because of their thin margins. Margins are impacted to the extent of 0.5-0.6 per cent for every rupee increase against the dollar, depending on the business mix,” says Subbu D. Subramanian, Director and Senior Vice-President (Manufacturing and Automotive group), Saytam Computer Services.
“As a part of our strategy to offset the impact of the appreciation of the Indian rupee, we are increasing our employee utilisation levels, and we were able to successfully further increase our global utilisation rates from 63 per cent to 65 per cent,” says Chandrasekaran, President and Management Director, Cognizant Technology Solutions.
Mr. Chandrasekaran says, “We do not hedge. And our rupee expenditure is about 30 per cent of our total expenses. We have not hedged so far because there is an implied cost to hedging. Besides, we have several short-term levers to pull, which have the natural ability to offset the effects of rupee appreciation.” The U.S.-based competitors depend on their Indian subsidiaries to control costs, and their competitiveness will also be hit by the rupee appreciation, says Mr. Subramanian.
U.S. sub-prime crisisThe banking sector in U.S. may be going through one of its worst challenges in the last few decades, because of sub-prime mortgages crisis. Despite the prompt supportive action from the U.S. Federal Government, there are many analysts who predict that this may culminate in a recession in the U.S. economy. However, the IT Industry in India is looking at this more as an opportunity than a threat.
From a Tata Consultancy Services (TCS) perspective, there has been no impact due to sub-prime meltdown. TCS views every crisis as an opportunity to grow and help that segment by managing costs and drive process efficiencies in the business, says Ravi Viswanathan, Vice-President (Chennai Operations), TCS.
“This can potentially have an impact in the short-term for those who have significant exposure to BFSI (banking, financial, services and insurance) segment, but in the long-term, the crisis would actually spur further outsourcing of IT services,” says J. K. Nair, Executive Vice-President and Chief Operating Officer of California Software Company.
“Despite an uncertainty in the market over the economic outlook, 92 per cent of our clients do not expect their overall IT budget to decline in 2008,” says Mr. Chandrasekaran. Even if there is a reduction in the IT budget, most of the clients do not expect the same to have an impact on offshoring budgets. Other players in the industry also echo similar views. Overall, large Indian IT services’ companies are expected to gain in this scenario.
Global model
Most of the IT companies are spreading their services delivery infrastructure within India by moving into Tier-II and Tier-III cities. They are making inroads into China and setting up near shore centres in Eastern Europe, Latin America and Canada.
The reasons for spreading-out the service delivery infrastructure are not far to seek, according to Mr. Nair. Retaining or enhancing cost-competitiveness, improving customer comfort, moving closer to customer locations, leveraging a specific locally available skill-set and de-risking dependence on any single location are among the reasons.
TCS appears to have a diversified strategy of delivery. It operates out of six regions in India. The setting up of solution centres in different parts of the world is driven by the needs of the market. Today, it has over 10 per cent of its one lakh workforce sourced from the local markets. Setting up centres of execution around the globe is a part of the strategy to establish TCS as an international brand, according to Ravi Viswanathan.
TCS’ foray into new geographic locations continued according to plan with operating units set up in South Africa and Morocco in the EMEA (Europe, Middle-East and Africa) region and Mexico in the Latin American region. The Chinese operations have grown in strength. Data privacy matters and security laws of the local geographies are some of the reasons other than availability of talent in that region for setting up such centres around the globe, says he.
“Continued rupee appreciation may cause Indian IT companies to create more jobs globally than in India, given the service delivery expertise,” says Shiva Ramani, CEO, Cybernet-SlashSupport Systems.
Major IT dealsThe year 2007 saw some small acquisitions in the IT space. These are targeted at new market entries acquiring new skill sets. However, there were many major business deals in the IT space during this year.
Be in total contract value (TCV) of deals, be it in takeover of large number of client employees and their development centres, be it the expansion into most near-shore centres in Latin America, Eastern Europe and Asia-Pacific regions, and be it tapping into emerging markets like China, South America and South Africa — the top Indian IT companies, in 2007, have adopted unconventional business models to gain market share and establish a global foot-print and a global brand presence.
Take the case of the $1.2-billion deal that TCS has struck with AC Nielsen for IT and operations support. The deal is unique because it has unusual ten-year contract. The finance and HR business processes are also included as a part of the contract. And, the deal is to be executed on a new business platform built by TCS. The company also has taken over the responsibility for the Baroda development centre as part of the deal. Similarly, the Royal Philips Electronics deal of Infosys is equally unconventional. Infosys has absorbed 1,400 professionals and three shared service centres of Philips — one each in Chennai, Poland and Bangkok. This too is a long-term contract, spreading over seven years.
Another deal sewed using an innovative business model is the Rabo Bank deal by Cognizant for $21 million. Wipro’s arrangement with Credit Suisse is to set up a captive unit for Credit Suisse. And, the one-billion dollar deal struck by Tech Mahindra with British Telecom by paying up over $100 million upfront signals a new trend of large Indian IT Services and BPO companies innovating on business models.
Crystal gazingDuring 2007, the industry saw global players focussing on building up their delivery capacities in India so as to remain competitive with the larger Indian players. Large Indian companies were also looking to build and strengthen domain and technology capabilities even as they were spreading the services delivery infrastructure.
Finally, the mid-size companies focussed on getting scales on a few chosen domains and technology capabilities. Assuming that the rupee strengthens further against the dollar, what will happen? Experts feel that the IT industry can offset the impact of a stronger rupee in the short term by improving productivity, currency hedging, adjusting the onshore/off shore ratio and migrating to an appropriate global service delivery model and negotiating new contracts in rupee terms.
However, the industry has to transform itself by moving up the value chain, productised IP (intellectual property)-led services, and expanding in to stable currency markets to sustain growth in a strong rupee regimen. The industry leaders do not expect any major change in 2008. However some of the long-term trends that they indicated are:
Shift from being a mere IT services outsourcing destination to home of IP-based productised services;
A major transitioning from ERP to Service Oriented Architecture (SOA) framework;
World majors in different verticals making India as their R&D outsourcing hub and specialisation in select vertical or niche markets
The Indian IT industry, in effect, is on a path to provide superior business value to its global customers.
The IT majors are transforming themselves into true global players with India as their headquarters and mid-size players are attempting to scale up. One message which comes out loud and clear is: Those who innovate new solutions and new delivery models will survive and succeed.
SHANTHI KANNAN
No comments:
Post a Comment