Summary of Indian Market happenings

India’s software exports have risen from $9.5 billion in 2002-03 to $25 billion in 2005-06. Indian ITes-BPO exports, which grew 48% from $3.1 billion in 2003-04 to $4.1 billion in 2004-05.  It touched $6.3 billion in 2005-06. The Indian IT market, which includes hardware, software and the IT enabled business services (ITes) including business process outsourcing (BPO), recorded a 22% growth in revenues to $12.4 billion during 2005-06, from $10.4 billion in the previous fiscal, according to National Association of Software and Service Companies (Nasscom), the IT industry body.  In the sub continent PC sales grew by 30% at 4.6 million during the last fiscal, from about 3 million two years ago.

When the worldwide growth in IT spending is projected to be about 5.5%, The International Data Corporation (IDC) predicts

- India’s IT spending during the current fiscal will jump by 19%, which will drive up the current 9% growth in IT spend - estimated at $112 billion - in the Asia Pacific region for the year.

- And Indian domestic market will grow at 17% during 2004-09 and will move to $18.86 billion (Rs 84,878 crore) in 2009.

To date, half of India’s IT market consists of hardware.  However, IT spending and staff hiring by businesses and government departments in India are rising at rates higher than in North America, Europe, and Asia-Pacific countries.

Multinationals such as IBM and Hewlett Packard have made inroads in the domestic market.  Today Wipro’s India arm Wipro Infotech, HCL Infosystems, TCS subsidiary CMC and Tata Infotech are competing with HP and IBM in the domestic market.  For now, the multinationals have an edge in both hardware supplies and at implementing software contracts over domestic firms.

Initially, to compete in the approximately $300 billion global offshoring market, multinationals firms adopted the Global delivery model of offshoring as a defensive move.  Now, IBM has ramped up from 6,700 in 2002 to over 38,500 professionals in India and added BPO firm Daksh in its kitty. Accenture has nearly 25,000 people and EDS would have a headcount of 14,000 after it completes the acquisition of mid-tier IT and BPO firm MphasiS.  HP has also ramped up its offshore presence.

Thus with the scale MNC have achieved in India, multinationals can compete at the price point offered by Indian IT services firms.  “Indian firms like Infosys or Wipro are expected to earn margins of 24% for their shareholders, while an IBM or Accenture has to give only 10% to their shareholders.  So they have the extra leverage to quote lower prices than Indian firms,” says TPI’s Analyst Pai.

Indian global players, TCS, Wipro, and Infosys have begun treading on multinational toes by going up the value chain.  Infosys’s US subsidiary, Infosys Consulting, gives strategic directions to clients in building IT infrastructure.  Wipro has invested heavily on R&D, deploying over 10,000 engineers to become one of the world’s largest outsourced R&D units.

With clients no longer deciding to handing over IT contracts and assets to one single vendor, instead the work is divided.  And nearly $100 billion worth outsourcing contracts in the US coming up for renewal (TPI Estimates) Indian firms can aim to garner a sufficient potion of this outsourcing pie.  Positive aspect is Indian software firms have successfully bid for contracts such as the ABN Amro deal for TCS and Infosys, and the General Motors contract for Wipro and indirectly Satyam.  Though, the deal sizes of around $250 million and less may be small in the multi-billion contracts, but the initial entry has been made in the big league.

In addition, Indian IT firms have also been active on acquisitions abroad.  In April, Bangalore’s mid-tier telecom software firm Subex Systems bought its British rival Azure Solutions for $140 million, making it the biggest overseas buy by an Indian IT entity.  Wipro itself has strung together a stream of buyouts in the $20-$50 million range to bolster niche expertise.  The big pie continues to be software. TPI has estimated that nearly $100 billion worth outsourcing contracts in the US would come up for renewal.

The Indian stock markets have definitely given India’s software trinity the thumbs up for their moves.  The Infosys share has risen 33% in the last one year, while TCS is up 45% and Wipro 33%.  The Bombay Stock Exchange IT index itself has returned 37%.

However, analysts believe, Indian IT firms need to face up to the MNCs by investing in capabilities in their own backyard.  Ignoring the local market will be a grave risk.  'Ignoring the domestic market is a short-sighted approach for the Indian majors as the tax incentives they gain by focusing on software exports will not last beyond 2009,'says TPI partner and managing director Siddharth Pai.

 Top Stories

EquaTerra Study Concludes Direct Correlation Between Outsourcing Satisfaction and Investment in Outsourcing Management/Governance
According to a study by EquaTerra, there is a direct relation between a satisfactory outsourcing agreement and that of investments made in Outsourcing Management and Governance (OM/G).  The conclusion was based on a survey of 250 IT and BPO decision makers by the US-based outsourcing advisory firm.  The firm advises a four to seven percent range in terms of the total value of contract as the optimum level of expenditure on OM/G to ensure maximum satisfaction on outsourcing deals.  Executives outsourcing for process improvement than cost-savings are also expected achieve higher satisfaction levels.  High-Tech Products and Services, Pharmaceuticals and Automotive/Manufacturing experienced the most satisfying results in terms industries while IT and CRM were the best verticals due to matured process.

North American Development Outsourcing and Off Shoring Increase Dramatically According to Latest Evans Data Survey
According to Evans Data Survey, application development outsourcing in North America has increased by 25 percent and use of contractors by 18 percent.  The survey reveals that the focus on outsourcing has shifted from cost-savings towards strategic talent acquisition to drive process change and revenue generation.  Corporate enterprise segment contributes 57 percent to the development effort.  Further, 37 percent of North American companies have been leveraging offshoring, representing a 20 percent increase from the previous Evans study. Demand for application development outsourcing has also increased in the small and medium companies.

Wage Differential to Remain in Favour of Offshoring Destinations
A recent study by Everest Research claims that the wage differential between the countries, such as the US, the UK, and France vis-à-vis the offshore outsourcing destinations will remain wide enough to make outsourcing economically viable. Offshoring destinations are expected to continue to have wage differential advantages at least for the next 20 years Everest report estimates that the labour arbitrage benefit that US companies can achieve by outsourcing IT application, development and maintenance services, which account for a large share of offshore activity, can be sustained for: • 18-25 years in the Asian markets, such as India, China and the Philippines • Three-six years in the Central European markets, such as Poland and the Czech Republic • 30 plus years in Mexico

Lloyds offshore’s HR admin to India
Lloyds TSB is to offshore about 150 HR administration jobs to India over the next 12 months.  The high-street bank said it was transferring the roles to outsourcing provider Xansa.

Amadeus Germany opts for Atos Origin as its IT services partner
Amadeus Germany has awarded a three-year contract for IT support services to Atos Origin, a French IT services provider. Atos Origin will provide IT support and development of travel applications for Amadeus Germany.  Atos Origin aims to leverage its competence in application management to provide the services for the contract.

Institutes sign €20m IT outsourcing deal with HP
An Cheim (Collaborative Higher Education Information Management), the IT systems provider for the Institutes of Education and the Tipperary Institute, has signed a seven-year shared service technology deal with HP worth €20m.

 Service Provider News

Top Indian IT firms to become globally valuable
The Boston Consulting Group (BCG) has predicted that one of the top Indian IT services firm was poised to become the most valuable company globally by 2012. The biggest shift will happen when the Indian companies will move beyond the labour advantage to both intellectual property and labour.

Investors’ off-shoring business to Sri Lanka to get bigger tax breaks
The revised incentive list that is to be published in a few weeks includes expanded tax breaks for BPOs setting up shop here from three to five years at present, to three to 12 years.  Investment criterion is also relaxed to a minimum level of 150,000 dollars. Existing incentives like duty free imports of capital goods and tax holidays for setting up shop or training centres outside of Colombo will be included in the new list.

Accenture to Provide Crestline Hotels & Resorts with Human Resources, Payroll and Finance & Accounting Services
Crestline Hotels & Resorts has awarded Accenture an outsourcing contract for HR and finance services. Accenture will manage Crestline's processes associated with HR, payroll, and F&A, including accounts payable, general ledger, and financial reporting.  Accenture BPO Services will deliver the services to Crestline.

ARINSO announces HR Services contracts from Schneider Electric, Repsol.
Repsol has awarded ARINSO International, a Belgian HR services provider, a five-year HR Outsourcing (HRO) contract.  The financial terms of the contract were not disclosed.  ARINSO will provide personnel administration and payroll services in Spain and Portugal for Repsol.  The contract will provide services to about 20,000 employees of Repsol.

NewVectors LLC Wins $7.7 Million Contract for DoD Transformation Support
Under the award, NewVectors will provide a wide range of support services US Department of Defence (DoD) Business Transformation Agency (BTA).  -- Systems Engineering - Enterprise Architecture (EA), Enterprise Transition Planning, testing, life cycle management, technical research and analysis; -- Execution Management, Evaluation and Oversight Support - governance and investment management; performance measurement, metrics, and assessment; and BTA records management; -- Acquisition & Program Support - acquisition and program management tasks for the Defence Business Systems Acquisition Executive (DBSAE); and -- Management/Administrative Support - support activities for the Defence Business Systems Management Committee (DBSMC), chaired by the Deputy Secretary of Defence.

Lawson is renewing its partnership with Xansa for software product maintenance.
Xansa provides product maintenance services to Lawson, a US-headquartered ERP software provider, through a dedicated offshore development centre (ODC) in Chennai, India.  The ODC, which started with employee strength of 70, has about 100 employees at present.  The ODC provides resources and infrastructure to provide product support, maintenance, and enhancement services for Lawson.

PTC expands R&D presence in Pune
The expansion is reflective of the significant contribution that the Pune Centre has made and continues to make to the growth of PTC's core products for the PLM market, including Pro/ENGINEER Wildfire, Windchill PDMLink, and Windchill ProjectLink.