dark side of India's software sector

Date: Thursday, May 15, 2003 12:17 PM

JOB DESTRUCTION NEWSLETTER

www.ZaZona.com

We often think that India is in a win-win situation as U.S. companies
outsource jobs there. This article deflates that Indian mystique.
Companies leave Indian BPOs faster than they come and this process of
"churning" is bodes very bad for their future. Indian companies may be
starting to wake up to the fact that the multi-national corporations
are in a "Race to the Bottom"
http://www.tradealert.org/view_art.asp?Prod_ID=403

The free-trading globalists will never rest until they find the
cheapest workers. They have no loyalty to nation-states so if India
doesn't provide the cheapest and most docile workers they will move to
other countries. There are ominous signs that the multi-nationals will
buy out Indian companies in order to have greater control of the labor
market.

India's dilemma won't be much conciliation to the Americans that are
seeing their jobs disappear.

http://www.atimes.com/atimes/South_Asia/EC20Df03.html

The dark side of India's software sector

By Indrajit Basu

KOLKATA - The Indian IT software and services sector saw yet another
year of healthy growth in 2002, despite the gloomy global economic
scenario that was marked by soft quarters, pink slips and slashes in IT
spending, according to a new study by the National Association of
Software and Services Companies (NASSCOM) - India's software industry
lobby.

But behind the figures, all is not as rosy as it might appear.

Ever since 2000, when the global IT sector suddenly reversed its almost
decade-long trend of scorching growth, NASSCOM and the country's
industry pundits have been steadfast in maintaining that no matter
what, India's software sector would continue with its high growth to
touch US$100 billion in revenues (currently running at about $12
billion a year) by year 2008. It's another matter, however, that growth
has slipped from its heady pre-2000 rates of 60 percent to 70 percent a
year to about 45 percent in 2000, setting a downward trend thereafter
to touch the current rate of about 28 percent.

Often the numbers that the top Indian software companies churn out each
quarter are stunning; the announcements usually feature impressive
revenue growth numbers, increased hiring, increasing margins, and
almost always, the impressive number of new clients they acquire every
quarter.

But what Indian software services companies hardly discuss at the end
of each quarter are the less positive developments. For instance, they
rarely highlight the threat that foreign software services and
consulting companies pose to Indian companies by shifting operations to
India; or the fact that the changing nature of global IT spending and
continued uncertainty could throw their revenue and profit projections
well off analysts' expectations; or for that matter, the number of
clients they lose for each new client they acquire.

Infosys Technologies, the Indian software industry's poster boy, is a
good example. According to its quarterly releases, it added 93 clients
in the last four quarters and ended up losing 77 in the same period.
Satyam Computer, another Indian software heavyweight, added 98
customers in the same period but lost 73 customers. Wipro Technologies,
tops in the sector in terms of market capitalization, added the highest
number of customers, 105, but ended up losing 76. In other words, for
every 100 customers that a company like Infosys adds, it ends up losing
82 of them. Thus, for every 100 customers it adds every year, it
retains only 18. For Wipro, the ratios are slightly better - it loses
72 customers for every 100 it adds annually. Some analysts believe that
the story is not radically different at Tata Consultancy Services
(TCS), India's (and Asia's) largest software company. But it's
difficult to figure out the quarterly client churn of TCS because it
has not started divulging that information yet.

According to analysts, Indian software companies have started facing
the long-feared and grim reality of customer "churn", which is common
globally. They add that as organizations started slashing IT spending,
Indian software companies embarked on an aggressive customer
acquisition spree. "Most of the top-tier Indian software companies went
in for tactical account acquisitions," said industry analysts.
"Tactical accounts help a company shore up its topline growth, but they
never scale up to more than a couple of hundred thousand dollars a
year."

Wipro, for instance, had a huge exposure to the battered telecom
industry and had to make up for revenue numbers by going in for smaller
projects - in the couple of 100,000 dollars range - to make up for the
steep fall in telecom revenues. And after six months, say company
sources, smaller projects still show up as clients but are no longer
active.

According to Rita Terdiman, an analyst with international IT data
monitoring firm Gartner, while the strategy of grabbing tactical
clients makes sense for shoring up revenues in the short term, the
churn phenomenon indicates that Indian software companies are not
putting adequate efforts into adding strategic clients. Strategic
clients typically have an annual run rate between $5 million and $40
million.

"Business models that rely on strategic customer acquisitions and
long-term partnerships help in penetrating accounts and growing them
into multi-million dollar accounts," said Terdiman. Strategic clients
are also driven by offshore programs and provide company executives
with strong incentives to achieve cost savings. "This means that they
tend to stay on longer as the commitment to outsourcing work is
stronger," said Terdiman.

There's yet another cause of worry for the major players in the
country's software services. A recent Merrill Lynch report said that
amid depressed world economies and shrinking IT corporate budgets,
multinational software companies are increasingly moving their
operations to countries like India, the Philippines and China for
leveraging the advantage of lower costs in such countries, just what
Wipro, Infosys and TCS have been doing over the past decade in India.
Global software services and consulting firm Accenture, for instance,
is all set to increase its offshore headcount to about 20,000 in next
four years from the current level of 7,000 in offshore destinations
across the world. A large chunk of this, as expected by Merrill Lynch,
could move into India.

"While this is great news for the country's IT professionals, Indian
companies need to worry," said the report, adding, "Foreign software
companies could grab a significant share of the Indian pie." NASSCOM
numbers reveal that multinational software exports from India surged by
a huge 131 percent - from less than $1 billion in 2000-2001 to over $2
billion in 2001-2002 - reinforcing Merrill Lynch's fears. Other major
multinational software service providers that are following Accenture's
footsteps include EDS, Cap Gemini and IBM Global.

And analysts like JP Morgan's Dirk Godsey say that these big fish have
also developed an appetite for smaller ones. According to Godsey, big
American IT services companies have decided that since offshore
companies, including Indian IT majors, could only impact a small
portion of their core business, they can afford to attack offshore
companies and destroy their margins, while protecting their own core
businesses. "They can only affect 1 percent of my business, whereas I
can destroy 99 percent of theirs," is what an executive of a large
US-based IT services reportedly said about competitions from Indian
software companies.
Instances of Indian software companies making assuring revenue
projections in one quarter and then going back on the statement in the
following quarter have also started emerging. Infosys, for example,
during its second quarter results July to September, announced that it
had reached price stability but withdrew the statement in the following
quarter (ending December 2002).

Satyam Computers is another instance where previous projections were
unfulfilled. Satyam revenues for the quarter ending December 2002 fell
short by over 3 percent, forcing it to reduce its revenue guidance for
the full year. "Clearly, the changing nature of the customers' IT
spending and continued uncertainty in the markets has brought in some
unpredictability to our forecasts," said Ramalinga Raju, Satyam's
chief. These have had one positive impact though; watching Satyam and
Infosys struggling with their projections, HCL Technologies, one of the
top 10 in the sector, stopped giving any.

A sense of realism seems to have finally dawned on the country's
software industry. NASSCOM president Kiran Karnik recently conceded
that Indian software companies would have to take a beating in revenue
and profit growth expectations. But analysts say that Indian software
companies will have to continue chasing tactical customers: for the
time being, that is.

()2003 Asia Times Online Co, Ltd. All rights reserved. Please contact
content@atimes.com for information on our sales and syndication
policies.)

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