Indian IT Services – Right Turn Ahead

Is the Indian IT Services party over? Is a decade of growth and wealth creation coming to an end? And if that is so, what can we read in the tea leaves.

There are three fundamental reasons why the IT Services industry finds itself in a challenging environment. One, the dollar-rupee rate. Two, wage growth. And three, slower revenue growth.

The dollar is now under Rs. 40 to a dollar. That is a huge movement within a short time span. However, the effect of this, while significant, is perhaps a little less than you might imagine. For an IT Services firm, the wage costs directly attributable to projects that are rupee denominated are typically less than those that are denominated in US$ or EUR. This is because while the offshore effort might be 70%, the wages onsite are much higher. As the dollar gets cheaper, revenue from US clients shrinks, but so does the project costs that are onsite as well as the largely onsite Sales and Marketing costs.

The other thing that mitigates impact of the weaker dollar is that Europe is a large and faster growing share of revenues for most large firms. And the Euro has not depreciated as much.

Nevertheless, a weakening dollar is bad news, and it isn’t expected to improve anytime soon.

Wage growth is another long-term secular trend. This trend is now no longer linked to the growth of the IT Services industry. Domestic demand for talent across industries is also contributing to spiraling wages now. This is good news for Indian graduates and IT workers, but it squeezes margins unless you can pass on the cost increases to clients.

In the past few years revenue growth hasn’t slowed down much for the IT majors, in spite of dire predictions from some analysts. But it may be different now. There is the law of large numbers of course – i.e. it is much harder to grow by 30% on a $4B revenue base than it was on a $1B revenue base. But I believe that there is ample opportunity for growth in the markets. This is a huge industry ($400B by some estimates) even if you don’t include BPO in it. While a US slow-down or recession may be a thing to worry about in the short-term, outsourcing is a long-term trend that is alive and kicking. So I don’t think the market opportunity will put the brakes on growth.

However, on the delivery side, the story could be different. The law of large numbers applies to recruitment and availability of talent. Within delivery the complexity levels can climb rather quickly beyond a point. Trying to do larger and larger projects with less and less experience isn’t fun. And it doesn’t scale well.

So what should an IT Services company do in this environment?

  • Diversify – Look at your portfolio of services. You might think that you have a well-diversified set of services, but if you have to hire engineers for all services, unfortunately they are all exposed to the same employment market issues. Look at services where you can hire graduates and make it work. Also, BPO is not one service line. There is a large variety in the kinds of services, markets, and talent required, that all fall under the grab bag called BPO. If you paint the entire BPO opportunity with the same brush “Oh, we don’t want to do call-center stuff” you are doing your company a disservice.
  • Look for growth outside the US – This is tough. The US is the largest IT market by far and the most accepting of outsourcing. But Europe is getting there. And the cost advantage is greater in Europe. I hear there are companies who have single-mindedly focused on Japan for years and are finally seeing the light at the end of the tunnel.
  • Specialize – Vanilla services are dime a dozen. If you are a big player, it might still work. But if you are below $1B, you’ll keep losing deals unless you have something to offer that they don’t. We recently contracted someone in Ukraine just based upon a reference because they were specialists in SugarCRM. Emerging technology areas like Open Source products offer good opportunities for specialization.
  • Build IP – If you want your bill rates to go up, you need to build IP. If you want to differentiate yourself you have to build IP. If you want to excite talented people who work in your company you have to build IP. If you want to…you get the point.
  • Invest in Sales and Marketing – Only those companies will be able to pass on rising costs to clients who provide value and have account control. If you don’t have the salesforce that can build trusting relationships with clients, its time to start investing in it.
  • Cash in – If you don’t have scale and you don’t have or don’t want to do any of the above – sell the company. You’ll still get a nice multiple today and save yourself a lot of trouble. You’ve built something of value. Maybe its future is better served as part of a larger enterprise.


  1. Krishna says:

    India’s IT vendors have long been smug under an illusion of control after the last few years of sustained success. Their growth was particularly striking in contrast to the flat or negative growth at many Western firms.

    The core strength of Indian firms continues to be in ADM. They have not made meaningful dents in the systems integration market – especially in projects which call for complex program management, industry knowledge or change management. If clients are no longer rolling out large CRM or ERP applications on-premise and are instead accessing them from a remote center via a web interface, it bypasses the role of third party systems integration and applications management vendors altogether. Indian vendors, busy dwelling on their staple model of sending coders across by truckloads, didn’t have the wisdom to invest in R&D to develop SaaS applications of their own or develop domain consulting skills. Those continuing high margins (25-30% margins) meant they are probably under-investing for the future. Didn’t they expect IBM, Accenture and EDS to play catch up in their own turf soon or were they too naïve to mistake the abnormal gains from tax largesses and Rupee depreciation for their competence…?

    Most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian firms need to invest heavily to secure a position in this arena and risk some shavings off fat profits at least in the short term. The global vendors knew eventually that’s where the field is level, where they’d smother their Indian competition. Particularly in consulting domain where outcome based billing are the norm and vendors bag deals after guaranteeing ROI to the client, upfront. That calls for intestinal fortitude and deep pockets besides mere self confidence that the global vendors immensely possess.

    The future lies in doing things the multinational way: embracing innovation, consulting, and geographical expansion. According to researcher Gartner (IT), over the next two years, Indian companies in the private and state sector, from banks to the railways, are expected to spend an estimated $5 billion on new technology, all of which will need to be serviced. They should look at their own backyard to grow now, as it will help reduce high overseas wages and spiraling visa costs. Automation and low manpower dependence would result in wage rationalization and reduced threat of attrition in IT industry as well, besides freeing up a lot of engineers for mainstream disciplines like Civil, Mechanical and Electrical which are severely constrained by the IT avarice.


  2. It is long said, ‘what does not kill you, will make you stronger’. This trend will force us to become a better player and a competitor. I think that the extreme labor rate arbitrage has been the ‘starter fuel’ for the industry. Now to compete we have to make significant productivity gains through IP (platforms components, frameworks), training, specialization etc.

    I do not agree with the scale argument, I think to survive and thrive now you do not need scale but you need productivity. In fact it might come at the price of growth.



  3. Siddharth says:

    High time Indian IT services companies started servicing India


  4. crsathish says:

    i guess, Indian IT firms can make Saturday as working day and compensate the dollar imbalance. these guys should invest heavily on R&Ds for System Integration and big ERP roll outs. How long they can survice by selling services and support ?


  5. Siddharth says:

    Sathish, why did you not suggest an increase in billing rates? Hard work mentality has been a detriment to sustainable innovation. If a person works 6 days a week, then that deepens the problem.


  6. Tushar Jha says:

    Business Consulting is quite a nebulous word.
    Are we talking about telling the client which areas/markets he must diversify into( strategy perhaps?)
    Or Are we talking about telling the client how he must structure his supply chain to gain competitive advantage/cut costs?
    Or Are we talking about telling the client which Enterprise Application he must choose to suit his business model?
    Whether we have the wherewithal to pitch for any of the above is another question.Acquisitions may be the best way forward to venture into any of the above.
    But do we need to delve into the above in the first place?As far as ADM/Infrastructure Management is concerned the US apparently has a lot more to offer for a long time to come.


  7. Couple of more options:

    1. Have less political people and more capable people at the helm.

    I have seen a lot of GM/DM/PM coming to services companies from other PSUs of India or some other company where Software is an alien concept.

    Believe me, they do not understand software at all. I have talked with a few of them. And they keep on talking it is all business. Yes, it is business, but do you understand the eco-system Sir?

    And above all, a person who has never gone through the pain of coding; can understand the pain of coding and create a right kind of environment. As in MS it goes, a developer can manage another developer (not software professional)…and till now Steve Ballmer does not command the kind of respect which Bill Gates does.

    2. Do something (with the cash they sit on) with respect to products. Well, it is highly risky business compared to Services. However, the business model is different and the reward is equally good, if you find a sweetspot.

    And come on guys, if you will not do, who will.

    I guess Infosys has started doing it, calling it as a Product Incubatin Engineering. And they have started from their Finnacle Unit.



  8. Satya says:


    Your article seems to be prophetic for mid sized companies. (report by Forrester Research on 26th June, 2008)

    Main story : Consolidation of Top 3 Indian IT outsourcing companies, share account for 46.4% in Y2008 (up from 26% in Y2004)

    Will really appreciate your thoughts on it.


  9. Basab says:


    You could have seen this coming. The flight to scale in the IT Services industry is natural. Large companies have all the benefits of scale – brand name (both in the market and for hiring), sales presence, diversity of skills…and on and on. The advantages that a small company typically has – agility, customer focus, innovation are not rewarded in the IT Services industry. Especially, in a low growth environment, when the larger companies will be hungry and responsive.

    I don’t think a mid-sized company with a broad market strategy can succeed any more. It has to be laser focused on a market/technology/delivery model, whatever, that it can dominate.


  10. Satya says:

    Thanks a lot Basab.

    I would like to agree with you, but I am not convinced with the conclusion of Forrester, considering:

    1. If the share has gone up from 26% to 46%, so has software export from India. (I guess 15B USD+)

    2. The top 3 have recruited close to 1lakh new employees among themselves, but the next 3 (sub billion category) and others have not recruited that much. So that may have resulted in more throughput as in services it is about headcount before gettting a project. And in downturn, employee layoff is normal as well.

    3. They have mentioned that Sasken, Mindtree to be success stories. But they are also pretty much diversified.

    4. Some of them also acquired a number of companies, who are much more focussed in niche areas. And that would have contributed to the bottomline.

    I think Forrester has not shown the complete picture.


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