Recession may bite, but outsourcing is here to stay

Updated on Feb 12, 2008 03:18 AM IST
There is a slowdown in domestic growth, a slowdown in IT spending by US companies – the key clients - and burgeoning wage costs, reports Venkatesh Ganesh.Check out the graphic
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Hindustan Times | ByVenkatesh Ganesh

Is this the same boomtown? Is India’s dream to become a global powerhouse for software and business services an illusion? Looking at the current year, one might see dark clouds.

There is a slowdown in domestic growth, a slowdown in IT spending by US companies – the key clients -- and burgeoning wage costs. The Indian IT sector, which witnessed growth rates of 30 to 40 per cent every year in the last four years, seems to be heading for a slowdown.

A strengthening Rupee and job cuts in industry leader Tata Consultancy Services – officially on grounds of performance quality – have raised questions on profitability as well as the ability of the industry to serve demand.

Industry analysts say that a lag in spending on information technology typically lags economic growth – and hence, in the absence of any clear signal on a US recession yet, there is no clear sigh of any IT slowdown either. But, to borrow a memorable expression from then Infosys chairman N.R. Narayana Murthy, there is “fog on the windshield.” Murthy used those words when the industry was in the throes of a slowdown in 2001.

Share of Infosys, Wipro, Satyam – three of the top four in the industry – have fallen over the past three weeks in the US. TCS is not listed there yet.

Infosys and TCS just about met market expectations in quarterly results announced in January, while Wipro’s numbers were weaker and the guidance for the current quarter was muted, said Vikas Jadhav, industry analyst at Motilal Oswal Securities.

Majority of the IT companies get in excess of 60 per cent of their revenues from the US – and if the economy there sneezes, India’s IT sector is bound to catch a cold.

“The glory days of the sector growing at 40 per cent in a year could be a thing of the past,” says analyst R. Shankar of PricewaterhouseCoopers, referring to the growth rates of the companies.

The rupee has risen by about 12 percent over the past year. Chief Financial Officer V. Balakrishnan of Infosys said last month that for every percentage point fall in the US dollar, his company’s profitability fell by half-a-percentage point.

The other big issue looming large over IT companies is the availability of quality talent, which can be co-related with pricing.
According to a study conducted by the National Association of Software and Service Companies (Nasscom) and global consulting firm McKinsey in 2005, India requires a 2.3 million-strong workforce by 2010 and has projected a potential shortfall of nearly 0.5 million qualified employees by that time if appropriate measures are not taken to build talent.

One key point is that Indian companies, in order to sustain high profits and growth are expected to shift from work billed by the hour to complex billion in which consulting and generation of intellectual property in the form of copyrights or reusable code lead to higher profits and billing rates.

“The current model is alright when companies are doing basic work like rewriting software codes, but when it comes to IP and consulting work it is a different ball game,” says Minoo Dastur of Nihilent Technologies.

“As companies move away from billable hours towards transaction-based pricing, it is important to maintain high benchmark service levels,” says Gangapriya Chakraverti, Business Leader, HR consultant firm Mercer. She adds that to maintain these benchmarks, companies will increasingly ask underperformers to leave – as TCS did recently.

Salary increases of IT professionals, which were 15 per cent in 2007, were twice the levels of 2006. Companies like TCS, Infosys, Wipro and Satyam offered salary hikes in the range of 15 to 20 per cent in 2007. However, the companies expect that this year, the increases will be only about 7 to 8 per cent across-the-board.

“Companies will have to start using technology at certain levels to reduce their dependence on people,” says Ganesh Natarajan, managing director of Zensar Technologies. Cheaper labour is no longer the key thing.

“The Indian IT/BPO industry needs to from pure labour arbitrage to productized services and improve employee utilization levels by driving efficiencies,” says Joydeep Datta Gupta, Executive Director, Deloitte and Touche Consulting, India.

“School curricula which is outdated should be reworked on,” says Dhananjay R Bansod, Chief People Officer, Deloitte Touche Tohmatsu India.

Nasscom is working with universities and its members to figure out a way to rank employees coming into the sector based on tests. Companies hire a large number of people and put them on the 'bench' which acts a buffer as and when new projects come in. “The large number of recruits hired to maintain 'bench strength' may also become unsustainable in the medium term coupled with even higher investments in training and development,” says Chakraverti.

Despite the concern that is looming large on behalf of employees, employers are positive about business and unanimously feel that even in case of a recession in the US, outsourcing is here to stay as a long-term proposition.

“We are not seeing a slowdown in tech spending in the US,” says Srinivas Vadlamani, CFO, Satyam Computer Services. Both Narayana Murthy and Azim Premji recently stated in public that US companies will continue to cut costs in technology work and outsourcing was here to stay. “A mature industry will witness these issues and companies will reward good performers and won't carry the burden of the non-performers like it happens at certain times,” says Shankar.

In other words, IT is still a boom area, but it may not stay a bandwagon.

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