Monthly Archives: April 2012

Europe Market holds potential for Indian IT Service Providers

Top tier Indian IT service providers have shown robust growth in second quarter of fiscal 2012. The combined sequential revenue growth for TCS, Infosys, Wipro & HCL is 4.5% with negligible growth in net profit. This can be attributed to salary increase, promotion and fresher’s joining the companies in the last quarter.

 

 

Q1   FY 2012 ( % Revenue Contribution)

Q2   FY 2012 ( % Revenue Contribution)

TCS

Infosys

Wipro

Cognizant*

HCL

TCS

Infosys

Wipro

Cognizant*

HCL

Americas#

56.00

64.20

53

78

54.40

57.40

65.30

51.70

78

55.80

Europe

25.20

21.30

28.60

19

27

25.60

20.50

28.80

19

26.60

India

9.30

2.60

9

 

 

8.30

2.20

9.30

 

 –

Others

9.50

11.90

9.40

3

18.50

9.70

12

10.20

3

17.50

*Cognizant revenue distribution is based on FY 2010 since the company does not declare revenue distribution on Quarterly basis

* Americas include North America & Latin America

* Europe include UK & Continental Europe 

In terms of geographical revenue distribution there is an increase of percentage point in revenue contribution from Americas for TCS, Infosys & HCL while Wipro saw a decline. There is decrease in revenue contribution from India market while Europe has seen muted growth except for TCS and Wipro who have seen a slight increase in revenue contribution. The sequential growth rate for the four India headquartered companies in Europe is less than that of growth rate for Americas.

 However, the questions that need answers are: If the current macroeconomic environment is going to affect the growth of Indian companies in Europe and what impact will the unfolding European economic crisis have on their future growth prospects.The crisis is limited to few European nations such as Greece, Italy, Spain and Portugal. All these markets are not the target markets for Indian IT companies. However the cascading effect will be felt across Europe and others parts of the world in the event of a disorderly meltdown. This may lead to slowdown in economic activity thereby lengthening the decision cycle. We need to watch as how the situation unfolds after a decision on Greece is taken. This will of course depend on the political turmoil within Greece also.However, the impact on Indian IT service provider will be temporary and short term while the long term opportunity continues to look promising.The IT outsourcing market continues to be strong in Germany with growth momentum visible in Nordics and Benelux. The discussions for outsourcing and offshoring are moving on to the next level where companies are getting mandates from their boards for initiating IT outsourcing to reduce cost.  Based on the last quarter outsourcing deal analysis Europe market is equivalent to United States in terms of deal volume though average deal size is lower. BFSI and Government have emerged as the top sectors for outsourcing in the Europe.The biggest challenges for Indian companies are their low visibility within the European buyer community and low onshore and near shore presence. Additionally companies need to deftly manage politico-socio situations arising in cases of asset transfer including human resource and offshore led job losses. In our recent engagement with a global company headquartered in Europe we observed that each country has their unique set of regulations to deal with situations and the level of complexity and difficulty in dealing with unions varies across the countries.  

   

  

   

 

   

   

               

  

   

  

   

   

 

 

 

 

 

 

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Indian Domestic IT Services Market: Emerging Opportunities

Introduction
Indian domestic IT services market opportunities have been the focus of all service providers and everyone has laid out their plans to capture a share of this growing market. We have covered different aspects of IT services opportunities within Indian domestic IT market in our earlier issues beginning since January 2008.

In our fifth article on Indian Market Opportunities we try to analyze some of the opportunities that hold greater potential in the future.
SMB
In India, according to the Ministry of Micro, Small and Medium Enterprises, SMEs contribute between 8-9% to the GDP and 34% to the total exports of the country. But the level of technology penetration among these companies has been very low. The competitive pressures of working in a globalized environment and improvisation needs will make these MSME’s implement technology solutions in their businesses. Additionally the emergence of Software as a Service (SaaS) and Cloud Technology will further drive the technology adoption in these business segments. The immediate trigger for the technology adoption by SMB is regulatory requirements as the government and regulatory bodies are adopting automation processes such as mandatory e-filing for income-tax and custom clearance. As such even small players will now have to keep electronic records of their transactions.

SaaS model of software delivery is gaining wider acceptance within the SMB segment. Many large as well as small IT service companies have detailed out their plans for offering SaaS solutions for SMB’s. We have also advocated the use of SaaS solutions for SMB segment by ‘the company’ in our article in the September-2008 issue. In this article try to analyze specific opportunity for ‘the company’ against the backdrop of Cluster Development Program launched by Nasscom to increase IT adoption in the MSME segment across vertical industries.

Nasscom Cluster Development Initiative
NASSCOM’s approach to the cluster development initiative involves a collaborative effort of working with carefully selected SME industrial clusters in India including local associations and stakeholders. As such the Nasscom has undertaken the following initiatives

• Auto Component Sector
NASSCOM in association with ACMA completed a study on “IT adoption in the Auto Component Sector”. A national level Auto Component sector development program has been initiated jointly by NASSCOM and ACMA.

• Federation of Andhra Pradesh Small Scale Industries (FAPSIA), Hyderabad-
FAPSIA is a cluster of 5,000 micro and small enterprises in Andhra Pradesh. NASSCOM initiated a pilot project involving 10 firms and one IT service provider.

• Adityapur Industrial Cluster, Jamshedpur-
The Adityapur industrial cluster, Jamshedpur, comprises of 600 SME firms which are predominantly ancillary suppliers to local OEMs. NASSCOM has initiated a cluster development program.

Similar to the Nasscom approach we believe that cluster based approach for targeting SMB will be the most appropriate strategy. The automobile cluster seems to be appropriate fit for ‘the company’ based on current competencies and capabilities. Pune, Chennai are established automobile hub while Ahmedabad is expected to emerge as another automobile hub with the setting up of Tata’s Nano factory in Sanand which is near to Ahmedabad. ‘The company’ is suitably placed to offer IT solutions to the companies located within these cluster. The low SG&A cost on account of proximity of ‘the company’ offices in Pune, Chennai and Gandhinagar to these clusters will prevent the margin erosion. In addition to SaaS solutions there are opportunities for packaged application services by leveraging ‘the company’ association with product vendors such as SAP, Microsoft and Oracle.

The preference for small cars the world over and emergence of India as hub of small car manufacturing will drive the growth of automobile companies within these clusters thereby driving the demand for IT solutions and services.

Similar such initiatives can be planned for other industrial clusters based on the potential of the particular industry.

BPO
India’s $1.6-billion (Rs 7,700 crore) domestic BPO market is small in comparison to the $11- billion (around Rs 49,000 crore) BPO exports market. However, the Indian domestic BPO phenomenal 50 per cent growth rate witnessed during the last five years has attracted Indian and international IT majors. Indian domestic BPO market is expected to reach $6 billion by 2012, according to a recent Ernst & Young study.

The average billing rate for domestic clients is just $3-4 per hour for every employee, compared with $8-12 offered by global clients, thereby straining the margins of the IT companies. With the expected increase in volume of work the effect on margins will be negated to a certain extent even as the IT companies’ try new concept such as ruralshoring to beat the margin pressures.

As the Indian domestic IT services industry mature there will be more high value and complex work that will get outsourced thereby benefitting the IT service and BPO companies with an established base and track record of servicing the domestic BPO market.

Ruralshoring
Ruralshoring, a push towards shifting less complex BPO work to inexpensive rural locations, as these locations could possibly evolve into the back-office of corporate India. The BPO firms have been moving hinterland – to the semi-urban centres – but the final push is in the offing with firms like RuralShores taking downstream work to rural locations.

At present there are about a dozen rural BPO players including RuralShores, HOV Services, Sai BPO and DesiCrew in India, accounting for just a fraction of the domestic industry. HDFC, the country’s largest home finance company, has picked up 26% stake in Bangalore-based RuralShores Business Services, a rural BPO firm. Some of the developments which highlights this growing trend are

• BPO firms like Xchanging, which acquired Cambridge Solutions, and Hinduja Global Solutions have ventured into semi-urban places like Shimoga in Karnataka and Durgapur in West Bengal.

• HDFC Bank through a fully-owned arm kicked-off captive operations at Tirupati last year, while Tata Chemicals came up with back-office centres at Babrala in Uttar Pradesh and Mithapur in Gujarat.

These centres do routine tasks like data entry, processing of utility bills, native language help desk and e-mail response, says Avinash Vashistha, CEO of Bangalore-based advisory firm Tholons. They are, however, not expected to scale up dramatically. That’s because, while the manpower is cheap its availability is extremely limited. There are other limitations like lack of skilled manpower, poor broadband connectivity and frequent power blackouts.

Tie-ups with the bigger companies will help these small startups attract big clients in mobile phone and banking industries that are making major inroads into rural markets. Rural BPO company Ruralshore is in negotiations with big IT companies for partnership even as this 12 month old startup gets technical support from Wipro.

The tie up with large companies will enable rural BPO to become part of large contracts which they may not be able to bid on their own. They will also benefit from large companies training infrastructure and knowledgebase while the benefits to the large companies will be addition of new capabilities such as native language at a lesser cost. This will help large IT companies in their domestic operations considering all the sectors such as telecom, banking, automotive, consumer durables, insurance are targeting rural sector for future growth. Therefore such capabilities will also be an enabler in integrated IT deals from both government and private sectors. Infosys BPO, which has 100 people for domestic business, will ramp up the number to 500 in the next six months, largely through tie-ups with rural players.

We expect the transformational trends affecting the global BPO industry will also have similar effects in Indian BPO industry. The two trends highlighted in our previous month article “BPO Industry: Transforming Trends” are emergence of platform BPO and consolidation of BPO industry driven by the sale of captives. The consolidation of BPO companies within Indian domestic BPO industry seems more likely event with the sale of captives by large financial institutions, airlines to capitalize on their investments and also sell out by small BPO companies due to their inability to scale.

Additionally the offshore IT companies have lately been focusing their efforts to gain a larger share of domestic BPO business in view of uncertainty in their traditional western markets due to global recession. Infosys domestic BPO arm has won Rs 250-crore BPO contract from the income-tax department while Genpact, India’s largest Business Process Management company has announced its intention to focus on the emerging domestic market for Business Process Management. Genpact will offer its expertise and services capabilities in Finance & Accounting, Supply Chain & Procurement, Collections and Customer Service, Re-engineering and Analytics across diverse industries, including Banking & Financial Services, Insurance, Telecom, Manufacturing and Healthcare. Genpact has secured process optimization assignments in healthcare with the Central Government of India and the Delhi State Government.

Packaged Applications
Research and forecast firm IDC says in its India packaged software market report for 2009-13 that the domestic ERP market in 2008 was $263.3 million and the CRM market was $140.8 million.

The business applications market in India right from its inception has been predominantly occupied by ERP solutions. But in the past few years’ users have started adopting CRM and SCM solutions even before ERP. While ERP has traditionally dominated the manufacturing verticals, in Telecom, BFSI and other customer facing verticals CRM applications are more popular. Similarly the SCM applications are finding a lot of demand from manufacturing and retail sectors.
ERP
Indian ERP market has been dominated by SAP with more than half of market share and Oracle at second spot followed by Microsoft. As the ERP adoption reached saturation among large enterprises the ERP vendors have focused on SMB.

SAP
SAP still retains the top place even as the ERP competition shifts to SMB segment and continues to register record growth. SAP has recorded over 100 percent growth in license fee revenues in the June 2009 quarter with SME segment contributing a large share of this growth. A large number of SMEs are automating their business processes for the first time, thus creating a demand for companies that have expertise. The established SAP portfolio for SME includes SAP Business One for companies with 10 to 100 employees, SAP Business All in-One for companies with 500 to 2,500 employees.

Along with SME, retail and the Indian public sector are top priorities for SAP followed by engineering and constructions operations segment.

Microsoft
Microsoft, according to IDC, has a 10% market share in ERP and a 4 percent market share in CRM by revenue. Microsoft also focused on SMB segment with its Dynamics suite and if it maintains its momentum it could overtake Oracle in fresh license sale in India in near future. SMBs accounted for more than 70% of the Microsoft ERP business in India with strong traction in manufacturing, auto ancillaries and textile sectors.

SaaS & Cloud Based Offering for ERP
SaaS model also gained traction within the SMB segment on ERP front in India. SAP launched its hosted offering SAP Business by Design for SMBs in India. Microsoft has tweaked its business models for its India business.

CRM
CRM adoption is mainly in the areas of sales force automation, customer service and marketing. CRM adoption has been high in customer centric business of Telecom, Banking & Financial Services and Insurance and will continue to thrive in this vertical. As per the available data IT/BPO, Telecom and BFSI accounted for more than 70% of the market. Oracle has emerged as the top vendor with SAP at the third spot.