A Whitepaper

The Indian IT Industry

Author Siddharth Sarawgi, Director & CEO Innoversant Solutions Pvt Ltd info@innoversant.com www.innoversant.com

TABLE OF CONTENTS

Overview of Indian IT Industry ...................................................................................................................... 4 History and Evolution of IT Industry ............................................................................................................. 5 Industry Segmentation ................................................................................................................................. 8 Software: ................................................................................................................................................... 9 Infrastructure Software:- ...................................................................................................................... 9 Enterprise Application Software:- ......................................................................................................... 9 IT Services: .............................................................................................................................................. 10 (a) Project- oriented services: ...................................................................................................... 10 IT Consulting: .............................................................................................................................. 10 Systems Integration: .................................................................................................................. 10 CADM: ......................................................................................................................................... 11 Network Consulting and Integration: ........................................................................................ 11 Software Testing:........................................................................................................................ 11 (b) IT Outsourcing: ........................................................................................................................ 11

When an organization contracts another organization for managing, deploying and maintaning its IT architecture or system, it is called as IT Outsourcing. It includes:...................................................... 11 (c) Training and Support: ............................................................................................................. 12

It includes three segments: ................................................................................................................. 12 IT- enabled Services: ............................................................................................................................... 12 Present Industry Structure.......................................................................................................................... 15 Advantage India .......................................................................................................................................... 18 Established IT hubs in India......................................................................................................................... 20 Emerging IT hubs in India ........................................................................................................................ 21 Growth of the Industry ............................................................................................................................... 23 1. IT Software: ......................................................................................................................................... 23 2. IT Services:.......................................................................................................................................... 24 3. ITeS- BPO Sector: ................................................................................................................................ 26 Competitive Landscape of the Industry ...................................................................................................... 28 Competitive Strategies............................................................................................................................ 29 2
Innoversant Solutions Pvt Ltd

Growth Opportunities for the industry....................................................................................................... 31 Major Threats to the Industry..................................................................................................................... 32 Recommendations ...................................................................................................................................... 33 The Way Ahead ........................................................................................................................................... 33 Conclusion................................................................................................................................................... 33 References .................................................................................................................................................. 34

3
Innoversant Solutions Pvt Ltd

Overview of Indian IT Industry

The Indian IT industry is growing steadily despite the global meltdown in the year 2009. When the whole of the world witnessed the negative growth, Indian IT industry still managed to register a growth of 5.5%. The industry is about to register the historic landmark of US $ 50 billion exports this year, according to NASSCOM President, Som MIttal. The domestic market is also slotted to witness 12% growth, this year. Potential size of Indias offshoring industry is estimated at US $ 120 to 180 billion by 2015. The industry currently employs around 1 million people and provides indirect employment to around 2.5 million people. It is expected to add another 1, 50,000 jobs in the next fiscal according to NASSCOM. Indian IT/ ITes sector is growing substantially with its expansion into varied verticals well differentiated service offerings increasing geographic penetration

The phenomenal success of the Indian IT- ITeS industry can be attributed to the favorable government policies, burgeoning demand conditions, healthy growth of related industries and competitive environment prevalent in the industry. The interplay of these forces has led to putting the industry on the global map.

4
Innoversant Solutions Pvt Ltd

History and Evolution of IT Industry

The evolution of IT industry can be studied in 4 phases:

Phase I: Prior to 1980

The software industry was literally nonexistent in India until 1960. Software used in the computers till that time, were in built with the systems. Government protected the hardware industry through high tariff barriers and licensing. However, in the West, the need for software development was gradually being felt as the software in built in the system was not sufficient to perform all the operations. The Government of India therefore, realized the potential for earning foreign exchange. In 1972, the government formulated the Software Export Scheme. This scheme made the provision of hardware imports in exchange of software exports. TCS became the first firm to agree to this condition. The year 1974 marked the beginning of Software exports from India. Phase II: 1980- 1990 Despite the government initiatives, the software exports were not picking up because of two reasons mainly: The exports of software, was heavily dependent on the imports of hardware, which was costly as well as the procedure for obtaining the same was very cumbersome. Secondly, there was a lack of infrastructural facilities for software development.

To counter these, the government formulated a New Computer Policy in 1984, which simplified import procedures and also reduced the import duty on hardware for software developers. In an attempt to make, software industry independent of the hardware industry, the government in 1986, formulated Software Policy which further, liberalized the IT industry. According to this policy, the hardware imports were de-licensed and were also made duty free for the exporters. This along with the world wide crash in the hardware prices reduced the entry barriers substantially. In 1990, government established Software Technology Parks of India. This scheme was formulated to increase the exports of software and services. Phase III: 1990- 2000 5
Innoversant Solutions Pvt Ltd

This decade made several significant changes in the economy, including trade liberalization, opening up of Indian economy to foreign investment, devaluation of the rupee and relaxation of entry barriers. These changes attracted many foreign entities (MNCs) to our nation. These MNCs in India, introduced Offshore Model for software services, according to which, the companies used to service their clients from India itself. This model further graduated to Global Delivery Model (GDM). Global Delivery Model is a combination of Onsite and Offshore Model. In this model, the Offshore Development Centre is located at various locations across the globe. During this period due to the entry of many players in the Indian market, the competition got intensified. Therefore, the players started investing in research and development to distinguish their services from others.

Phase IV: Post 2000

The global problems like the Y2K, the dotcom crash and recession in the US economy, proved to be a boon to Indian IT industry. The Y2K problem demanded the existing softwares to be compatible to the year 2000. Due to the shortage of US based programmers during this period, many mid sized firms were forced to utilize the services of Indian firms. This had placed the Indian IT industry on the global map. Post 2002- 03, the industry had registered a robust growth rate because of increase in the number of clients, large sized contracts and a strong global delivery model.

6
Innoversant Solutions Pvt Ltd

[Source: D& B Industry Research Service]

Figure 1: Evolution of Indian IT- ITeS Industry

7
Innoversant Solutions Pvt Ltd

Industry Segmentation
IT industry can be broadly classified into three sectors: Software IT Services IT enabled Services (ITeS)- BPO

Indian IT Industry

Software

IT Services

ITeS- BPO

Software Products

Engineering and R& D services

Project Oriented Services

IT Outsourcing

Training and Support Hardware Deployment and Support Software Deployment and Support IT education and training

Customer Interaction Services Financing and accounting

Infrastructure Software Enterprise Application Software

IT Consulting

Application Management

Systems Integration

IS Outsourcing

HR Services

CADM

Others (SOA, web services, E commerce)

KPO Services

Network Consulting and Integration

Software Testing

[Source: NASSCOM, D&B Industry Research Service]

Figure 1: Indian IT Industry Segmentation

8
Innoversant Solutions Pvt Ltd

Software:

IT Software comprising of the (a) Software Products and (b) Engineering and R & D Services, forms the smallest sector of the Indian IT industry. a. Software Products: The market for software products is growing rapidly as the Small and Medium Enterprises (SMEs) as well as large organizations are utilizing the services of software in simplifying their works. The sector is highly concentrated with the top 10 firms, dominating the market. IT Software comprises of the the i. ii. Infrastructure Software Enterprise Application Software.

Infrastructure Software:-

The Infrastructure software connects the people and systems across an organization. It helps in efficiently executing the business processes, share information and the manage the various touchpoints with the customers and the suppliers. It can be of the following types: Application development Application integration and middleware Business intelligence tools Database management systems Data integration tools IT operations Security software Operating-system software

Enterprise Application Software:-

It is a software specifically designed to solve an enterprise problem. The application software performs various business functionalities like accounting, production scheduling, customer information management, etc. The Enterprise application softwares currently available are: 9
Innoversant Solutions Pvt Ltd

Customer relationship management Enterprise resource planning Supply chain management Project portfolio management Content, communication and collaboration E-learning

b. Engineering and R & D Services: This sector has recently originated in India. Many players are trying to tap this market by developing their engineering capabilities.

IT Services:

India is one of the leading provider of IT services. The basic model followed is known as Offshoring wherein Indian firms cater to the specific requirements of its clients by employing efficient project and quality management skills for its execution. This segment comprises of : (a) Project- oriented services: These services are delivered as individual projects. The services are catered according to the needs and wants of the clients, and the expertise of the vendor. These services can be delivered onsite or offshore, or can be a combination of both also. These services include the following services: IT Consulting: The players in this service line advise clients to streamline their business using IT. They help them in devising IT strategy, IT architecture, IT assessment and planning etc. IT consulting in India is still at a very nascent stage. Major companies which are involved in this service are Wipro, TCS, Satyam, Infosys. Systems Integration: This comprises a whole bouquet of services which are very specific to the requirements of the end user. The range of services included are: o o Integration of various systems deployed by the organization- CRM, ERP, SCM etc. Integration of business processes and logistics

10
Innoversant Solutions Pvt Ltd

o o o CADM:

Configuration of customized software Database Maintenance Integration of legacy systems with the new software or hardware

These services include designing, upgrading and maintainance of software to suit the user requirements. These services dominate the project oriented services market. These services are best suited for offshoring, that is why, these services dominate the Indian export basket. Network Consulting and Integration: These services offer planning, construction and designing of data networks. The range of services in this service line includes: o o o o o Network architecture design Network connectivity Systems Management Project Management Network Maintenance etc.

Software Testing: It checks the quality of a software product or service. It is basically a technical investigation to identify and rectify errors to meet specific quality parameters. Software Testing operates in three spheres: o Response Testing: Ensures that parameters from which the responses are elicited from the target audience are operational as well as efficient enough. o o Security Testing: Ensures that all the security parameters are risk free Load Testing: Ensures that the software can handle the load density so as to reduce the down time.

(b) IT Outsourcing: When an organization contracts another organization for managing, deploying and maintaning its IT architecture or system, it is called as IT Outsourcing. It includes: Application Management: It includes management and execution of all activities involved in deploying, maintaining, and upgrading a firms IT systems. IS Outsourcing: The services offered in this segment varies depending on the requirements of the client. The services offered in IS Outsourcing can be: o Desktop Management 11
Innoversant Solutions Pvt Ltd

o o o o o

Help Desk Support Management of Operation systems Management of Applications systems Management of Anti Virus systems Back up equipment service etc.

(c) Training and Support: It includes three segments: Software Deployment and Support: It involves installing, configuring and maintaining software on the clients systems. Hardware Deployment and Support: It involves deploying specific hardware devices on the clients systems. IT education and Training: It is designed to educate and train the in house team for organization Information Technology systems. It is imparted to provide organization specific skills.

IT- enabled Services:

It consists of those services which are delivered using software as a means of production and Internet as a means of transmission. According to AT Kearney, India is considered to be the most preferred destination for companies which are looking for off shoring their IT and backoffice functions. The factors favoring the growth of this sector in India are: Low cost advantage Technically skilled work force English speaking population Superior service maturity Friendly governmental policies supporting FDI Robust infrastructure A thriving indigenous software industry

12
Innoversant Solutions Pvt Ltd

ITeS- BPO

Customer Information Services

Financial and Accounting Services

KPO

Others

HR Services

B2B

Card Processing

Research Services

Media

Retirement Planning

Customer Care

Cheque Processing

Re- modelling

Publishing

Benefits Planning

eCRM

Data Capture/ management

Medical Services

CAD/ CAM

Recruitment

Email Support

Document management Insurance claims Processing

Language Translation

Technical Support

Content Creation

Tele-marketing

Taxation

Strategy Consulting

Course designing/ modelling

[Source: NASSCOM, D&B Industry Research Service]

Customer Information Services: These services include all the activities related to managing relationship with the customer i.e. capture, storage and analyisis of customer information. Financial & Accounting Services: These services manage financial and accounting aspects of businesses. These services are slowly and steadily gaining pace in the Indian IT industry. It is the second largest contributor to exports in the ITes segment.

13
Innoversant Solutions Pvt Ltd

Human Resource Services: It entails all the activities pertaining to human resource management. It includes managing employee records, payroll processing, hiring, staffing and training and development of the employees etc. Knowledge Process Outsourcing: The KPO segment offers a bouquet of services, ranging from market analysis, strategy consulting, business research, content management, medical transcription etc.

Concentration of Players within KPO segment (FY '07)

5% 5% 2% 1% 18%

5%
7% 7% 9% 14% 12% Content Management Business Research Litigation Retail Analytics Forign Language Translations Course Designing & Modelling Market Analysis Medical Transcription Legal Research Strategy Consulting CBT/ WBT Content Creation Re- modelling

15%

14
Innoversant Solutions Pvt Ltd

Present Industry Structure

The Indian IT industry comprises of well established billion dollor firms as well as start ups or the emerging players. The industry can be described as fragmented yet concentrated. In terms of the expanse of presence of the small and medium enterprises (SMEs) and their offerings, they can be termed as Fragmented. But, on the other hand, when the dominance of the leading players are taken into consideration, because of their earnings as well as their offerings, the industry can be reffered to as Concentrated. The industry can be categorized into: Tier I Players Tier II Players Offshore Global Services Provider Pure Play BPO Providers Captive BPO Units Emerging Players

15
Innoversant Solutions Pvt Ltd

Tier I Players
No. of Players: 5- 7 Share in Exports: 45% of IT services, 4- 5 % or BPO Performance: Revenues greater than US $ 1 billion

Emerging Players
No. of Players: >3000 Share in Exports: 10- 15% of IT services & 5% of BPO Performance: Revenues less than US $ 100 billion (IT) & Revenues less than 10 billion (BPO)

Tier II Players
No. of Players: 10- 12 Share in Exports: 25% of IT ser vices, 4- 5% of BPO Performance: Revenues greater than US $ 100 billion

Industry Structure
Captive BPO Units
No. of Players: 150 Share in Exports: 50% of BO Performance: Revenues US $ 25- 150 billion (top 10 units)

Offshore Global Services Provider

No. of Players: 30- 40 Share in Exports: 10- 15 % of IT services, 10- 15 % of BPO Perfornance: Revenues US $ 10- 500 billion

Pure Play BPO Providers

No. of Players: 45- 50 Share in Exports: 20% of BPO Performance: Revenues US $ 10- 200 billion (excluding top provider with US $ 500 million)

[Source: NASSCOM, D&B Industry Research Service]

Figure 3: Present Industry Structure

Tier I Players: Though the number of players in this category is very low (5- 7), but they account for
almost 45 per cent of IT Services and 4- 5 percent of BPO exports. These firms have been able to increase their sales with the help of their strong management capabilities and Global Delivery Model (GDM). This has helped them in enhancing their global presence. They are increasing venturing into new services like IT consulting, Research and Development (R & D), testing etc. 16
Innoversant Solutions Pvt Ltd

Tier II Players: These players have their revenues greater than US $ 100 billion. The number of players
in this category is also low (10- 12), but they account for 25 per cent of IT services and 4- 5 per cent of BPO exports. Due to limited number of clients, service lines and verticals, these players have registered a lower growth rate than the Tier I players.

Offshore Global Service Providers: This category has around 30- 40 players who have registered their
sales revenue of US $ 10- 500 billion. These players are recording inorganic growth through acquisitions in low cost destinations including India. But, due to complex local market conditions, they are facing challenges in integrating Indian operations.

Pure Play BPO providers: The number of players in this category have hovered around 40- 50. They
account for around 20 per cent of BPO exports. These players are facing serious challenges in terms of increasing customer expectations in terms of quality and delivery of service.

Captive BPO Units: There are about 150 players in this category. They account for 50 per cent of BPO
exports. They are also increasing their presence in Tier II cities, primarily for cost and resource considerations.

Emerging Players: The number of players in this category is over 3000. They account for about 10- 15
per cent of IT services exports and 5 per cent of BPO. These players are facing severe challenges as they have limited access to markets and the lack delivery scales.

17
Innoversant Solutions Pvt Ltd

Advantage India
Technically Skilled Professionals: India has a huge reservoir of technically sound manpower. This has
proved to be one of the most critical success factor for Indian IT sector. This growth is also complimented by the demographic profile of India, where over 50 per cent of the population is below 25 years of age. The growing number of world class educational institutions along with the policy for educational loans, have geared the growth of the industry.

English speaking population: Because of Indias colonial past, the medium of education in India is
primarily English. This has proved to be boon to the industry. India is the second largest nation in the world in terms of English speaking population, first being USA.

Robust Telecom Infrastructure: The telecom industry in India is well established. The
telecommunications network in India, is the third largest network in the world and the second largest among the emerging nations in Asia. The availability of superior, robust and reliable telecom connectivity has added to the success of the whole industry in India.

Rendering Customized, end to end and Niche Services/ Solutions: Due to the increasing
pervasiveness of IT and huge potential for earning foreign exchange, Indian firms have slowly graduated from giving customized solutions to end to end services and also niche solutions/ services.

Lower costs of offshore outsourcing: The initial driver for offshoring to India was cost. But, India has
proved to deliver quality services at affordable costs. According to AT Kearney, offshoring to India results in saving 25- 60 per cent of the base cost.

18
Innoversant Solutions Pvt Ltd

Technically Skilled Professionals English Speaking Population

Quality Orientation

Favorable Governmental Policies

Advantage India

Robust Telecom Infrastructure

Lower cost of Offshore Outsourcing

Rendering customized, end to end and niche services/ solutions

Figure 4: Indias Competitive Advantage

Favorable Governmental Policies: After the liberlization of Indian economy, entry barriers for foreign
investors have been removed. Therefore, liberlized FDI policies, tax exemptions, basic infrastructure, subsidies etc. from the government has definitely given a boost to the establishment of the industry in India.

Quality Orientation: Indian companies are certifying themselves with ISO 9001, Six Sigma, Just in
Time, COPC certifications to attract foreign clients.

19
Innoversant Solutions Pvt Ltd

Established IT hubs in India

[Source: STPI, Tramell Crow Meghraj]

Figure : Established IT hubs in India

1. Bangalore:
The total number of Software Technology Parks (STPI) in Bangalore in the year 2008-09 were 2085 (5% growth as compared to the year 2007-08). Bangalore witnessed a 23% growth in the software exports as compared to the national growth of 21% in the year 2008-09. Major IT/ ITeS in the hub: Infosys, Wipro, TCS, HP, Siemens, HSBC, Compaq The ICT cluster in Bangalore has over 1500 IT firms out of about 3500 IT firms in India. In fiscal 2005-06, the state of Karnataka accounted for 37.6 percent of the total software exports from India and the city of Bangalore alone accounted for about 97 percent of it. Thus around one third of all of Indias software exports are from the city of Bangalore.

2. Hyderabad:
Total number of STPI registered units by the end of 2008-09 were 1060 Hyderabad registered a 24% growth in software exports. 20
Innoversant Solutions Pvt Ltd

Major IT/ITeS in the hub: HP, Amazon, Verizon, Convergys, EXL, Infosys, TCS

3. NCR- Delhi:
Total number of STPI registered units by the end of 2008-09 were 1938

IT/ITeS majors: IBM, Genpact, Oracle, Am Ex, Convergys, HP, General Motors

4. Kolkata
Total STPI registered units by 2006-07: 166 (28 added in 2006-07) IT/ITeS majors: IBM, Cognizant, TCS, Infosys, Wipro

5. Mumbai
Total STPI registered units by 2006-07: 630 (40 added in 2006-07) IT/ITeS majors: TCS, Infosys, Wipro, Siemens, Accenture

6. Pune
Total STPI registered units by 2006-07: 635 (108 added in 2006-07) IT/ITeS majors: Cognizant, Convergys, EXL, KPIT, Msource

7. Chennai
Total STPI registered units by 2006-07: 900 (131 added in 2006-07) IT/ITeS majors: Infosys, Wipro, Accenture, Cognizant

Emerging IT hubs in India

Slowly and steadily the Tier 2 and Tier 3 cities are also emerging to become IT hubs. The major advantage which these cities provide are Higher savings in administration Lower infrastructural costs Large pool of talent in the form of skilled professionals

21
Innoversant Solutions Pvt Ltd

[Source: STPI, Tramell Crow Meghraj]

Figure : Emerging IT Hubs in India

22
Innoversant Solutions Pvt Ltd

Growth of the Industry

The Indian IT industry has been growing at a rapid pace by offering a wide range of products and services. This growth can be attributed to the exports of lower end services, but slowly and steadily the Indian IT industry is moving towards rendering higher end services. The growth of the industry can be studied by observing the growth in all the segments of the industry. There has been a growth in the exports as well as domestic sales.

1. IT Software:
This segment represents the smallest segment of the Indian IT industry. It comprises of (a) the Software products and (b) engineering and R& D services.

Growth of Software Sector

10 9 8 7 6 5 4 20 18 16 14 12 10 8

3
2 1 0 FY '01 FY '02 FY '03 FY '04 US $ Billion FY '05 Percent FY '06 FY '07 FY '08

6
4 2 0

[Source: NASSCOM, D&B Industry Research Service]

Figure : Growth of IT Software sector Before FY 03, Engineering and R & D services was not a part of this segment. Therefore, there was not much scope for exports. But after the advent of Engineering and R & D services, Indian IT firms have

23
Innoversant Solutions Pvt Ltd

been making a historic progress in the export orientation. The export orientation has been increasing year after year. Looking at the graph below, representing the increase in exports, after FY 03, we can conclude that this segment is extremely lucrative and going to flurish in the future.

Software: Share of Exports and Domestic Sales

100% 90% 80% 70% 60% 42.86 50

78.95

83.34

81.58

75.48

75.76

75.59

50%
40% 30% 20% 10% 0% FY '01 FY '02 FY '03 FY '04 Domestic Sales FY '05 Exports FY '06 FY '07 FY '08 57.14 50 21.05 16.66 18.42 24.52 24.24 24.41

[Source: NASSCOM, D&B Industry Research Service]

Figure : Share of Exports and Domestic Sales

2. IT Services:

India is an expert in provinding customized IT services which are very specific to the needs and requirements of the clients and the end user. These services have always dominated the Indian IT industry, accounting for over 60%. Before the advent of engineering and R & D services, the share of IT services in the overall revenue of the industry was above 71%. Nonetheless, the segment is growing at a CAGR of 26% since FY 00, and is expected to reach US $ 29.7 billion in FY 08. This segment is divided into three categories: (a) Project- oriented services, (b) IT Outsourcing and (c) Training and Support.

24
Innoversant Solutions Pvt Ltd

Growth of IT Services Segment

35 30 25 20 15 10 5 0 FY '00 FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 IT Service Revenue (US $ billion) Share in Industry Revenue (%) 90 80 70 60 50 40 30 20 10 0

[Source: NASSCOM, D&B Industry Research Service]

Figure : Growth of IT Services Segment

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY '00 FY '01 FY '02 FY '03 FY '04 FY '05 Exports FY '06 FY '07 FY '08 Domestic Sales

3.1

5.8

5.5

7.3

10

13.3

18

23.2

1.5

2.1

2.4

3.1

3.5

4.5

5.6

6.5

[Source: NASSCOM, D&B Industry Research Service]

25
Innoversant Solutions Pvt Ltd

Figure : Share of Exports and Domestic Sales

Share of Exports of IT Services

16,000 14,000 12,000 US $ Million 10,000 8,000 6,000 4,000 2,000 0 FY '06 Project Oriented Services FY '07 Outsourcing FY '08 FY '09 Training and Support

[Source: NASSCOM]

3. ITeS- BPO Sector:

The Indian ITeS- BPO sector was known to specialize in offering the lower end services. But with the initiation of reforms in the early 1990s, the industry is moving up in the value chain by offering higher end services.

26
Innoversant Solutions Pvt Ltd

Growth of ITeS Sector

14 12 10 8 15 6 4 2 0 FY '00 FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 Total Revenues (US $ billion) Share in Industry Revenues 10 5 0 30 25 20

[Source: NASSCOM, D&B Industry Research Service]

Figure : Growth of ITeS Services Segment

Share of ITeS Exports

6000 5000 US $ Million 4000 3000 2000 1000 0 FY '05 CIS FY '05 F&A HR FY '05 KPO FY '05

[Source: NASSCOM, D&B Industry Research Service]

Figure : Growth of ITeS Services Segment

27
Innoversant Solutions Pvt Ltd

Competitive Landscape of the Industry

The competitive landscape of the industry can be understood using the Porters five forces model.

Rivalry among Players

Bargaining Power of Buyers

Bargainig Power of Suppliers

Threat of New Entrants

Indian IT Industry

Threat of Substitutes

Threat of New Entrants: When the barriers of entry are low, the threat of new entrants becomes
very high. Since in IT software and services, the players enjoy significant economies of scale and the switching costs are also very high, therefore, the entry barriers for the IT Software and Services are very high. In contrast to this, in ITeS- BPO, lower economies of scale are reached and the switching

cost is also very low. This leads to very low entry barriers.
Therefore, there is high threat of new entrants in the ITeS- BPO sector while it is low in the case of IT software and services.

Rivalry among players: When the number of players increases in a sector, the intensity of rivalry also
increases. With the increase in rivalry, the players resort to a number of strategies being followed by the players to acquire new customers or to retain older ones. Earlier players used to provide customized services to attract customers, but now this practice, also fails to attract them. Therefore, they resorted to providing end to end solutions, niche services etc.

Bargaining Power of Buyers: Since the switching costs in case of IT Software and Services, is very
high, the Bargaining power of the buyers becomes low. But just opposite to this, in case of ITeS- BPO sector, the switching cost is relatively very low, which makes the bargaining power of the buyer very high. 28
Innoversant Solutions Pvt Ltd

Bargaining Power of Suppliers: Suppliers for the industry can be categorized into: (a) Knowledge
Professionals, (b) Hardware Manufacturers and (c) Telecom industry players. Knowledge Professionals have a high bargaining power in the IT Software and Services sectors because they demand high level of skill and expertise to render their services. In the ITeS- BPO sector, the level of skill and expertise required is low, therefore, they have a lower bargaining power on the industry. For the IT industry to function properly, proper hardware infrastructure is required. Therefore, the bargaining power of hardware manufacturer grows. This is supported by the fact that hardware manufacturing industry is very concentrated (HP, IBM, Dell etc.) While a robust telecom network is a pre-requisite for proper functionality of the IT industry, but the presence of a number of players in the industry reduces their bargaining power.

Threat of Substitutes: Since the IT industry is driven by technology, which itself is ever eveolving,
therefore, there is a high risk of substitutes for the industry.

Competitive Strategies
After studying the competitive landscape of the industry, the following competitive strategies can be followed by the players: 1. Consolidating Business from Repeat Clients and win new clients: TCS, Infosys and Satyam have a major chunk of their revenues from their repeat clients. In the year 2007, the revenues from repeat clients for TCS, Infosys and Satyam were 96.8%, 95.0% and 90.0% respectively. These figures highlight the importance of Customer Relationship Management. In order to retain their clients, the companies increase the size and number of projects and also, extend the range of services they offer. 2. Focus on Niche Service Lines: Some mid size players have adopted this model where they render specialized services rather than offering end to end services. This helps them to differentiate themselves amongst other players.

29
Innoversant Solutions Pvt Ltd

Consolidating business from 'repeat clients' and win new clients

Setting up ODCs

Wide spectrum of service offerings

Competitive Strategies
Focus on Product Innovations Focus on niche service lines

Higher Capital Expenditures

Mergers and Acquisitions

Figure : The Competitive Strategies followed by the players

3. Mergers and Acquisitions: M& A help in consolidating the whole industry. It enables firms to
expand, enhance its skill sets, expand its service offerings and enter new geographies.

4. Higher Capital Expenditure: This can help in enhancing business activities as well as increasing
the operational effectiveness of these companies.

5. Setting up ODCs: Offshore Development Centres have helped in instilling customer satisfaction to
a great extent. It also has helped in reducing the operating expenses of the companies.

6. Wide Spectrum of Services: The players are constantly extending their bouquet of services to
attract the new clients as well as retain the existing ones. They are also offering higher value added services which ensures greater earnings and on the same time lower resource utilization as well.

30
Innoversant Solutions Pvt Ltd

Growth Opportunities for the industry

There are two ways in which the industry can witness growth: Increasing the domestic sales Moving up the value chain

The industry is right now predominantly export oriented. When we look at the growth in exports and the growth in domestic sales, we can observe that the domestic sales growth are left far behind. So if the domestic sales increases, growth of the overall industry will happen. Therefore, the players as well as the government should take initiatives to increase the domestic consumption. The Indian IT players are pre dominantly involved in rendering lower end services to their clients. Therefore, the industry can grow only when it starts moving up in the value chain. Presently, the Indian IT industry is basically focusing on the Application Maintenance and Infrastructure Management. But the focus on rendering higher end services will help in strengthening the brand image of the industry.

Application Design and Development, Package Implementation Application Management, System Integration Infrastructure and Network Management

Business Intelligence Solutions, Business Process Redesign

Business & IT Strategy

Figure : The IT Value Chain 31

Innoversant Solutions Pvt Ltd

Major Threats to the Industry

1. High Attrition Rate: Staff shortage can prove to be a major bottleneck to the growth of the industry. According to McKinsey & Co., only 25 percent of the technical graduates are competent enough to work in the offshore IT industry in India. In the BPO sector also, only 10- 15 per cent of the graduates are suitable for employment. Therefore, managing attrition rate is becoming a big task for the IT companies in India. High attrition rate results in loss of skilled manpower, loss of skill sets etc. Apart from loss in skill sets, cost of recruitment, training and development of the new recruits also becomes a major investment for these companies. 2. Competition from other emerging nations: Chinese IT hubs like Beijing and Shanghai are set to overtake Indian hubs by the year 2011, according to a report by IDC. These cities are competing with India on account of their stable socio- economic environment, excellent infrastructure, low attrition rates and skilled talent pool. 3. There is a need for improvement in the urban infrastructure. According to McKinsey, further growth of the industry has to come from small districts, outside the Tier 1 and Tier 2 cities. 4. Lack of fluency in languages other than English, e.g. French, Spanish, Italian etc. is proving to be a weakness of the Indian IT industry. 5. End of Tax Benefits at STPIs: There is a dissimilarity in the tax regimes at STPIs. This would lead to conversion of these STPIs into SEZ units. 6. Overdependence on US Economy: Almost 70% of the IT industry revenues comes from USA. Therefore, any downscale in the US market, adversely impacts the Indian market too. E.g. recent downsizing and job cuts due to recession in the US market. 7. Rupee Appreciation: As most of the earnings are in foreign currencies, therefore Rupee appreciation becomes an area of concern for the industry. 8. Lack of Product Innovation: India specialises in services but not in products. The nation lacks in product innovation, which can be considered a major area of concern. It will be difficult to maintain competitive advantage if product innovation doesnt occur. 9. Limited Domestic Market: The domestic market is still in the nascent stage in India. This makes the whole industry vulnerable to export market only.

32
Innoversant Solutions Pvt Ltd

Recommendations
Building Domain Knowledge: If the players in the industry have to move up the value chain, the first
pre requisite is building up domain knowledge. Only this can help them in satisfying their customers and in turn winning their confidence. Once this is achieved, they will become repeat customers for them.

Investing in Research and Development: This will help in innovating new products and services
which will help in the growth of the company as well as the industry as a whole.

Knowledge Management: The industry faces a high attrition rate which deprives the company of its
talents. Knowledge management is a technique which helps in retaining the knowledge in the firm, even when these knowledgeable persons leave the organization. It is a technique of assembly, preservation, transfer and management of data and knowledge in companies. A boost in the domestic sales can occur with more favourable government policies and also improvement in the infrastructure which is a pre requisite for the growth of IT industry as a whole.

The Way Ahead

The future of the industry is very bright provided it overcomes the challenges noted above. The industry will witness a surge in the Engineering and R & D services. Along with there will be more penetration in new service lines such as packaged software support and installation, IT consulting, IS outsourcing, IT training and education etc. The domestic market will also gain more attention and focus. IT spending across verticals like Banking and Financial Sector Institutions (BFSI), healthcare, manufacturing, retail etc. would increase, with the increase in the internet usage. Slowly and steadily, the Tier II and Tier III cities will also witness increase in the number of IT companies.

Conclusion
The Indian Information Technology industry represents one of the most successful industry showing consistent rapid growth. In a report, Perspective 2020: Transform Business, Transform India, prepared by Mc Kinsey, the export revenues of Indian IT industry will touch US $ 175 billion by the year 2020. The domestic sales revenue will also contribute US $ 50 billion by the year 2020. Therefore, we can say that the industry is shining and will continue to do so as well. 33
Innoversant Solutions Pvt Ltd

References
http://www.businessweek.com/adsections/indian/infotech/2001/growth.html http://timesofindia.indiatimes.com/biz/india-business/IT-exports-to-touch-50billion/articleshow/5536663.cms http://blog.nasscom.in/nasscomnewsline/2009/02/a-view-on-the-indian-it-bpo-industry-in-2009/ http://www.blr.stpi.in/pop_stpindustrygrowth.htm www.blr.stpi.in http://www.infoworld.com/t/business/indias-outsourcing-valued-60-billion-2010-684

www.hyd.stpi.in
http://www.naukri.com/nri/article2.htm http://www.dnb.co.in/TopIT_08/overview.asp http://www.mindbranch.com/India-Information-Technology-R302-10603/

India's

offshore

outsourcing

revenue

grew

34.5%

at

networkworld.com

http://www.networkworld.com/news/2005/060205-india-outsourcing.html
http://www.ibef.org/artdispview.aspx?in=38&art_id=25847&cat_id=121&page=2 Perspective 2020: Transform Business, Transform India http://www.nasscom.in/upload/Perspective%202020%20Press%20release%20presentation.pdf

34
Innoversant Solutions Pvt Ltd