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Software Industry

Software Industry

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Published by: Swapnil on Nov 02, 2009
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Introduction
The software industry is the fastestgrowing segment within the Indian IT industry and is earningIndia very valuable foreignexchange.The Indian software sector has reached amassive size of Rs243.5bn during the financial year 1999-2000. The sector grew by 53%during the year. The growth during the last six years hasbeen awesome – in 1995 thesize of the whole software industry was just Rs26.05bn. Thistranslates into an annualisedgrowth of more than 56%.The domestic market accounted for Rs72bnwhile exports accounted for Rs171.5bn in the currentfiscal. While domestic software hasgrown by 45% (46% annualised during the last 5 years).Exports have grown by 57% duringthe year (62% annualised over the last five years).The export segment has been the starperformer driven by increased prominence of India in theworld as a quality supplier ofsoftware services. India currently exports software to some 95countries around the globeand 185 of the Fortune 500 companies have outsourced some part of their softwarerequirement to India. In fact, software exports have become a major foreignexchangeearner for the country and account for a substantial 10.5% of India’s total exports.
The Indian software industry
Rs.bn.
19961997199819992000
Domestic software16.724.135.149.572Software exports25.23965.3109.4171.5
Total41.963.1100.4158.9243.5
Source : NASSCOM 
Software Exports
The software export market is essentially aservices market. Professional services, which isbasically related to sending softwareprofessional to work for bits and pieces of large projects,made up a substantial 44% ofthe total exports. Projects, where the Indian company takesresponsibility for completingfull projects, made up around 37% of the exports.
Outsourcing of software services from India
The global IT services market was wortharound US$365bn in 1999. Currently, outsourcing andcross-country exports is estimated tobe around 6% of this figure, but it is expected that this figurecan go up to 25% withinthe next decade. This throws up immense opportunities for India’ssoftware exporters.Already, around 185
Fortune 500 
companies outsourced software from Indiaduring1999-2000.The factors which have contributed towardsthe growth in outsourcing market :
need to be cost competitive to be able to service global operations
increased use of IT as a productivity tool and business growth driver rather than for automation of processes
explosion in telecommunication capabilities has rendered location of softwaredevelopment centers immaterial.
evolvement of hardware and software technology to open systems
 
increased adherence to quality standards and efficiency parameters in developingcountries
rapid spread of Internet, electronic commerce, e-mail, networking etc
the tendency of US companies to retain focus on business plans while transferring thecoding and software development job offshore
need to outsource certain functions which are difficult to manage in-house for lack of expertise or otherwise.India has already established considerablepresence in the US and has earned the reputation of being the
first country of choice
among US companies. The regions where it needs to makesignificant headway are Europe andJapan. European region where outsourcing was at a low ebbuntil the last few years, isforecast to record the maximum growth in the coming years. Softwareexports to othercountries is also expected to increase, as new markets are vigorously beingexplored inKorea, South Africa, Latin America and some countries in Asia Pacific.
Domestic SoftwareIndustry
Domestic market for software has recorded aCAGR of 46% over the last 5 years to touch Rs72bnin FY2000. This does not includein-house development efforts undertaken by companies. In thepast domestic software marketgrowth lagged behind exports, owing to low penetration of computers and rampant piracy.Some of the factors which have contributedto strong domestic growth in the recent years include:
strict enforcement of anti-piracy laws, bringing down illegal copying of softwareconsiderably
zero import duty on software
growing computerization of business operations, forced by unshackling the economy andfreeing several industries from a regulated regime
deeper penetration of computers in the household segment
increased use of computers as an educational toolThe domestic software market is dominatedby products and packages, which account for around40% of the market and by projects,which accounted for around 30%.The presence of domestic companies in thesoftware product market is negligible - estimated tobe less than 20% in value terms. ANASSCOM study revealed that 280 software packages werereleased in FY2000 of which 54%were launched by Indian companies. This suggests that Indiancompanies are getting theiract together to fight for market share, particularly in niche segments. Amajor part ofthe software products market is estimated to be held by US companies. Stronggrowth rateswere witnessed in FY2000 in the e-commerce segment (200%), banking software(70%), CAD/CAMpackages (41%), ERP packages (23%). Most of the demand for softwarecomes from thebusiness segment. Consumer and entertainment software is still a nascent marketin India,but has the potential to grow rapidly in the future. Software piracy rates in India arequitehigh, at about 59%. With swift crackdown on piracy, this should come down in thefuture – thisshould spur growth in software packages.In turnkey projects, Indian companies havea much larger share of the cake. Till recently globalcompanies found the Indian markettoo small to make a competitive entry. Since the last couple of years several globalcompanies like Microsoft, SAP, IBM etc have set up Indian affiliates/ jointventurecompanies. These companies besides pedaling parent company's software products,alsoprovide specialized software services to domestic companies.
 
Structure of theIndustry
Indian software industry has a mix of a fewlarge companies and several small to medium sizedcompanies. Currently 37 Indian companieshave exports of more than Rs1bn. These few largecompanies would however be classified assmall companies by US standards. Most of these largecompanies are operated by firstgeneration entrepreneurs, who had limited access to finance andlow risk takingcapability. Smaller companies, which are also typically entrepreneur runcompanies, have asimilar potential to strike it rich.
Geographical distribution
Most of the software companies areconcentrated in the western and southern parts of India.These are further concentrated ina few cities. Choice of location has been driven by availability of infrastructurefacilities, cost of space and manpower availability. In terms of business size,Mumbai,Hyderabad, Bangalore and Chennai have the highest concentration.
Competitive Position
The Indian software sector has severalcompetitive advantages, which is allowing it to grow at afast pace. Some of the keyadvantages are :
Locational advantage
India enjoys a locational advantage. Theadvantage it enjoys over other countries, is a 12-hour difference with the world's largestmarket - the USA. This enables US companies to establishround the clock softwarefactories by subcontracting to Indian companies.
Manpower 
There is a tremendous latent potential ofmanpower supply in India. India has the second largestpool of technically qualifiedEnglish speaking manpower (second only to the United States)available at a comparativelylower cost. Demand for manpower continues to surge. India has thecapacity to supply about70,000 software professionals each year, which hardly meets the globaldemand. Indiansoftware industry can therefore continue to have a manpower led growth.
Low cost
Much of India's strong growth in softwarein the past is attributable to the low cost of Indianprogrammers. Indian programmers arepaid only about 15-20% of his/ her counterpart indeveloped nations. Even among competingcountries Indian software professionals were paid theleast. This provided domesticsoftware companies a cutting edge in pricing for software projects.However the low costedge has now been considerably eroded with most software professionalsgettingremuneration at par with global standards. Nevertheless in terms of cost-quality,Indiacontinues to offer significant 'value for money'.
Wide gamut of services
India's advantage was that it could offer awide range of software services from clerical support/data processing to sophisticatedsoftware systems. The low cost and easy availability of manpower at all levels enabled itto offer labor intensive support services, while the technicallyqualified and skilledpersonnel enabled it to offer quality solutions involving sophisticated softwaresystems.

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