IT & ITES SECTOR REPORT

IT INDUSTRY ORIGIN

In 1974 the industry was begun by Bombay-based conglomerates which entered the business by supplying global IT firms located overseas with programmers.

Mid Eighties : Mainframe-based programming and manufacturer-specific operating systems and languages gave way to workstation-based programming and standard operating systems and high-level languages. These changes caused the Indian software industry to shift from supplying programmers to supplying software programs.

Following telecommunications policy reforms in 1999, this opened new opportunities for domestic firms. In 2000, reforms in foreign ownership rules, intellectual property protection and venture capital policy induced foreign venture capital entry. The traditional software services industry, dominated by large local firms, has subsequently competed with firms with superior domain skills and access to finance. In consequence, the industry as a whole is seeing new leadership, more product development and higher value-addition.

Types of software by usage:

1. System-level software: programs that manage the internal operations of the computer, such as operating system software, driver software, virus scan software and utilities.

2. Tools software: programs that help applications to work better, such as database management software.

3. Applications: programs that deliver solutions to the end-user, such as word processing software and financial accounting software.

Software is either (1) written for general use and replicated in its original form across many users, or, (2) written for a specific user. The former is termed a software product or package. It may be shrink-wrapped and transported physically or over the Internet. The latter is termed custom software. System-level software is the most complex as it manages the interfaces with both hardware and higher level software; applications software is the least complex.

Nowadays, all system level software are products. The more varied an end-user’ needs from another end-user, the more likely is the software to be customized. Since variations in needs appear most at the stage of applications, most customized software is applications software.

Definitions:

Consulting refers to IT strategy, system conceptualization, architecture and design. It is comprised of Nasscom numbers for IS consulting and network consulting and integration.

Applications Development refers to creating the applications programs. It is comprised on Nasscom numbers for custom applications development.

Systems integration: Hardware and software deployment and support refers to making the software and hardware components compatible and interoperable. It is comprised of

Nasscom numbers for (1) Hardware Deployment and Support and (2) Software Deployment and Support.

Systems integration: Applications, tools and O/S refers to integration of the software components (both products and custom software) in a software project.

Managed services refers to services such as managing applications either onsite or remotely over the Web, managing networks, etc. It is comprised of Nasscom numbers for applications management, IS outsourcing, network and desktop outsourcing, applications service providers and system infrastructure service providers.

WHY IT SERVICES ?

Table 3 : Client-Vendor grid during 1970-79.

Source : Author’s compilation, based on steinmullur, 1996.

ISV – Independent Service Vendors

Columns A to E above are not intended to describe mutually exclusive choices. For example, a firm might purchase system level software products while developing its own applications. The columns are arranged by sequentially dominant work-types over the decade, starting with the shift from external data processing and managed services (Column A) to in-house hardware at the start of the decade. Initially, firms developed their own software (B). As the 1970s progressed, hardware and software became more complex making in-house software development and management more difficult. This led to the outsourcing of system integration (C) and then to the sourcing of system level and applications products (D). The move to outsourcing customized

applications (E) was due to the failure of industry specific products to meet the needs of the more sophisticated users, particularly the large banks

U-W standard – Unix based work station

Outsourcing of processes that can be enabled with information technology Delivered from/to remote areas through the telecom and Internet medium Transfer of ownership and management of the process from the customer to the service provider Eg., functions like finance, HR (human resource), administration, healthcare, telecommunication, engineering etc.,

HOW ITES HAS EVOLVED ?

Phase I (1996-2000) started with GE in 1997

Pioneers - focus on building scale. Absence of vendors with exhibited capabilities. Preference of captive model

Phase II (2000-2003)

Early adopters - sharpen outsourcing strategy. Rise of 3PSP (Third Party Service Providers)

Phase III (2003-2008E)

Cautious followers - embracing outsourcing unconditionally. Higher degree of consolidation and shakeout

Indian ITES industry is moving up the value chain – Finance and Accounts, Customer Interaction,HR Admin (89% of revenue in 2004-05) to BFSI, Pharma and Life Sciences, Legal Services and Business Process management

Factors impacting competitiveness of ITES industry

A new breed of high-end knowledge based BPO called Knowledge Process Outsourcing is emerging. This comprises of vendors providing higher-end research and analytic based services - in traditional service lines as well as new business areas.

Areas with significant latent potential for KPO include healthcare -pharmaceuticals and biotechnology, legal support - intellectual property research, design and development for automotive and aerospace industries, and animation and graphics in the entertainment sector.

F&A (Finance and Accounting) outsourcing is emerging as one of the fastest growing BPO segments. While earlier, the majority of F&A outsourcing deals were focused on transaction processing, now customers want BPO solutions providers to manage almost the entire business process.

The Indian IT & ITES sector revenues are slated to reach $48 billion in FY07. Below are some highlights -

Key Highlights of the IT-ITES sector performance

IT Industry-Sector-wise break-up

USD billion
FY 2004
FY 2005
FY 2006
FY 2007E

IT Services 10.4
13.5
17.8
23.7

-Exports 7.3
10.0
13.3
18.1

-Domestic 3.1
3.5
4.5
5.6

ITES-BPO 3.4
5.2
7.2
9.5

-Exports 3.1
4.6
6.3
8.3

-Domestic 0.3
0.6
0.9
1.2

Engineering Services and R&D, Software Products 2.9
3.9
5.3
6.5

-Exports 2.5
3.1
4.0
4.9

-Domestic 0.4
0.8
1.3
1.6

Total Software and Services Revenues

Of which, exports are 16.7
22.6
30.3
39.7

12.9
17.7
23.6
31.3

Hardware 5.0
5.9
7.0
8.2

Total IT Industry (including Hardware) 21.6
28.4
37.4
47.8

Employment figures-Software and Services sector

Sector FY 2004
FY 2005
FY 2006
FY 2007E

IT Services
215000
297000
398000
562000

ITES-BPO
216000
316000
415000
545000

Engineering Services and R&D and Software Products
81000
93000
115000
144000

Domestic Market (including user organizations)
318000
352000
365000
378000

TOTAL*
830000

1058000

1293000

1630000

*Figures do not include employees in the hardware sector

The contribution to the Indian GDP in FY07 from this sector will increase to 5.4% from this year’s 4.8%
Announced investments in this sector will touch US$ 10 billion over the next few years.
About 70% of the 6,500 companies registered with about 47 STPs located across the country are small and medium enterprises (turnover under Rs 10 crore).
Every Rupee spent by the Indian IT/ITeS sector translates into a total output of about Rs 2
IT-ITES employs over 1.6 million people directly and provides indirect employment to another 6 million
Domestic market growing at over 21%

TYPES OF PLAYERS

TOP 15 BPO PLAYERS 2006

TOP 20 IT SOFTWARE & SERVICE EXPORTERSE FORM INDA (2005-06) (excludes ITES-BPO)

1
Tata Consultancy Services Ltd.

2
Infosys Technologies Ltd.

3
Wipro Technologies Ltd.

4
Satyam Computer Services Ltd.

5
HCL Technologies Ltd.

6
Patni Computer Systems Ltd.

7
I-flex Solutions Ltd.

8
Tech Mahindra Ltd. (formely Mahindra-British Telecom Ltd.)

9
Perot Systems TSI (I) LTD.

10
L&T Infotech Ltd.

11
Polaris Software Lab Ltd.

12
Hexaware Technologies Ltd.

13
Mastek Ltd.

14
Mphasis BFL Ltd.

15
Siemens Information Systems Ltd.

16
Genpact

17
I-Gate Global Solutions Ltd.

18
Flextronics Software Systems Ltd. (Standalone for FSS)

19
NIIT Technologies Ltd.

20
Covansys India Ltd.

Had they been ranked based on their India revenues, companies such as Cognizant, Accenture, IBM and HP would have been placed amongst the Top 10 of this list and companies such as Kanbay, Syntel and Intelligroup would have been amongst the Top 20.

TALENT SOURCE ISSUES

The industry presently employees 1.6 million people and is constantly expanding. Though India has a large labor pool, company heads say the education system isn’t giving people the skills they need. And there’s a lack of finishing schools to train graduates—a big concern for tech firms since they hire a majority of their employees straight out of college..

2006 Estimates - 3 million graduates & post-graduates. 10% of these are post graduates in Arts, Science and Commerce. Engineering Graduates and Diplomates are another 7% each. 17% are Science graduates, 19% are Commerce Graduates and 40% are Arts graduates.

NASSCOM has proposed the setting up of a chain of finishing schools for IT professionals to make them more employable with a simple 3-4 months of honing of technical skills and imparting soft skill training, helping bridge the manpower supply-demand gap by at least 30-40%. It has been proposed that finishing schools be set up by the IITs and National Institutes of Technology

The NAC (NASSCOM Assessment of Competence nationally rolled out in November 2006, after a successful pilot, is being taken to a number of states in 2007.A comprehensive skill assessment and certification program for entry-level talent and executives (low-middle level management) is underway to detect talent fitment. Opportunity for us to position Managerial assessment tools.

National Skills Registry (NSR): A centralized database of all employees of the IT services and BPO companies in India. This database contains third party verified personal, qualification and career information of IT professionals. May be we can get skill qualification criteria developed with the.

NASSCOM has been working with the academia across the country under its IT Workforce development initiative to encourage and facilitate greater industry interaction; it has signed MoUs with UGC and AICTE to take forward these initiatives. Here lies a specific Dale Carnegie opportunity for building strategic alliance.

NASSCOM has suggested the concept of experimenting with adapting the Special Economic Zone concept (deregulation and removal of restrictions) for education, and create Special Education Zones. The long term steps that are needed include much higher government investment in education, major education reform and better compensation and research grants for teachers/researchers. Opportunity for DCT at university level to train teachers.

TALENT TRANSORMATION ISSUES

In a recent news report it was stated that the training tab for the IT industry could run to $1.5-2 billion in FY07. Of this Infosys alone plans on spending $140 million, while Wipro and Satyam will spend $100 million and $70 million respectively.

College/university education does not ensure that graduates are immediately employable. It is felt that every engineering graduate requires about 14-16 weeks of training at a cost of approx US$5000 per person.

In the SME IT sector there is almost zero investment in training leading to attrition. Overall there is a crucial need for business specific training for middle management and executive coaching for senior management.

TALENT MANAGEMENT ISSUES

A. IT SERVICES COMPANIES – Most IT services companies have organisations structured around some key functions (Not organisational hierarchy). At the Customer interface level , is the Business Development group usually stationed overseas. For product companies, a customer service group backed up by technical support team interfaces with customers for online problem resolution and maintenance support. For product development companies project teams are consituted based on a particular domain. Such teams engage and dis-engage after completion of projects. Most technical professionals prefer roles that add to their expansion in domain knowledge and expertise in a given area. The product development groups usually have people with domain expertise (with little or minimal IT knowledge) intergrated to a software team with minimal industry knowledge.

The top management have a challenge to step up innovation and create a knowledge environment so that business opportunities can be captured . Besides buildng upon domain knowledge these companies depend a lot on IT infrastructure and Facilities management including transportation.

The people management challenges are :-

Ø Communication skills of the front levels technical groups

Ø Presentation skills and selling skills for BD groups and project team leaders

Ø Project management skills – People side of project management skills

Ø Cross culture business skills

Ø Managing change – for companies growing by organic growth

Ø Management skills – Performance Management, people management

Ø Leadership skills – Innovation and people engagement

B. ITES COMPANIES - Most ITES companies commenced operations as Captive operations. From the second phase many companies went ahead as third part service providers. The typical organisation providing BPO service has a hierarchial structure. At the front end of delivery are the Customer Service Associates. They are supported by team leaders , who report into managers. These managers report to senior managers, who report into a Dy GM/GM responsible for a Process. Likewise, the operations can have more than one process and business with more than one company. Therefore information flows are restricted , and geographical barriers created with utmost care. Like IT Service companies, creating a knowledgeable and competent workforce is key to success. This sector is characteristic of a young workforce and a high percentage of working women. Consequently, the management levels are also very young. Most supervisors and managers are less than 25 years old

The people management challenges are :-

Ø Communication skills – usually taken care of by voice and accent training

Ø Internal personal skills

Ø Supervisory skills of the team leads

Ø Performance Management and people development skills

Ø Coaching and training skills om the floor

Ø Problem solving and cricis management skills

Ø At senior and Top management the need for managerial talent development is a key

challenge.

The common issues involve training and development to build domain knowledge and managerial talent. Challenge of high attrition rates and cost of training and retraining are other significant problems.

WHERE LIES OUR OPPORTUNITY ?

The SME sector contributes to nearly 60% of revenues. They do not have centers of learning excellence as the tier 1 companies have such as TCS, INFOSYS, WIPRO , IBM, ACCENURE have. This sector can be tapped by partnering with STPI’s for open programs.The SME companies not only pay 20% more salaries to their employees but also become source of ready talent to the tier 1.

PROVIDING a first level supervisory management program for the BPO segment on a time spaced basis especially for the domestic and third party service providers can yield significant business . Here again , integration with our Assessment tool will offer a complete solution.

IMPORTANT CONTACT INFORMATION

KEY CONTACTS AT NASSCOM

Group Forum

SIPI's

Executive Summary

India's market share with estimated exports of US$ 12.2 bn stands at a mere 3.3%. The strength of the Indian software is indicated by the fact that the Indian software and services exports have managed to grow by around 26%-28% over the past few years despite the economic downturn that swept worldwide markets.

While cost leadership has been the competitive edge of the Indian software sector over the years, this seems to be threatened now by MNCs who are replicating the Indian outsourcing model and setting up bases in the country.

With competition for talent intensifying, the need to retain key employees has gained weight. While the average attrition rate in the Indian software industry continues to be high, but for software majors it has declined over the past year owing to better HR practices, and improvement in work culture.

In terms of software services delivery, the sector is witnessing a move towards offshoring as can be seen from the chart above. This (offshore) segment now contributes around 62% to India's IT export revenues, while the share from the onsite segment is down to 38%, from 56% in 2001.

To improve volume growth, the companies not only improved utilisation levels and concentrated on a host of new service offerings but also tried to expand their presence in the less-penetrated geographies like Europe and Asia-Pacific. This trend will continue.

The initiative of moving higher up the value chain, as mentioned above, would see Indian software companies invest significantly in their human resource and selling and marketing infrastructure.

Background

The global IT services market is estimated to be worth around US$ 570 bn in 2004, as per Gartner's estimates. India's market share with estimated exports of US$ 12.2 bn stands at a mere 3.3%. As such, the growth potential for the sector continues to be immense. The strength of the Indian software is indicated by the fact that the Indian software and services exports have managed to grow by around 26%-28% over the past few years despite the economic downturn that swept worldwide markets.

While cost leadership has been the competitive edge of the Indian software sector over the years, this seems to be threatened now by MNCs who are replicating the Indian outsourcing model and setting up bases in the country. Going forward, the advantage of low employee costs could dry out and the sector could get commoditised. Besides, India has competition from the likes of China and South East Asia as other outsourcing destinations.

Increasing competition and pressure on billing rates are among the key reasons forcing the Indian software industry to make a fast move up the software value chain, thereby providing high-value services to its clients.

With competition for talent intensifying, the need to retain key employees has gained weight. While the average attrition rate in the Indian software industry continues to be high, but for software majors it has declined over the past year owing to better HR practices, and improvement in work culture.

In terms of software services delivery, the sector is witnessing a move towards offshoring as can be seen from the chart above. This (offshore) segment now contributes around 62% to India's IT export revenues, while the share from the onsite segment is down to 38%, from 56% in 2001.

When compared to the 41% CAGR for India's software and services exports during the period 1996-97 to 2003-04, growth in the domestic IT market has been relatively staid at 16%. The domestic Indian market promises huge potential for the sector in light of the burgeoning IT budgets of Corporate India. Growing this segment, therefore, is a key challenge faced by the sector.

Key Players

List at the end of the document…

Current Trends

In 2004, India's IT software and services exports grew by 30.2% to reach revenues of US$ 12.5 bn. Of this, IT services and products grew by 25% to clock revenues of US$ 8.9 bn, while the ITES segment grew by around 46% to reach revenues of US$ 3.6 bn.

The domestic market grew by 22% (same as in FY04) to reach a size of US$ 3.4 bn. Growth in this market was characterised by a higher volume growth in the face of falling billing rates.

While application development and maintenance (ADM) continued to be a major source of revenues, software companies concentrated on high-end services like package implementation, IT consulting and systems integration for growth. This was in line with the Indian software industry's rapid movement up software the value chain. While billing rates stabilised during the second half of 2004, growth was mainly volume based. To improve volume growth, the companies not only improved utilisation levels and concentrated on a host of new service offerings but also tried to expand their presence in the less-penetrated geographies like Europe and Asia-Pacific.

With around 80% of Fortune 500 companies evaluating the offshoring option, Indian BPO companies added new and diversified services to their portfolio. This included, among other, engineering services and equity research. While lower attrition rates came as a positive surprise, there still remained bottlenecks in the form of poor infrastructure and inconsistency in the government's taxation policy towards the segment.

People Challenges

Managing growth and change: Keeping people in tune with the rapid changes and growth in the industry. Developing and maintaining order for team members amidst dynamic role changes.

Managing Teams: Managing teams from diverse backgrounds and talents to have them move in a unified direction of managing projects.

Attrition: A significant issue for the small and medium enterprises is to manage attrition of key employees.

Business Positioning: As the Indian industry matures there will be a stress on positioning organisations as ‘Solution Providers’ and partners in business with clients. The initial ‘Cost Advantage’ positioning will limit growth potential. And this will require an attitude shift amongst team members.

People & Business Skills Inventory

Outlook

The global software services market is expected to grow by around 7% in 2005 (as per Gartner). Also, NASSCOM projects the IT services (including ITES) to grow by 30%-32% in 2005 to reach revenues of US$ 16.3 bn. Of this, IT services are likely to grow by 26%-28% to reach revenues of over US$ 11.2 bn, while ITES segment is expected to grow by 40% to reach revenues of US$ 5.1 bn.

With the global (read, the US) technology spending still to show signs of sustainable growth, the future of the Indian software industry hangs in balance. As such, Indian software companies would continue to derisk their revenues from this market and concentrate on increasing their presence in the European and Asia-Pacific regions.

As global players replicate the Indian outsourcing model, competition for Indian software companies is likely to increase going forward. This would require a great effort on the latter's part to improve upon their systems and move towards providing higher-end services (IT consulting, package implementation, etc.) to their clients. However, application development and maintenance would continue to be the bread-and-butter business.

The initiative of moving higher up the value chain, as mentioned above, would see Indian software companies invest significantly in their human resource and selling and marketing infrastructure. This would make their processes scalable to meet anticipated higher demand in the future. Also, going forward, these companies would gain from the scale benefits of investments that they are making now.

The existing pressure (though marginal) on billing rates is unlikely to ease in the next year, especially for smaller companies. But for Indian software majors, this stabilisation in billing rates is likely to continue. However, the imperative for them is to compensate for this pricing pressure by continuing to grow on their volumes front.

The Indian BPO industry, which was estimated to be around US$ 1.4 bn in revenue in 2002, is expected to grow to US$ 21-24 bn by 2008. To achieve this target, Indian companies would be building up on their domain and delivery competencies and would strive to garner large-size contracts.

Key Players

Large:

DSQ Software Limited

Flextronics Software Systems Limited

H C L Technologies Limited

I-Flex Solutions Limited

Information Technologies (India) Limited

Infosys Technologies Limited

Mphasis B F L Limited

N I I T Limited

Patni Computer Systems Limited

Pentamedia Graphics Limited

Pentasoft Technologies Limited

Ramco Systems Limited

Rolta India Limited

Satyam Computer Services Limited

Satyam Infoway Limited

Silverline Technologies Limited

Sonata Software Limited

Tata Infotech Limited

Wipro Limited

e.Star Infotech Limited

Medium

Ace Software Exports Limited

Adam Comsof Limited

Advanced Micronic Devices Limited

Advent Computer Services Limited

Aftek Infosys Limited

Astro Bio Systems Limited

Avance Technologies Limited

Aztec Software & Technology Services Limited

B S E L Infrastructure Realty Limited

Baron Infotech Limited

Bathina Technologies (India) Limited

Blue Star Infotech Limited

Brels Infotech Limited

Burr Brown (India) Limited

CCS Infotech Limited

CG-Vak Software & Exports Limited

California Software Company Limited

Canaan International Infotech

Cauvery Software Engineering Systems

Color Chips India Limited

Compucom Software Limited

Compudyne Winfosystems Limited

Contech Software Limited

Corcomp Infosystems Limited

Cybermate Infotek Limited

Cyberscape Multimedia Limited

Cyberspace Limited

Cybertech Systems & Software Limited

Danlaw Technologies India Limited

Datapro Information Technology Limited

Datasoft Application Software (India)

Digital GlobalSoft Limited

Dynacons Systems & Solutions Limited

Encore Software Limited

Eonour Technologies Limited

Fortune Informatics Limited

Fourth Generation Information Systems

Frontier Information Technologies Limited

Genesys International Corporation Limited

Geodesic Information Systems Limited

Geometric Software Solutions Co. Limited

Helios & Matheson Info Technology

Hinduja TMT Limited

I C E S Software Limited

I E C Softwares Limited

I K F Technologies Limited

I Q Infotech Limited

IQMS Software Limited

IT People (India) Limited

Indian Infotech and Software Limited

Induj Enertech Limited

Indus Networks Limited

Info-Drive Software Limited

Infoquest Software Exports Limited

Infotech Enterprises Limited

Infotrek Syscom Limited

Innovation Software Exports Limited

Integrated Hitech Limited

K L G Systel Limited

K P I T Cummins Infosystems Limited

Kaashyap Radiant Systems Limited

Kale Consultants Limited

Kanika Infocom Global Limited

Kolar Biotech Limited

Lan Eseda Industries Limited

Lanco Global Systems Limited

Lee & Nee Softwares (Exports) Limited

Libord Infotech Limited

Logix Microsystems Limited

M Y M Technologies Limited

Maars Software International Limited

Mangalya Soft-Tech Limited

Mastek Limited

Megasoft Limited

Melstar Information Technologies Limited

Midpoint Software & Electro Systems Limited

Mindteck (India) Limited

Nexus Software Limited

Nucleus Software Exports Limited

O R G Informatics Limited

Octagon Industries Limited

Odyssey Technologies Limited

Omega Interactive Technologies Limited

Online Media Solutions Limited

Onward Technologies Limited

Orient Information Technology Limited

P S I Data Systems Limited

Pentagon Global Solutions Limited

Polaris Software Lab Limited

Quintegra Solutions Limited

R S Software (India) Limited

Ram Informatics Limited

Rane Computers Consultancy Limited

S Kumars Online Limited

S Q L Star International Limited

S R G Infotec Limited

Sanra Software Limited

Saven Technologies Limited

Sequel Soft India Limited

Shapre Global Info Services Limited

Sibar Software Services India Limited

Sierra Optima Limited

Softpro Systems Limited

Softrak Technology Exports Limited

Softsol India Limited

Subex Systems Limited

Sun Beam Infotech Limited

Sun Infoways Limited

Svam Softwares Limited

Tele Data Informatics Limited

Telesys Software Limited

Transtream India.com Limited

Transworld Infotech Limited

Trigyn Technologies Limited

Tulip Computers India Limited

Twinstar Software Exports Limited

Tyche Industries Limited

Unisys Software & Holding Ind

Usha Martin Infotech Limited

V & K Softech Limited

Vakrangee Softwares Limited

Valuemart Info Technologies Limited

Vans Information Limited

Vantel Technologies Limited

Virinchi Technologies Limited

Visesh Infotecnics Limited

Visualsoft Technologies Limited

Vjil Consulting Limited

Zenith Infotech Limited

iGate Global Solutions Limited