IT

1
KEY POINTERS TO UNDERSTAND THE IT INDUSTRY
•Global IT industry Size and Segmentation
•Size of Indian IT industry and share of different segments
•Key performance parameters
•Recent trends in the industry practices
•Factors could affect the growth and the profitability of an IT Services
Company and how Indian IT companies are affected by it
•How to overcome the risks and sustain growth?
•Impact of cloud on Indian IT Services industry

2
GLOBAL SIZE AND SEGMENTATION
Indian IT industry Overview
 Performance parameters

5
EXPORTS REVENUE GROWTH
Offshore Billing Rate
Utilization Rate
Tata Consultancy Services Ltd
 KEY INDUSTRY TRENDS

10
Foreign IT service providers closing arbitrage gap
•Large MNCs like IBM, Accenture, Cognizant, and Capgemini - setting
up sizeable development centres in India, the cost arbitrage enjoyed by
Indian IT services companies so far, has shrunk significantly.
•Global IT companies have expanded in India both organically and
inorganically.

MNCs increasing focus on lower-value contracts

•Multinational IT services companies, which historically focused on large

deals, are now looking at smaller deals with shorter turnaround periods
to support growth.
•This will land them in direct competition with Indian IT services
companies across the value chain.

11
Increasing SLA driven business models
• Indian IT services companies have been slowly but surely moving away
a from a time and material based business model to a fixed price and
service-level agreement (SLA) based model.
•The global slowdown also gave this trend a push, as clients looked to
save costs.

Adoption of cloud-based services on the rise

•According to TPI, an organisation who tracks IT deals in global market,

the number of cloud-based service contracts awarded to Indian IT
vendors increased by 100 per cent y-o-y in 2011 to 220 contracts and it is
estimated to further rise to 300 contracts in 2012.

12
Sharp rise in contract expiries leading to increased vendor churn
•The global outsourcing industry is going through a transformational
phase where more contracts are expiring.
•In such a scenario, clients try to renegotiate contracts to suit their
business needs.
•Hence, while renewing their contracts clients are looking to optimize
costs by reducing billing rates or getting more value for the same money.

13
 Analysis of Risk

14
Type of Risks
• CURRENCY RISKS
• POLITICAL RISKS

• COMPETITION FROM LOW COST COUNTRIES

• GEOGRAPHICAL RISKS
• VERTICAL RISKS

• SERVICE LINE RISKS

15
Which of these risks affect the Indian IT companies?

• High
• CURRENCY RISKS
• About 70% of industry revenues are
from exports

• POLITICAL RISKS • High

• COMPETITION • High
FROM LOW COST • Competition from countries like
COUNTRIES Vietnam, philipines, China etc
• High
• GEOGRAPHICAL RISKS • 80% of exports to US and UK
Indian companies are affected by all these risks in a big way

• High
• VERTICAL RISKS
• About60% of industry revenues are
from 2 verticals: BFSI and Telecom

• High
• SERVICE LINE RISK • More than 90% of the revenues
come from low-end service lines
OVERCOMING RISKS

• Difficulty of overcoming a risk involves:

• How much of existing competencies can be transferred?

• How much of new learning or effort or investment is involved?

OVERCOMING RISKS
Geographical Risks

BFSI BFSI
Application Development Application Development
US Germany

• This involves understanding the practices (cultural, business and

regulatory) of the new geography
•Existing competencies in Vertical and Service Line will be helpful to
over come this risks
OVERCOMING RISKS
Vertical Risks

BFSI Healthcare
Application Development Application Development

• This involves understanding the new vertical

•Services Line Competencies can be used to over come this risks
 Service Risks

Application Development, IT Consulting

IMS, Support etc

• This risk is very difficult to overcome because:

 Very little of existing competencies can be transferred
 Tough competition from big players (Accenture,
EDS (HP) etc)
 Brand positioning of Indian IT players
• But it is important to overcome the service line risk as:
•This involves moving up the value chain (removing other risks is
more a horizontal movement)
• Billing rates can be improved only by moving up the service line risk
 Products

Existing New

Market Penetration Product

Development
Market Segments

Existing

Market Product Proliferation

New Development
Cloud Computing
TRADITIONAL IT SPENDING
CLOUD CHARACTERISTICS

The cloud platform

comprises of three kinds of

services:

•Software as a Service (SaaS)

• Infrastructure as a Service

(IaaS)

• Platform as a Service

(PaaS)
NEW ROLES UNDER CLOUD
BENEFITS OF CLOUD TO USER
•Cloud services offer trememendous flexibility of usage and scalability,
which, if applied effectively, can reduce IT costs for a company
considerably.
•The flexibility of cloud services is highly suited to web sites and web
services, which have peaks and troughs of data usage.
•For example: During the Indian Premier League cricket tournament for
example, sports websites will witness a flurry of activity and will require
further processing and data storage support during that period.
•Small and medium enterprises (SMEs) will be more pliable to move to
cloud services due to the easy access to enterprise applications which is
provided by a service provider over the cloud.
BENEFITS OF CLOUD TO USER

• Other advantages of cloud services include protection from technology

obsolescence as the cloud provider takes care of the upgrades in the

software and incurs regular maintenance.

•The application can be used on a pay-per-use basis as the cost of the

software is amortised over a large number of user companies by the

service provider.
BENEFITS OF CLOUD TO VENDOR

•For the vendors and service providers, the opportunity comes from
access to a whole new market – the SMEs, who are averse to making
significant upfront investment in IT.
•This would result in overall market expansion for the vendors, who had
so far achieved limited success in targeting this segment.
BENEFITS OF CLOUD

and Reduction in costs

CONCERNS OF CLOUD
For User Organizations For Vendors

• Security a concern in shared

resources
• Bugs in platform service or software
application hurts more than one user
•Connectivity issues will hamper
productivity
•Loss of control on data in case of
server abnormalities
•Sunk costs incurred on IT spends
IMPACT OF CLOUD ON LARGE ORGANIZATIONS
• In the short-term Large companies that require a substantial amount of
customisation will not adopt cloud services easily.
•IT service companies, who provide enterprise application services (like SAP or
Oracle) to large companies, may not see much change in their business models
in the short-term.
•Over time, once the useable life of their IT infrastructure comes to an end, they
would be more willing to migrate to cloud services for their non-critical
applications like payroll, admin etc
IMPACT OF CLOUD ON SMEs
•Rapidly growing cloud market among SMEs is already compelling traditional
IT service providers to rethink their business models to include pay-per-use
models.
• Software service vendors, makers of ERP software, who deal in on-site
software, are already facing severe competition from application services over
the cloud.
•Non-critical services like those for CRM, payroll etc have been adopted by
SMEs.
•ERP software developers like SAP have now ventured into making versions
and parts of their software which can be used over the cloud.
•Hardware players like IBM are also venturing into providing infrastructure
services over the cloud.
GLOBAL CLOUD COMPUTING MARKET

• Global cloud computing market to grow at 30 per cent CAGR over the next

5 years

• Revenues will grow from $15 bn in 2010 to $55-60 bn in 2015.

• While IaaS is expected to show decent growth in the near term with large

players like Amazon, Google and Rackspace offering scalable hardware at

affordable prices, SaaS constitutes a large portion of the current estimated

market and is expected to drive cloud adoption over the long term.
IMPACT OF CLOUD ON INDIAN IT SERVICE COMPANIES
SHORT-TERM CONCERNS
•As a majority of the Indian IT service exports revenues come from IT
spends made by large enterprises, there will not be a significant
disruption in the service line share of Indian IT exports over the next 5
years.
LONG-TERM CONCERNS
•The largest share of revenues currently comes from customisation of
enterprise software, building business specific applications and managing
enterprise IT infrastructure.
•However, services provided over the cloud are standardised and have
minimal scope for customisation. Over the long term, thus, spends on CAD
are expected to reduce.
•Integration and maintenance services for enterprises are also expected to
reduce. However, these services would then be provided to the cloud
service providers instead of the user organisation.
IMPACT OF CLOUD ON INDIAN IT SERVICE COMPANIES
NEW OPPORTUNITIES
• Tier-I companies like TCS, Infosys, Wipro and HCL along with
some mid-size companies like Persistent have already begun to create
frameworks and offer cloud computing services.
•The cloud computing market is expected to open up new business for
Indian IT service providers in the long-term owing to the following:
•IT service companies are building expertise in cloud service delivery
platforms and are expected to garner business from providing consulting
and migration services to existing clients to migrate their non-critical
applications to the cloud.
•Small and medium enterprises adopt cloud services readily, Indian IT
service players looking to develop SaaS applications.
•The estimated cloud services market for Indian service providers was $2 bn
billion in 2012-13, comprising largely of SaaS.