2001: Bitter-sweet pill
arwinianism was the dominant metaphor for domestic IT players in 2001. Jolted by the recession in the US economy, the deceleration in IT spending, the 9/11 terrorists attacks and the hammering at the stock markets, India's US centric tech players were robbed of their "invincible" status as they struggled to keep themselves afloat. The quick rich days of 100 per cent profits were soon relegated to legends of yore, as major players ruthlessly scaled down growth margins by 70 per cent while others issued dire profit warnings or were ruthlessly rooted out by unyielding market forces.
Trend 1 - Price Wars
The first ominous signs that all was not well with India tech was the competitive undercutting of hourly rates for onsite developmental work. In order to retain a foothold in the fast eroding market, Indian companies under-quoted each other and drastically slashed hourly rates from $75 to $15-25. Top-tier Indian IT companies were willing to offer deep discount to large customers and even match their rates with the much lower billing rates of second-tier IT companies. For instance majors like Tata Consultancy Services lowered rates and openly competed with small companies to grab projects to maintain a healthy bottomline. The price wars squeezed out smaller firms, which lacked the marketing muscle of the majors and could not promise faster and cheaper delivery to US companies.
The pricing pressure was not restricted to onsite work. According to a November 5 Dow Jones report, operating margins from offshore work have come under increasing pressure. For instance, analysts point out that for the period of September 2000-March 2001, billing rates have fallen by 4 per cent for HCL Technologies and by 2.5 per cent for Infosys. Satyam's billing rates grew by a slender 0.1 per cent. Although Wipro registered a healthy 6 per cent growth, Goldman Sachs points out that Wipro will see its billing rates fall in fiscal 2002.
Global brokerages point out that the billing rate fall for Indian companies will be quite steep as the fiscal 2002 fans out. Analyst Goldman Sachs believes, "We expect to see overall billing rates decline 1-3 per cent every quarter over the next three quarters.'' Credit Suisse First Boston strengthened the dismal forecasts with its prediction that billing rates (onshore and offshore combined) for most Indian IT companies will fall at an average rate of 6.8 per cent in fiscal 2002.
Trend 2 - Better staff utilisation
The pricing pressure on had an immediate effect on staff utilisation by Indian companies. According to analysts Morgan Stanley, "Billing rate cuts improved the current low staff utilisation levels in Indian IT companies. In Q4, 2000, Infosys had a utilisation of 65 per cent, meaning a bench of 35 per cent, while Wipro had a bench of 38 per cent. In 2001 both companies made serious efforts to bring down this number by downsizing the workforce. In addition, companies stopped hiring professionals in the hope of bagging projects.
Trend 3 - Focus on new markets
The declining operating margins from US business compelled Indian players to reduce dependence on the US markets Domestic IT companies made efforts to spread out in the Asia-Pacific region. For example, Satyam Computer Services, I-flex Solutions and Tata Consultancy Services are trying hard to consolidate their reach in the Asia-Pacific region by establishing it's regional headquarters in Singapore. TriVium India, a global provider of CRM products, stuck a strategic alliance with Singapore based Tecsol solutions to leverage the company's experience in application selling and its strong client base in the manufacturing, financial services, reseller and call center industries.
Other markets which Indian companies are seriously exploring are Europe and Japan. For instance, US contribution to Wipro's profits declined to 64 per cent from 70 per cent. On the other hand, Europe's contribution grew from 24 per cent to 29 per cent and apan increased from 5 to 6 per cent. The trend to explore alternate markets will continue in 2002.
Trend 4 - Upward movement on the Software value chain
Apart from spreading the market net, Indian IT majors are trying hard to change their technical mix of activity and move up the software value chain. Formerly confined to offering testing, maintenance and coding services, consulting companies have now forayed to offering end to end services. For instance Wipro secured a $ 70 million system integration order from Lattice group after a tough fight with Accenture.
Other companies have made a diversion from traditional services offered by Indian companies and forayed into more sophisticated R&D services. A small part of the Indian exports till a few years, R&D in 2001 and crossed the $1 billion mark. Texas Instruments for instance has entrusted Wipro with customisation of Xtreme Digital Signal Processor and has given the company the option of adding its own intellectual property rights.
Companies such as i-Flex Infosys Technologies and Nucleus Software developed software products for the financial software sector that are doing extremely well in both the domestic and the international markets. To cite just one example, Nucleus' flagship product Finness fetched the company 21 per cent of its revenues in 2001.
Another corollary to this trend is the increasing breed of product driven start-ups. Ishoni Networks, Ittiam and Impulsesoft, are a few start-ups in Bangalore who have survived the downturn.
Trend 5- Outsource
The strategic shifts as a result of the downturn were not confined to Indian companies. The increasing necessity to rein costs and heightened focus on operational efficiency has triggered considerable interest in India as an investment destination. Consider this:
When HP CEO Carly Fiorina visited India she said: "The slowdown should be good for India. The country has a competitive and comparative advantage in terms of quality, talent and cost. I don't think the slowdown will cause us to think differently". HP plans to increase its workforce to 5,000 professionals from the present level of 1,500.
Lucent Technologies, the global communications networking equipment major, is building its largest worldwide center in Bangalore to develop the next-generation integrated network management solution frameworks for its global customers in the carrier class.
Microprocessor giant Intel has said it will continue to expand its R&D activities in India, even though the US slowdown has forced it to cut costs through layoffs elsewhere.
Oracle India has acquired 50,000 sq. ft of land in two phases at Hyderabad. The Hyderabad center will handle application design development and application product support.
Commworks Corporation a wholly owned subsidiary of network solutions provider 3Cpom Corporation is setting up a technology center in Bangalore.
Undoubtably, 2001 was the toughest year in a decade for India's sunrise industry. The slowdown has proved to be bitter sweet pill forcing India's tech players to exhibit greater innovation, thus making them more resilient.
---------------------------------------------------------------------------------------------------------