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INDIAN SOFTWARE INDUSTRY

The Growth Saga Continues

This case has been written by J. Ramachandran, BOC Professor of Business Policy and
Pranav Garg, Research Associate, both at the Indian Institute of Management Bangalore,
based on publicly available information. This case was developed solely as a basis for
class discussion. It is not intended to serve as an endorsement, source of primary data or
an illustration of either effective or ineffective management.

© 2006, Indian Institute of Management Bangalore


Indian Software Industry: The Growth Saga Continues

In October 2005, Infosys Technologies Limited, the Indian software major, reported
growth in its quarterly revenues for the fifteenth consecutive quarter. The other software
majors - Tata Consultancy Services (TCS), Wipro Technologies (Wipro) and Satyam
Computer Services (Satyam) and the rest of the industry soon followed with similar
reports, thus sustaining the remarkable industry growth saga that began over a decade
ago. Despite the ongoing rhetoric against the offshoring of work in the major markets for
the industry, especially in the United States, the growth continued. Unabated.

In the last five years, the industry has more than tripled its exports (Exhibit 1); enhanced
its service offerings (Exhibit 2); diversified its geographic presence (Exhibit 3); and
expanded its customer base by focusing on new vertical markets (Exhibit 4). More
importantly, the growth of the Indian industry is increasingly getting de-linked from
swings in global information technology (IT) spending. Greater availability of
international bandwidth and powerful workflow management software is fundamentally
unbundling the services value chain and driving outsourcing of IT services. It is now
possible to disaggregate any business process, execute the sub-processes in dispersed
global locations, and re-assemble them almost instantaneously wherever required.
Consequently, global IT spending priorities are shifting towards offshoring. For example,
in the past couple of years, the Indian industry has witnessed ramping up of captive
offshore development initiatives by multinational companies.

Further, pressure to offshore from clients in search of lower prices and productivity
benefits has forced even the predominantly “on shore” delivery oriented IT service
companies such as IBM Global Services, Accenture, EDS, CSC etc to scale their offshore
operations in general and their Indian operations in particular.a In April 2004, IBM
acquired Daksh, the second largest Indian business process outsourcing (BPO) service
provider and recently Accenture announced plans to establish Accenture Technology
Labs, a high-end R&D centre, in India. The securities firm CLSA estimates that by
March 2006, the global service majors would employ over 140,000 people, almost three
times the number two years ago. Thus, India, despite dire predictions about the
emergence of other low cost destinations, continued to be the leading destination for
offshore outsourcing of software and IT enabled services, a position it is expected to
maintain in the foreseeable future (Exhibit 5). The leading Wall Street firm, Goldman
Sachs noted1:

Although much has been made about the potential offered by other low cost
countries around the world in particular China, the Philippines and some Eastern
European countries, it is our opinion that in terms of competency, availability of
skilled resources, cost, and business environment, no other country is as
competitive as India (emphasis in original).

Accompanying the remarkable performance in exports is the steady growth in demand for
software services in the domestic market. Indian companies have started investing in IT

a
Offshore employees as percentage of total employees: IBM (9%), Accenture (18%), EDS (15%), CSC
(4%); India as percentage of offshore employees: IBM (33%), Accenture (55%), EDS (14%), CSC (61%)
(Source: NASSCOM Strategic Review 2005)

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Indian Software Industry: The Growth Saga Continues

to improve their competitiveness. Many have implemented state-of-the-art Enterprise


Resource Planning (ERP), Supply Chain Management (SCM) and Customer Relationship
Management (CRM) software packages to improve productivity and performance. Some
companies such as the telecommunications major Bharti Televentures, the consumer
goods player Dabur India and the public sector bank, Bank of India, have gone one step
further and outsourced their entire IT management. Interestingly, all three of them have
opted to work with global majors – IBM, Accenture and Hewlett-Packard respectively.

The phenomenal growth of the industry also unleashed a fresh war for talent (Exhibit 6).
In the second quarter of FY 2006 alone, Infosys Technologies (Infosys) recruited over
8,026 people2, taking its total employee strength to 46,196. Competition for manpower, a
key industry growth driver, is leading to higher than average annual attrition rates of 25-
30% and salary inflation of 12-15%. The twin problems of salary inflation and attrition
are particularly severe at the middle-management level. Competition is most intense for
middle-level engagement managers who possess both business and technology expertise.
Keen to sustain their respective growth momentums, individual firms are bidding up the
compensation packages and contributing to the increasing industry attrition rate.
According to one estimate3, a 5% attrition rate reduces the operating margins of a
company by 1.5%. Firms are trying to cope with the surge in demand for software
professionals by increasing their intake from college campuses. This however comes with
the attendant challenges of training and assimilating the new staff quickly.

The competition for talent is expected to intensify in future as most industry researchers
and analysts predict sustained growth for the industry. In its annual strategic review,
National Association of Software and Service Companies (NASSCOM), the nodal body
of the Indian software industry, projected the value of services sourced from India to
reach $48 billion by 2008. Such a projection may not be far-fetched. According to
Forrester Research, less than 5% of Fortune 1000 companies, which it classified as “Full
Exploiters”, have taken full advantage of offshore outsourcing. Other companies have
used offshoring in varying degrees. While the “Committeds” (5-10% of Fortune 1000
companies) have graduated to outsourcing their mission-critical development and
maintenance programs, the “Experimenters” (25-30% of the companies) are exploring
offshoring on a trial basis through small projects. The remaining firms in Fortune 1000,
the “Bystanders”, are yet to seriously investigate the potential of offshoring (Exhibit 7).
In their survey of vice presidents and directors of IT and business unit decision makers in
North American companies, Forrester Research found that beyond cost savings, the
experienced offshore outsourcers benefited significantly from the process discipline of
third party service providers. Interestingly, the respondents felt that while it was
challenging to work with Indian offshore service providers because of their lack of high
level business and industry process knowledge, they provided better value for money and
quality of work than did large US services firms. Forrester Research reports4:

When we asked interviewees how their offshore suppliers rated, 88% say that they
provide somewhat better or much better value for the money compared to their US-
based counterparts. In addition 71% of the users stated that offshore providers
delivered somewhat better or much better quality work.

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Indian Software Industry: The Growth Saga Continues

History

Contrary to popular perception, the Indian software industry came into being long before
the much-publicised software services boom of the 1990s. TCS, the industry pioneer and
the largest Indian software company in 2005, was set up way back in 1968! Infosys and
Wipro, the other homegrown majors, were established in the early 1980s. However till
the mid-1980s, the import substitution oriented (high tariff regimes being a case in point),
largely domestic hardware industry centric policies of the Government of India and an
overvalued Rupee restricted industry growth. Ironically though, the government’s other
major policy initiative in this period - undertaking substantial investment in technical
education - would later prove to be a big boon for the industry when global demand for
software engineers exploded following changes in computing technology.

The advent of personal computers and networking radically changed the computing
paradigm. The shift from hitherto mainframe oriented computerisation to network
oriented systems opened up a new source of demand in the advanced countries for
customised software. A worldwide crash in hardware prices coupled with a relaxation in
some of the previously restrictive government policies – for example, allowing hardware
imports by software firms under a new Software Policy regime announced in 1986 –
resulted in the Indian industry’s export revenues growing five fold from $22 million in
1984 to over $100 million by 1989.

The export orientation of Indian software firms was in large part due to lack of
opportunities in the domestic market. While private companies in most sectors had little
incentive to computerise and improve productivity as they had historically been protected
from foreign competition, the then widely prevalent “fear” that computerisation would
lead to job losses discouraged government and state owned enterprises from undertaking
large scale computerisation efforts. As a consequence, most software firms focused on
providing software services to international clients. The dominant revenue generation
model during this period was to second software engineers (sometimes pejoratively
referred to as body-shopping) to overseas client organisations to work onsite in client
projects. The fundamental value proposition of the industry was its ability to “deliver” a
working team of professionals capable of undertaking any software engineering task. The
projects were conceived, designed and managed by client organisations while Indian
software professionals worked on specific “tasks” assigned to them. A few Indian firms
(for example Sonata Software and Wipro) attempted to develop software products. But
they failed in part due to the shallow domestic market, and in large part due to the
unavailability of risk capital to sustain investments in product development and market
the product in international markets.

The policy changes that effectively de-linked the growth of the software industry from
the hardware industry resulted in large-scale entry of firms into the industry. Apart from
the entry of local companies (Satyam entered the industry in 1987), many multinational
companies established operations in India during this period. While US multinationals
such as Citicorp and Texas Instruments (TI) set up captive software subsidiaries that
catered to their internal needs, the UK multinational British Telecom set up a joint

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Indian Software Industry: The Growth Saga Continues

venture with Mahindra and Mahindra, one of India’s established industrial houses. By the
end of the decade, NASSCOM had over hundred member firms.

Impact of Economic Liberalisation

The liberalisation of the Indian economy in 1991 after a severe monetary and fiscal crisis
provided a real fillip to the Indian software industry. The sustained depreciation of the
Indian Rupee against the US Dollar (Exhibit 1), a ten-year tax holiday for the industry
and the establishment of specialised software technology parksb that decreased the cost
while dramatically improving the quality of telecommunication access made the Indian
industry extremely competitive in global markets. Over the next five years, software
exports quintupled as the global market continued to experience severe shortage of
software engineers. Exports increased from $128 million in 1990-91 to over $700 million
in 1995-96. Bulk of the work undertaken by the industry during this period was the so-
called “low end project work” – legacy application development, migration and
maintenance, providing support to technology products in the mature phase of their
lifecycle etc. Typically, the tasks required knowledge of diverse software languages and
protocols, which was not easily available in the West. Even if it was available, such
expertise was rather expensive to acquire.

While onsite projects continued to be the dominant engagement model, the 1990s also
witnessed the emergence of offshoring of software “development”. The availability of
skilled software programmers at a substantially lower cost and the liberalisation of
policies on investments by multinationals made India an attractive destination for many
global companies. The costs of executing a project in India in an offshore model were
estimated to be one-third the costs of executing onsitec. But doubts about the ability of
Indian professionals and firms to execute without direct supervision led most firms to
adopt the onsite model. However, persons of Indian origind in senior management
positions in firms such as Nortel and Motorola, aware of the high quality of engineering
talent available in India, played a very influential role in persuading their companies to
offshore the requirements. While Motorola opted to offshore by setting up a captive
subsidiary, Nortel and General Electric (GE) preferred to outsource their requirements to
Indian companies. These companies encouraged Indian firms to set up software factories
that largely wrote routinised migration software. This format gained momentum and has
since emerged as a major growth driver for the Indian software industry.

Offshore Development Centres

An Offshore Development Centre (ODC), as the software factories have come to be


known, is a facility that a local Indian company sets up with dedicated personnel and
resources to support a customer’s requirements. In return, the customer commits to buy a
b
In 2005, there were Software Technology Parks (STPs) in 39 locations across the country. Some of the
STPs like the ones in Bangalore, Gurgaon (near Delhi), Hyderabad etc have grown to become ‘dynamic
industry clusters’ with large-scale participation of both domestic and multinational firms.
c
Cost of one man year of onsite work was $90,000 while cost in the offshore model was $30,000.
d
They were typically alumni of elite Indian engineering schools. Their role has not been well-documented.

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Indian Software Industry: The Growth Saga Continues

minimum amount of services from the Indian service provider over an extended period of
time. The relationship between the client and the service provider is governed by a master
service agreement between the two parties5. The agreement provides for, among others, a
billing rate that covers cost of time and other resourcese used by the service provider. The
billing rate, often standardised on a person-hour basis, is used to charge the client for
services provided to the client on all “projects” executed during the currency of the rate
agreement, usually a year. Thus, for each project, negotiations between the two parties
are restricted to the resources and the time required for that specific project.

Typically, the routine and manpower intensive latter phases of the software development
process such as low-level design, coding, testing and support were carried out in the
ODCs. The early stages of the process such as conceptualisation, requirements analysis
and high-level design were executed in the client’s premises by its team along with
personnel deputed onsite by the service provider. The unbundling of the development
process required strong coordination between the onsite and the offshore teams along
with tight integration of the software development effort. While the service provider’s
personnel in the onsite team facilitated coordination, definition of and strict adherence to
the development processes became the key lever to achieve integration. Initially, most
firms aligned their process to the standards specified under the International Standards
Organisation (ISO) 9000 framework. Later, the Indian software industry embraced the
Capability Maturity Model (Exhibit 8) proposed by the Software Engineering Institute of
Carnegie Mellon University in the United States. Over time this model (popularly known
as the SEI-CMM) evolved as the international standard for software service organisations
because of its greater rigor and utility. By the end of the nineties, five of the first ten
software companies to be awarded CMM Level 5 certification in the world were based in
India and in 2005, the largest number of CMM Level 5 certified software companies
were located in India (Exhibit 9).

Over the years, most large Indian service providers such as Wipro, Infosys and TCS set
up multiple ODCs within their organisations. Likewise, multinational companies such as
GE, Nortel etc established ODCs in several Indian software services organisations. As a
consequence, the share of offshore revenues in total industry revenues increased steadily
(Exhibit 1). The offshore component would have perhaps grown even more rapidly but
for the big and predominantly onshore oriented Y2K (Millennium) bug opportunity that
came the industry’s way in the mid-1990s.

The Take Off


The Indian software industry got its first big growth opportunity with the realisation of
the ‘Year 2000’ (Y2K) problem in software applications deployed across the world. Put
simply, the problem was brought about by the absence of the two-digit century value in
the date field in computer systems and applications. To fix the problem, programmers
e
In many cases the client also funds investment in specialised infrastructure. For example, Nortel provides
its service providers with its own proprietary telecom hardware that are used, among other things, for
“testing” the software developed for it.

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Indian Software Industry: The Growth Saga Continues

had to change the way the system referred to dates, examine each line of code and correct
every reference to the dates. A typical Y2K project had nine phases (Exhibit 10). While
technically not very demanding, the solution required a large number of skilled personnel
and strong project management capability.

Companies especially in the banking and insurance sectors spent billions of dollars
worldwide to fix the problem. Such huge spends enabled many Indian firms to scale up
their operations. In 1997-98 alone, an estimated 30% of the Indian software programmers
were working on Y2K related projects.6 Overall, the Indian software industry earned an
estimated $2.5 billion from the Y2K opportunity.7

More importantly, the Y2K opportunity enabled the Indian software industry to
demonstrate, initially its problem solving capability, and later its project management
capability. At first, clients managed the Y2K projects and Indian firms just provided the
requisite personnel. Subsequently, towards the end of the millennium, many clients,
perhaps in recognition of the latter’s growing maturityf, handed over the management of
the entire project to Indian companies. Such contracts, coupled with the process
management skills acquired during execution of projects in the ODCs, enabled Indian
companies develop generic project management skills and thereby sustain growth even
after Y2K remediation and other one-time big windows of opportunity like euro
conversiong ended.

The NASSCOM-McKinsey Study

NASSCOM, the trade body and chamber of commerce of software and services industry
in India, played a significant role in the growth of the industry. In addition to playing the
traditional role of advocacy - lobbying to influence government policies - it furthered the
cause of the industry in many novel ways. These included establishing the brand equity
of India as a premier global sourcing destination by organising seminars in various
countries; representing the industry in inter-national events such as CeBIT, Comdex etc.;
enabling transfer of best practices among various members by creating multiple platforms
for active exchange of information and practicesh; accessing world-class research and
market intelligence services; benchmarking global competition by seeking advice from
leading analysts and consultants; and jointly undertaking research studies with best in
class companies in various areas of business, technology and strategy research.

f
The clients however sought to protect themselves by including a penalty clause in the contract for lapses
in delivery time and quality.
g
On 1st January 2002, the Euro became the official currency of Europe, and it was mandatory for
companies based in the countries of the European Union to record all their transactions in the Euro in
addition to whatever other currency they used. Thus, software applications had to be converted to become
Euro-compliant. The core logic of applications had to be changed to incorporate both two-currency
accounting and inter-currency transactions. (“Year 2000, The Day After”, Business Today, 22nd Sep. 1998)
h
For example it had forums for exchange that included a Quality Forum, a Products Forum, an MNC
Forum, a SME Forum, a Cyber Security and Compliance Forum and International Policy Forum

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Indian Software Industry: The Growth Saga Continues

Noteworthy among NASSCOM’s several activities was the study it instituted with
international strategy consulting firm McKinsey and Company in 1998.

The study, even as it highlighted India’s emergence as a major destination for software
services (Exhibit 11), warned the industry about the impending dramatic shift in demand
away from old generation legacy/client services – the Indian industry’s dominant source
of revenue at that point in time - towards new generation services centred around the
Internet (Exhibit 12). The study argued that the Internet would radically transform
enterprise IT architecture and redefine the way business is conducted. It found the
emphasis within IT departments of companies in the advanced countries shifting to the
“edge” of the enterprise to facilitate superior interaction between businesses, suppliers
and customers. Consequently, the study expected IT spend among potential customers of
the Indian software industry moving away from “back-office” applications towards e-
commerce and front-office applications such as logistics, supply chain, sales and
customer management. Following this view, it identified, among others, web-enabling
legacy systems and development of e-commerce applications, as opportunity areas for the
Indian software industry. It also concluded that to exploit emerging opportunities in the
web-applications and e-commerce domains, Indian firms would have to modify their then
prevailing offshore model (Exhibit 13).

The study projected export revenues of $50 billion by 2008 provided the industry
redefined its value proposition. It argued that the industry’s basic value proposition of
being a “skill surplus” country had served it well until then. However, it believed, future
growth lay in transforming into a “hub” for software development rather than remaining a
country to source people from. To emerge as a hub, the industry had to grow its offshore
operations. However, it said, many companies with little or no experience in offshore
outsourcing doubted the Indian industry’s capability to meet those requirements on a
sustained basis. It cautioned Indian firms to tread carefully, lest they end up damaging
their reputation by attempting to offshore unsuitable projects.

Focus on Quality

Recognising the changing nature of demands that new opportunities imposed on them -
the “evolutionary” nature of projects and the attendant potential for “scope creep”i -
Indian firms intensified their commitment to software process discipline. They were
aware that frequent changes in scope, if not managed well, could add cost to the
development cycle and make the offshore initiative less valuable overall. They realised
that using standard processes and methodologies such as Project Tracking and Oversight
Charts (PTO) and Quality Charts8 (Exhibit 14) would be the best way to mitigate the
corresponding risks. They further supplemented process control mechanisms with weekly
and monthly review meetings in which they evaluated the performance of every project
on a number of metrics that included: errors per line of code, in process defects, rework
costs before and after user acceptance testing (UAT), first pass user acceptance, cost
overruns etc.

i
“Scope Creep” is the industry terminology for frequent changes in scope. Often, customers made changes
to their initial specifications even when projects had progressed to the design and implementation stages.

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Indian Software Industry: The Growth Saga Continues

To specifically manage requests for change in specifications after commencement of


projects, they set up ‘Change Control Boards’9. These Boards documented the requests
for change, evaluated the impact of all change requests on schedules and effort and most
importantly communicated this impact to customers. The last step was critical for smooth
execution because, in addition to the stereotypical challenges imposed by language and
cultural differences between the client’s team and the Indian company’s team, client
organisations often operated at much lower levels of process maturity than did the Indian
service providers. Giga Information Group commented10:

For offshore vendors in India, quality is a key differentiator. Few vendors or user
companies in the United States or Europe can compete with Indian firms in the
quality category.

Further, an offshore relationship is not an easy one to manage. It requires constant


attention11. Enterprises typically underestimated the management effort required to
successfully execute an outsourcing contract. This situation arose in part because of a
lack of understanding of the boundaries of the relationship between the client and service
provider. The absence of clear definition and demarcation of responsibilities between the
two parties coupled with the urge to reduce total cost by cutting overheads allocated to
the projects resulted in the initiative being “under-managed”.

To ensure that the projects were not under-managed, leading firms such as Wipro, TCS
and Infosys went beyond the SEI-CMM Level 5 certification and extended quality
standardization to a host of other organisational processes. They embraced the newer,
multifaceted CMM assessments such as People-CMM (P-CMM) and CMM-Integrated
(CMMI) into their delivery processes. They also sought to achieve continuous
improvement in their operations by integrating Six Sigma methodologies into their
management processes (Exhibit 15). Often, leading Indian firms applied their process
management expertise to further re-engineer client work and deliver savings much higher
than originally contracted. Wipro, for example, according to Forester Research, achieved
an additional 10% to 15% increase in application maintenance productivity by applying
its quality methodology and by consolidating redundant program applications12.
Impressed by the sustained improvements in their delivery capabilities and the
continuous reductions in cost of services achieved by Indian firms, Forrester Research
commented13:

Software development is a science in India, not an art. The top-tier Indian vendors
collect metrics and use them effectively to improve. They are constantly
measuring themselves against themselves.

Listing in US Capital Markets

In March 1999, Infosys became the first Indian company to be listed on NASDAQ.
Infosys started preparing for the listing a few years in advance when it started declaring
its results under both the Indian GAAP and the more stringent US GAAP principles.
Within the next couple of years, some more Indian software firms listed their stock either

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Indian Software Industry: The Growth Saga Continues

on the NASDAQ or the NYSE. The adoption of international standards of information


disclosure by software firms distinguished the software services industry from other
industries in India.

While the ostensible reason for the listing was to raise capitalj to fund acquisitions, these
firms also sought to leverage the listing to build reputation capital. Nandan Nilekani,
currently the CEO of Infosys Technologies said14:

We wanted to be recognised as a global company, and it was imperative that we


get listed on the largest and deepest capital markets in the world.

International listing ensured that the listed firms came within the radar of international
technology analysts such as IDC, Forrester Research and Gartner and of equity analysts
at Wall Street. The analysts started tracking the performance of not only the listed
companies but also the entire industry, resulting in high visibility and credibility for the
Indian software industry and providing it with a cachet of being global and world class.

Listing in US capital markets had yet another beneficial impact. The listed firms could
now attract international talent by offering attractive stock options to potential
candidates. These companies had successfully employed stock options to attract and
retain talent in India. Like other high growth industries, the Indian software industry had
to grapple with the problem of high attrition. The growth of captive subsidiaries of
companies such as Microsoft, Oracle, HP, Philips etc. and entry of global service
providers such as IBM, Accenture etc. provided software professionals with opportunities
to move across organisations in the industry. Many highly skilled professionals were also
attracted towards working directly for client organisations overseas leading to flight of
talent from Indian firms. Employee costs skyrocketed and attrition rates soared. To
combat these phenomena, leading Indian firms such as Infosys, Wipro etc started offering
employees stock options with vesting spread over several years. The rapid appreciation of
equity prices of these companies made many of their employees millionaires – yet
another phenomenon hitherto unheard of in Indian industry.

The Slowdown

After a decade of uninterrupted growth, the Indian software industry experienced a


slowdown in growth rate in 2001 for the first time in its short history. A global recession
led by a downturn in the US economy; the “reluctance” among firms to aggressively
pursue offshoring after the September 11 terrorist attacks; and the dot-com implosion
together impacted the growth and profitability of the industry. Billing rates came under
severe pressure, in part due to heightened rivalry among service providers and in larger
part due to the sameness of the value proposition of rival firms. The industry attempted to
sustain its growth by widening its geographic footprint. However the opportunities for
growth available in Europe and Japan, the two geographies that the industry focused on,
were not sufficient to offset the decline in growth rates in the US market, its traditional

j
Infosys raised $70.38 million by issuing 2.07 million American Depository Shares (ADS). Each ADS was
equal to half a local share. (Source: Infosys Annual Report 1998-99)

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Indian Software Industry: The Growth Saga Continues

stronghold. The smaller firms were particularly hit hard as size and reputation became
default decision drivers among clients.

Fortunately, the slow down did not last very long. By 2003, growth rates bounced back.
However, the market context had changed. First, the industry did not have large one-time
windows of opportunity such as Y2K. Second, competition had become more intense
both because of the strategic sameness of Indian firms and the entry of global majors
such as IBM and Accenture through their back-end units in India. Third, customers
changed the way they bought IT services. They centralised purchases, rationalised the
vendor base and realising that their spending in the past had not been very productive,
and perhaps even excessive, they focused on return on IT investments. Clients no longer
undertook projects to “keep up with their competitors” or because a new technology had
become available.

However the changed context also threw up new growth opportunities for the Indian
industry. For example, even though the pure play e-business firms had failed, the vision
of e-commerce had not. The so-called “brick and mortar” companies expanded their
vision into areas such as CRM and SCM, thereby opening up new avenues of growth for
service providers. Additionally, cost pressures and regulatory discontinuities in the West
led to opportunities in healthcare and retail verticals. The Indian industry seized these
opportunities and grew. While traditional service offerings in custom software
development and application maintenance continued to be the core area of focus, firms
expanded the breadth of offerings to include package implementation and support, R&D
services, data and application integration, IT consulting etc.

The Indian software services majors such as Infosys, TCS and Wipro, also started
investing heavily in sales and marketing and brand building (Exhibit 16). They set up
new offices or strengthened existing offices, organised customer meets and participated
in or sponsored technology seminars. However, even as they embarked on these efforts, it
was clear that they had to fundamentally reinvent themselves to stave off the growing
competitive pressure from global service majors.

The Global Delivery Model

Traditionally, the Indian services majors had distinguished themselves on their ability to
deliver services from an offshore locationk. In sharp contrast, the global majors had
differentiated themselves on the basis of their “domain expertise” and their ability to
serve clients locally i.e. wherever the client happened to be. However, shifting industry
economics was forcing the global companies to ramp up their low cost remote delivery
capabilities. Thus it became clear to the Indian services majors that to retain their
competitiveness, they had to evolve their model from a simple “one-hop offshoring” one
(for example from US to India) to a more sophisticated and globally distributed delivery

k
According to Forrester Research, the superior capabilities of the Indian majors were visible to the clients.
It cites the example of a client whose time and budget variance dropped from 20% to less than 1% when
the application work was shifted to Infosys from IBM.

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Indian Software Industry: The Growth Saga Continues

model. They did so by unbundling the service delivery process into different components
and by delivering them from multiple locations. For example, in a package
implementation project, they did process mapping and solution definition onsite at client
location; performed the tasks of prototype building, high level design and implementation
support either at an “onshore”l or a “near shore”m location; and executed the balance
tasks such as development of custom components and integration interfaces at a low cost
offshore location (Exhibit 17). As compared to the global majors, Indian companies
executed a greater fraction of the software development process offshore (Exhibit 18).
While India continued to be their largest offshore operation, many Indian companies set
up facilities in other low cost countries. For example, today TCS has operations in
Hungary and Uruguay and Infosys has operations in China.

In addition to morphing their delivery model, leading Indian players began to bolster their
domain expertise with a view to deepen their engagement with clients. They set up
practice focused competence centres to develop expertise in select industry verticals. Like
their US based competitors, most large Indian firms reorganised themselves and began to
go to market by verticals. Some like Infosys went one step beyond and set up a separate
consulting unit called Infosys Consulting. Staffed with people recruited from leading
global consulting firms, the mandate to the unit was to enable Infosys achieve a
significant presence in the IT consulting market that was undergoing a paradigm shift.
The traditional three stage “sequential” approach was giving way to a more integrative
model of consulting (Exhibit 19). Looking for “tangible cost benefits” from consulting
led initiatives, clients expected the consulting units to deliver solutions end-to-end.

To enhance their end-to-end service delivery capability, the Indian majors ventured into
the rapidly growing BPO space. Until the entry of large Indian companies, much of the
work undertaken by the Indian BPO industry was voice-based work in the area of CRM
(inbound/outbound call centres). Sensing an opportunity to leverage their skills in
managing offshore projects and to grow off-shoring of core business processes such as
payroll, policy administration, accounts and reconciliation etc., the Indian majors entered
the BPO industry hitherto dominated by captive centres of multinationals such as GE.
Their entry strategies varied. While Infosys set up a green-field venture, TCS opted for a
joint venture and Wipro acquired Spectramind, the then third largest Indian BPO
company.

The Emerging Landscape

In 2005, the Indian software industry comprised both home-grown companies and
subsidiaries of multinationals. Among the Indian companies, the leading domestic firms
(top 5) commanded over 40% of the industry’s export revenues. The tier two domestic
firms, nearly 100 of them, together had a 16% share of export revenues. While a majority
of the second tier firms were essentially smaller scale versions of the broad based tier-one

l
An onshore facility (in a client’s country) was different from an onsite (in a client’s office) location.
m
A near shore location was typically located close to a client’s country in a neighbouring country. For
example, Canada was a near shore location for US based clients.

12
Indian Software Industry: The Growth Saga Continues

service providersn, a few specialised in select industry verticals such as financial services
(i-flex Solutions) and telecommunications (Sasken Communication Technologies). The
bottom of the pyramid comprising more than 3000 small companies, accounted for the
rest of the industry’s export turnover (Exhibits 20 and 21).

The subsidiaries of multinationals companies included both captive development centres


of companies such as Microsoft, Intel, Motorola, TI, Adobe, HSBC etc., and offshore
facilities of global service majors such as IBM, Accenture etc. The former accounted for
a significant 31% share of the industry exports15. However their share was expected to
stabilise, if not decline, at current levels due to the new trend of sale of captive centres by
the parent companies. For example, the Swedish telecommunications equipment
company Ericsson sold its captive R&D Centre to Wiproo. CLSA reported16:

We see mature captive units going through a process of questioning their cost
model, which is almost universally higher than Indian vendors (by up to 20%). At
the same time, higher confidence in offshore, increased skill sets of Indian vendors
and the desire of some clients to realise investment gains from their efforts would
drive the trend towards captive hive offs.

Competition between Indian and global majors was expected to intensify with the entry
of Indian majors into the infrastructure management space and other value added services
like helping client organisations to effectively outsource - the traditional forte of global
service providers. The jury is out on which set of majors would emerge as the leaders in
future. In a detailed study using 60 different criteria, Forrester Research compared the
onshore majors (IBM, Accenture and EDS) with the offshore majors (TCS, Infosys and
Wipro). Commenting on their evolution towards a more distributed, process-centric, low
cost global delivery model, Forrester concluded17:

While all six vendors are making significant investments in skills, processes, tools,
locations, and infrastructure, none is fully entrenched in the leader category. The
offshore players need to add more domain expertise and improve account
management to better interface with the business buyer. The onshore players need
to fully embrace CMMI and encourage their account teams to more consistently
utilise its low-cost GDM capabilities.

CLSA compared the performances of the global big three pure play services companies
(Accenture, EDS and CSC) with that of the big three Indian companies (TCS, Infosys and
Wipro) and found something startling. While the global vendors were much larger than
the Indian vendors in revenue terms but their profits were not! (Exhibit 22) CLSA
observed18:

n
Companies such as Patni Computer Systems, iGate Global Solutions, Mphasis BFL, MindTree Consulting
are illustrative examples.
o
Other examples are Lucent’s divestiture of it captive centre to Hughes Software (now Flextronics) and
GE’s sale of its captive BPO facility to private equity investors, Oakhill and General Atlantic Partners.

13
Indian Software Industry: The Growth Saga Continues

Compared individually, EDS and CSC are already lagging in profit terms. While
behemoths such as IBM Global Services would stay much ahead in the foreseeable
future, the pure-play global vendors such as Accenture, EDS and CSC will be
increasingly hard-pressed to manage their operations profitably in a changing
pattern of services spending.

The change CLSA was referring to was in the nature of deal structures in large
outsourcing contracts, typically multi-$100 million plus contracts. Until now customers
outsourced their entire IT management to a single vendor in a mass “re-badging” type of
deal. Increasingly, however, along with cost, customers were looking for best-of-breed
solutions and were willing to engage with multiple vendors to get the best results. This
trend of unbundling of deal structures worked in favour of Indian majors as they could
now bid for parts of large outsourcing contracts that they could not previously participate
in. In September 2005, TCS and Infosys carved out nearly a fifth of the Dutch bank ABN
Amro’s $2.34 billion technology services contract between them. While IBM got the
lion’s share of the deal ($1.8 billion), the two Indian companies beat all other global
majors including Accenture to win the $400 million (TCS: $260 million and Infosys:
$140 million) application development, maintenance and support modules of the deal.
The ABN Amro contract was the largest till date for both companies. N. Chandrasekaran,
Executive Vice President of TCS’ global operations said19:

The rules of the game have changed. Now everybody is invited to the (high) table.

Invitations notwithstanding, it was not clear whether Indian firms had the winning edge
in the emerging battle. They were disadvantaged on two counts. First, they did not, as yet,
have matching domain expertise. Second, their relationships were largely confined to
Chief Information/Technology Officers of client organisations. They did not have strong
business relationships with other members in the top management of global companies.
Kris Wadia, associate partner, Accenture said20:

The quality of relationships we enjoy with CEOs, CIOs and CFOs gives us a huge
advantage. We may run across Indian firms where the client is looking to do some
stuff around the low-end, commoditised area. But by and large, because of the
quality of our relationships and the scale and range of our work, we don't see them
with the kind of frequency that everybody assumes.

But, Nandan Nilekani, CEO of Infosys, remained unfazed. He said21:

The MNCs have the business relationships, but their delivery has to be completely
redesigned. That is a much bigger challenge because there you have to completely
displace your people. When you move work from there to here, revenues go down.
The whole process is very traumatic for them. For us it (building the front-end) is
progress.

14
Indian Software Industry: The Growth Saga Continues

Exhibit 1
Indian Software Industry Revenue Trend

Indian Software Industry Size

25.0 5.0%

20.0 4.0%

15.0 3.0%
USD Billion

10.0 2.0%

5.0 1.0%

0.0 0.0%
1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005-
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E
Time

R e ve nue S ha re in GDP

USD Billion FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 E
IT Exports 0.49 0.74 1.11 1.76 2.59 3.40 5.30 6.20 7.10 9.20 12.00 15.20
IT Domestic 0.22 0.31 0.48 0.67 0.85 1.90 2.50 2.50 2.80 3.60 4.30 5.30
IT Total 0.71 1.05 1.59 2.43 3.44 5.30 7.80 8.70 9.90 12.80 16.30 20.50
GDP Share* 1.2% 1.5% 1.9% 2.7% 2.9% 3.2% 3.5% 4.1%
INR/USD 31.5 34.3 35.1 37.1 42.1 43.3 45.6 48.0 48.3 45.5 45.3

Source: (1) NASSCOM Strategic Review 2005 (2) Ghemawat 2002 (3) NASSCOM Newsline June 2005
Calculations for the period 1990-91 to 1998-99 done on basis of data available in (2)
Figures for 2004-05 and 2005-06E include authors’ estimate for domestic ITES-BPO, which has been
excluded from total domestic market
* Share in GDP represented above is of Total (Exports + Domestic) IT+ ITES Market

Offshore-Onsite Export Mix

Year FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY 01 FY 02 FY 03 FY 04 FY 05E


Offshore 38% 39% 40% 41% 41% 42% 43% 44% 55% 57% 64% 71%
Onsite 62% 61% 60% 59% 59% 58% 57% 56% 45% 43% 36% 29%

Figures include ITES-BPO export revenues – earned for services that are predominantly delivered offshore.
If ITES-BPO export revenues are excluded, offshore proportion increased from 33% (2000) to 50% (2004)
Source: NASSCOM Strategic Review 2005

15
Indian Software Industry: The Growth Saga Continues

Exhibit 2
Exports* by Service Offering

IT Exports by Service Line (USD Billion) FY01 FY02 FY03 FY04


Project Oriented Services 2.7 2.85 3.23 3.85
IT Consulting 0.05 0.05 0.08 0.12
System Integration 0.15 0.15 0.1 0.14
Custom ADM 2.50 2.65 3.02 3.54
Network consulting and integration 0 0 0.03 0.05
IT Outsourcing 1.75 1.80 1.94 2.45
IS Outsourcing 0 0 0.01 0.02
Application Outsourcing 1.7 1.75 1.85 2.16
Network Infrastructure Management 0.05 0.05 0.08 0.27
Support and Training 0.30 0.30 0.37 0.61
IT Training and Education 0 0 0 0.02
Hardware Support and Installation 0 0 0.02 0.04
Packaged Software support and Installation 0.30 0.30 0.35 0.55
TOTAL 4.75 4.95 5.54 6.91

Exhibit 3
Exports* by Geography
IT + ITES Exports by Region FY03 FY04
USD Billion Value Percentage Value Percentage
Africa 0.07 0.8% 0.08 0.6%
USA 6.46 67.7% 8.72 68.2%
Rest of Americas 0.13 1.3% 0.16 1.2%
Asia, Oceania and Middle East 0.76 7.9% 0.94 7.4%
Europe 2.12 22.2% 2.89 22.6%
TOTAL 9.54 12.80

Exhibit 4
Exports* by Verticals

IT+ITES Exports by Vertical (USD Billion) FY02 FY03 FY04


BFSI (Banking, Financial Services & Insurance) 2.70 3.74 4.74
Telecom (Services + Equipment) 1.16 1.25 1.66
Manufacturing 0.92 1.15 1.66
Healthcare 0.23 0.48 0.78
Retail 0.31 0.48 0.79
Others 2.39 2.50 3.16
TOTAL 7.70 9.60 12.80

* Figures for IT + ITES provided as robust data for IT Exports by verticals and by geography not available
* Source: NASSCOM Strategic Reviews 2003, 2004, 2005

16
Indian Software Industry: The Growth Saga Continues

Exhibit 5
Value of Offshore (IT and ITES-BPO) Sourcing of Services for 2004 and 2008

CY04 CY08E
USD Billion
Value Percentage Value Percentage
India 17.2 43% 48.0 51%
Canada 12.6 32% 20.9 22%
China 1.9 5% 5.0 5%
East Europe 1.8 5% 6.4 7%
Philippines 0.9 2% 2.6 3%
Mexico 0.5 1% 1.1 1%
Others 4.7 12% 10.0 11%
Total 39.6 94.0

Source: NASSCOM Strategic Review 2005

Exhibit 6
Manpower Growth
MNC Captives FY02 FY03 FY04 FY05E FY06E
Adobe 50 200 300 500 800
Intel 96 1,112 1,814 2,902 3,918
Microsoft 215 450 617 926 1,388
Motorola 800 1,200 1,500 1,800 2,100
Nortel 592 769 1,000 1,250 1,563
Oracle 2,000 2,700 6,000 7,500 9,000
Philips 671 748 937 1,175 1,470
SAP 300 500 1,300 2,600 4,000
Texas Instruments 650 700 950 1,300 1,750
Other Captives 14,840 22,060 38,275 55,049 70,153
Financial Service Captives 5,200 10,300 17,850 23,220 30,750
TOTAL CAPTIVES 20,040 32,360 56,125 78,269 100,903

Global Majors FY02 FY03 FY04 FY05 FY06E


Accenture 700 1,200 5,800 12,500 18,500
Cognizant 3,836 6,484 10,490 16,500 23,100
CSC 400 750 1,000 3,100 5,000
EDS 700 1,100 1,500 3,000 5,500
HP Services 2,969 4,140 5,550 8,840 10,840
IBM (incl PwC) 4,698 5,498 9,000 20,000 35,000
Total Global Majors 20,266 30,372 52,433 93,814 141,403

Indian Majors FY02 FY03 FY04 FY05 FY06E


TCS 18,000 24,383 31,472 43,268 55,768
Infosys 10,738 15,356 23,377 33,807 44,807
Wipro 9,626 13,474 19,202 26,702 35,702
Satyam 8,634 9,759 14,032 19,032 26,032
HCL Technologies 6,500 7,917 11,586 16,260 21,138
Total Indian Companies 141,642 167,506 186,728 246,061 307,291

Source: “Indian IT Services: Sector Outlook”, CLSA Asia-Pacific Markets Report, February 2005

17
Indian Software Industry: The Growth Saga Continues

Exhibit 7
Characteristics of Offshore Customer Segment

Customer or
Prospect Bystanders Experimenters Committeds Full Exploiters
Characteristics
Large scale apps
development and
Small 10-20 person management, remote
30-50 person mission
None to initial projects for monitoring and
critical development
Focus of efforts investment of conversion of older administration,
and maintenance
offshore’s potential apps or isolated new implementation and
programs
development upgrades of
packaged apps, and
BPO
Global sourcing is a
Uncoordinated Centralised and
Level of program core competence
None project-by-project dedicated program
management skills with documented
management management
best practices
Percentage of IT
services budget 0% 1% to 5% 10% to 30% 40% to 50%
going offshore
50% to 60% of 25% to 30% of 5% to 10% of Less than 5% of
Size of segment Fortune 1000 Fortune 1000 Fortune 1000 Fortune 1000
companies companies companies companies

Source: Offshore Outsourcing: The Complete Guide, Forrester Research, September 2004

18
Indian Software Industry: The Growth Saga Continues

Exhibit 8
Description of Capability Maturity Model

The roots of research in software maturity assessment can be traced back to the mid-1980s when the
Software Engineering Institute (SEI) at the Carnegie Mellon University, in collaboration with the MITRE
Corporation, began developing a framework for assessing the maturity of software processes within
organisations. From a first description in 1987, the framework has evolved over the years into the widely
accepted Capability Maturity Model (CMM) for software maturity assessment.

CMM has five maturity levels – Initial, Repeatable, Defined, Managed and Optimised. At Level 1, an
organisation’s software processes are ad hoc and occasionally even chaotic. At Level 5, continuous
improvement procedures enabled by the appropriate use of metrics are institutionalised. The following
table provides a summary of the key process areas considered within the CMM.

Maturity Level Key Process Areas


• Defect Prevention
Level 5 • Technology Change Management
• Process Change Management
• Quantitative Process Management
Level 4
• Software Quality Management
• Organisation Process Focus
• Organisation Process Definition
• Training Program
Level 3 • Integrated Software Management
• Software Product Engineering
• Inter-Group Coordination
• Peer Reviews
• Requirements Management
• Software Project Planning
• Software Project Tracking and Oversight
Level 2
• Software Subcontract Management
• Software Quality Assurance
• Software Configuration Management
Level 1 • None

Source: Motorola India Electronics Private Limited, IIMB Case, Ramachandran and Dikshit, 2002

19
Indian Software Industry: The Growth Saga Continues

Exhibit 9
CMM Level 5 Certified Companies in India

CMM Level 5 Certified Indian Companies

80

Number of Companies 76
60 70
60

40 50

20
20

0
5
00

01

02

03

04
99

O 0

01

02

03

O 4
9

4
0

0
-9

-0

-0

-0

-0

-0
b-

b-

b-

b-

b-
n-

n-

n-

n-

n-

n-
ct

ct

ct

ct

ct

ct
Fe

Fe

Fe

Fe

Fe
Ju

Ju

Ju

Ju

Ju

Ju
O

O
Source: NASSCOM Strategic Reviews 2001, 2003, 2005

Exhibit 10
Sample Y2K Project Time Line

4% 20% 20% 25% 15%


Project Examination, Analysis Modification Unit Test Systems
Scoping and Solution Design Test

1% 5%
Inventory Integration/User
Acceptance Test

1% 9%
Awareness Implementation Disaster
Recovery Documentation

Project Management (Adds 25% to Total Project Cost)

Source: “The Year 2000 Crisis: An Enormous Challenge That Must Be Addressed”, Gartner, March 1997

20
Indian Software Industry: The Growth Saga Continues

Exhibit 11
India Inc.’s Value Proposition in IT Software and Services

High

USA

People Sophistication India


• Number UK
• Cost
• Skills China
Indonesia Germany

France
Philippines Ireland

Singapore
Low

Low Vendor Sophistication High


• Number
• Quality

Source: Indian IT Strategies, NASSCOM-McKinsey Study 1999


Exhibit 12
Shift in Demand towards New Generation Services
Components
$562*
• Y2K
13 • Euro
Figures in USD Billion and % • Maintenance
81 • Migration
$353* • Development

15

• Internet
75 Application
Integration
• ERP/EAS
100% = $163* • Package/
Component
Implementation
46
• Package
• Legacy/Client Server Application
Services
46 Maintenance
• Web/Package based-
services 8 10 7
• Training & Education

1997 2004 2008

* Does not include total IT services spending, but only the fraction targeted by Indian companies
Source: Indian IT Strategies, NASSCOM-McKinsey Study 1999

21
Indian Software Industry: The Growth Saga Continues

Exhibit 13
Modifying the Offshore Model for New Generation Services

• Greater cross-
• Very detailed
specifications
$ enterprise involvement
• Higher demands on
• Long lead times
speed and
with limited
Legacy responsiveness
customer
interaction / client • Rapid iteration
server between
• High manpower New web-
systems implementation (build)
requirements / package- and operations (run)
based • More (initial) concerns
services about offshore bases

Traditional Modified
Offshore Model Offshore Model

Source: Indian IT Strategies, NASSCOM-McKinsey Study 1999

Exhibit 14
PTO Charts

1.50 Replan Req. & Effort


Project: XX Volatility
1.00
Proj Mgr: ABC
0.50 Req. Vol.
SSE: XX SSTE: YY
Effort Vol.
0.00
Project Start date: 31-Aug-98
98

98

99

99

99
/9

/9

/9

Date of SPMP baseline: 31-Aug-98


8/

9/

1/

2/

3/
10

11

12

No. of replans: 4
Date of Last revision: Staffing
3.5
Date of last replan: 16-Dec-98 3
2.5
Milestones Original Forecast Actual 2 Planned
1.5 Actual
Product Requirements Spec 30-Jul-98 23-Sep-98 12-Oct-98
1
Product Functional Spec 7-Aug-98 15-Oct-98 29-Oct-98 0.5 Attrition
Design 25-Sep-98 16-Dec-98 22-Dec-98 0
Coding 30-Nov-98 27-Jan-99 2-Feb-99
98

98

99

99

99
/9

/9

/9
8/

9/

1/

2/

3/
10

11

12

Integration Testing 4-Jan-99 18-Mar-99 17-Mar-99


System Testing (Development) 15-Feb-99 30-Mar-99 25-Mar-99 Cumulative
Alpha Release 31-Mar-99 31-Mar-99
40 Milestones
Patch Release 25-Feb-99 8-Apr-99 5-Apr-99
30
[Field Trial] 28-Apr-99
20 Planned

Project Key Factors Actual


10
TOP 3 RISKS: Probability Impact 0
8

8
98

98

99

99

99
/9

/9

/9
8/

9/

1/

2/

3/
10

11

12

Schedule Variance
2

CTR Factor
0
Weeks
8

98

99

99

99

2
/9

/9

/9
/9

9/

1/

2/

3/
8

10

11

12

1.5
1 -2
0.5 Bull's Eye
0 Variance
Goal Orig Fcst. -4

Source: Motorola India Electronics Private Limited, IIMB Case, Ramachandran and Dikshit, 2002
22
Indian Software Industry: The Growth Saga Continues

Exhibit 15
Executing with Quality at Wipro Technologies

People CMM
• Better Performance
PEOPLE • Strong sense of process
• Retention ownership
• Development • Highly motivated workforce
• Productivity
• Collaboration
Integrated CMM
• Repeatable, measurable and
predictable software
People
processes
• Increased use of metrics Six Sigma
• Reduced Defects
• Increased productivity
• Cycle time reduction
Process Continuous
Improvement

OPERATIONS STRATEGY
• Integration • Cost Reduction
• Low Total Cost of • Technology
Ownership Innovation
• Scalability • Time to Market Leader
• Flexibility • Quality Leader

Quality systems and processes address the three core processes


required for execution excellence and enable measurement of results

Source: Website of Wipro Technologies

Exhibit 16
Marketing Spends of Major Indian Companies

FY00 FY01 FY02 FY03 FY04 FY05


Infosys 4.7% 5.0% 5.0% 7.4% 7.0% 5.7%
Satyam 4.3% 1.8% 1.7% 1.7% 1.9% 1.5%
Wipro NA NA NA 6.0% 8.3% 5.9%

Figures for: Infosys - as fraction of its total revenues; Satyam - as fraction of its software revenues; Wipro -
as fraction of its Global IT & Products and India-Asia Pac IT & Products Divisions
Source: Official Websites of Infosys, Wipro and Satyam

23
Indian Software Industry: The Growth Saga Continues

Exhibit 17
Global Delivery Model of Infosys Technologies

Strategy and
Development and SI and package IT Outsourcing,
Roadmap
Integration implementation BPO and AMO
Definition
Client interaction,
Client Interaction, Architecture process mapping, First level support,
interviews, reviews, requirements, change solution definition, facilities support,
Onsite
program leadership, management and architecture, change program
goal setting implementation and program management
management
Requirement
analysis, high level Prototype building,
Near site support
Analysis and design, prototype high level design,
Near-Site centres, service
synthesis building, implementation
redundancy
implementation support
support
Background Custom components,
Detailed design, code Large offshore
research, thought integration
Offshore development, testing centres, core service
leadership and interfaces, reports
and integration delivery
information support building

SI: System Integration; AMO: Application Maintenance Outsourcing


Source: Infosys Technologies Limited

Exhibit 18
Process Differential between Indian and Global Majors

Architecture and Consulting Team


Indian Global
Start of Project A Typical Outsourcing Workflow End of Project Vendors Vendors

Functional Design Business Testing


Onsite

Architecture Design Full Assembly Testing

Technical Design Testing for Components

Offshore
Application Development

Development and Technical Team

Source: “Indian IT Services: Sector outlook”, CLSA Asia-Pacific Markets Report, February 2005

24
Indian Software Industry: The Growth Saga Continues

Exhibit 19
Traditional Consulting Approach and the New Paradigm

Consulting

Strategy
Process Design Hand-off to implementation
Architecture team / separate vendor Consulting

Implementation
Integrated Teams
Full responsibility, end to end
Design Use of global delivery bases
Develop Hand-off to internal operations
Deploy or separate vendor

Operations Implementation Operations

Maintain
Enhance
Upgrade

Traditional Model New Paradigm

Source: “Indian IT Services: Sector Outlook”, CLSA Asia-Pacific Markets Report, February 2005

Exhibit 20
Evolving Structure of Indian IT and ITES-BPO Exports Industry

Annual Turnover Number of Companies


(INR) FY01 FY02 FY03 FY04
Above 10 billion Tier 1 5 5 7 9
5-10 billion 7 5 5 8
2.5-5 billion Tier 2 14 15 15 24
1-2.5 billion 18 27 41 53
500 million – 1 billion 25 55 71 56
100-500 million Tier 3 193 220 244 367
Below 100 million 544 2483 2644 2653
Total 806 2810 3027 3170

Note: MNC captives account for about 31% of the industry turnover (exports for India)
Source: NASSCOM Strategic Review 2005

25
Indian Software Industry: The Growth Saga Continues

Exhibit 21
IT Software and Service Exports (excluding ITES-BPO)

In USD Million FY05 FY04 FY03 FY02


TCS 1644 1199 941 813
Infosys 1502 1026 734 535
Wipro 1198 854 577 481
Satyam 745 539 415 357
HCL Technologies 588 413 317 277
IBM Global Services 412 NA NA 160
Patni Computers 342 266 189 153
i-flex Solutions 245 168 123 82
Mahindra BT 201 159 131 113
Polaris Software 154 126 76 52
Perot Systems TSI 145 119 93 94
Hexaware 129 82 53 50
Larsen and Toubro 123 77 48 51
Mastek 121 83 78 54
iGate Solutions 118 106 87 84
Siemens 111 NA NA NA
Mphasis BFL 103 86 70 66
Tata Infotech 102 75 53 NA
NIIT 99 117 88 84
Flextronics 94 70 44 NA

Source: (1) NASSCOM Strategic Reviews 2003, 2004 and 2005 (2) NASSCOM Newsline June 2005

Exhibit 22
Profit Convergence of Indian and Global Majors

USD Million FY00 FY01 FY02 FY03 FY04 FY05 FY06*


Accenture 2463 1057 244 498 690 755 817

CSC 233 344 440 519 605 683 831


123
EDS 1143 1363 1116 (1698) 381 643

Global Big 3 3839 2764 1800 (681) 1418 1819 2291

TCS 170 232 226 351 512 722 869

Infosys 137 169 197 271 414 596 740


376
Wipro 146 186 170 224 512 648

Indian Big 3 453 587 593 846 1303 1830 2257

* Estimate for FY 2006


Source: “Indian IT Services: Sector Outlook”, CLSA Asia-Pacific Markets Report, February 2005

26
Indian Software Industry: The Growth Saga Continues

Endnotes
1
“Technology: IT Services”, Goldman Sachs Global Investment Research, September 2004
2
Website of Infosys Technologies
3
CLSA Asia Pacific Report, February 2005
4
Forrester Report Offshore Outsourcing: The Complete Guide, 2004
5
Mukherji and Ramachandran, “Complementary and Continuous Innovation: Case of the Indian software
industry”, Journal of Academy of Business and Economics, 2004
6
“Year 2000, The Day After”, Business Today, 22nd September 1998
7
NASSCOM Strategic Review 2001
8
Ramachandran and Dikshit, Motorola India Electronics Private Limited, IIM Bangalore Case, 2002
9
ibid
10
“Critical Success Factors for Offshore Outsourcing”, Giga Information Group, Inc., December 12, 2002
11
“Criteria for Selection: Offshore Outsourcers”, Giga Information Group, Inc., January 2, 2003; “Demand
Analysis of Offshore IT Services”, Gartner Dataquest August 2002 etc.
12
“Offshore Outsourcing: The Complete Guide”, Forrester Research, September 2004
13
“Indian Outsourcing in the 21st Century: Benefits and Risks”, Forrester Research, September 2003
14
Eric Pfeiffer, “From India to America”, Forbes.com, 23rd August 1999
15
NASSCOM Strategic Review 2005
16
CLSA Asia Pacific Report, February 2005
17
“Low-Cost Global Delivery Model Showdown”, Forrester Research Report, August 2004
18
CLSA Asia Pacific Report, February 2005
19
“The Face-Off”, Business World, 26th September 2005
20
ibid
21
ibid

27