Clouds on the Horizon

The Indian infotech industry is under intense pricing pressure globally. It may even have to rethink its very business model

THE $60 BILLION Indian infotech industry has a weathervane in Infosys’ annual ‘guidance’ figures that project its financial future. This year, Infosys’ forecast for 2009-10 took some time to sink in. In an industry used to growth rates in excess of 20 per cent, an actual fall in revenues was unthinkable. “We have never faced this kind of uncertainty,” said S Gopalakrishnan, Infosys’ CEO, gloomily, “It is unprecedented.”

Nobody had any illusions about the turbulence, though. The financial meltdown in the US, home to the industry’s biggest clients, and the subsequent global slump in demand were bound to hurt India’s most lionised export industry. Even a weaker rupee couldn’t help much; after all, the sudden reversal of the exchange rate trend last year (and RBI’s dumping of the Rs 40-44 range for the dollar peg) meant that financial defences against a once-rising rupee had turned into a costly deadweight. But just how dreadful it would be, only a few had any inkling of.

By an earlier assessment of the industry’s apex lobby Nasscom, things seemed grim, but not all that grim. “The Indian IT industry is projected to grow at 23-24 per cent in 2009 as against 29 per cent in 2008 in dollar terms,” announced Ganesh Natarajan, Nasscom chairman and chief of Zensar, at a conference, “As the US accounts for about 60 per cent of Indian software and services exports, lower technology spending and rising unemployment in the US economy will lower the export growth rate by 5-6 per cent.”

Well, that seems too optimistic now. “The turning point was the collapse of Bear Stearns, Lehman Brothers and AIG. The US insurance giant was one of TCS’s biggest clients,” says Milan Sheth, partner, Ernst & Young, listing banking, finance, telecom, healthcare and retail as the hardest hit sectors. And battered clients mean battered suppliers. Virtually every outsourcer has leapt to renegotiate contracts, beating prices down by 10–40 per cent. Infotech budgets lie crushed. Infosys expects growth of 1.7–5.7 per cent in rupee terms and a decline of 7.6–3.3 per cent in dollar terms, this year. Clients such as British Telecom, Northwest Mutual, Telstra and Aetna Inc, say sources, have beaten contracts downwards (the company refuses to confirm this, however).

What about other companies? “We expanded our margins despite the headwinds of reduction in volume and lower tailwind of forex gains,” reported Suresh Senapathy, CFO of Wipro. An Infosys rival, Wipro may have turned in a decent performance last year, but the future it forecasts is no less worrisome. Its CEO Azim Premji, when asked about the prospect of a turnaround by 2009 end, sought to quell such optimism. “Let’s play it by the ear, quarter-to-quarter,” he said, “Let’s not get carried away. That’s something we have learned. It then breaks your momentum in terms of all the work which you are doing to get leaner and more effective and closer to the customer.”

According to Forrester Research, a consultancy, the credit crunch has squashed capital expense plans. Loans are hard to get and raising capital in other ways is much too costly, with risk-pricing mechanisms in global disarray. Wary of investment, businesses prefer to hoard cash. This means less money for infotech projects. “Pricing pressure will be there in this kind of environment,” according to N Chandrasekaran, COO of TCS, India’s biggest infotech services exporter. The company expects a ‘lower single digit’ decline in prices this year. Clients, it seems, want fixed-cost pricing instead of the regular pay-per-man-hour scale. This will squeeze margins.

Depressed profits mean depressed business. There are long faces to be spotted in Bangalore, Pune, Chennai, Chandigarh, Bhubaneshwar, Mysore and the NCR, where the talk revolves around cutbacks, salary freezes and downsizing. Large-scale lay-offs have not happened yet, but the threat looms large. “Instead of laying off, managements are putting employees on notice for non-performance,” says Thomas Mathew, CEO of Amboseli HR, a Bangalore-based recruiter. While Wipro says it intends to honour the 7,000 campus offers it has made this year, it has specified no timeframe for this. Nasscom, meanwhile, has urged companies not to offer placements to anyone more than two months in advance (a year was the earlier norm). That’s bad news for nearly 400,000 freshly minted engineering graduates entering the job market this year.

Is there a way out of this mess? Ernst & Young’s Sheth advises Indian infotech companies to “look for new geographies and new verticals in Bric nations, North Africa and the Middle East”. Domestically, sectors like nuclear power, defence, healthcare and e-governance could possibly present new infotech opportunities.

The other quest could be for original product applications, which, once invented can notch up year-to-year revenues without extra man-hours thrown in. Here, says Sheth, innovations such as transformational outsourcing and cloud computing could prove winners. There’s nothing meteorological about this one. It’s nothing but a fancy name for a model that uses a ‘cloud’ as a metaphor for the formless Internet. If things look cloudy, then, it need not be such a bad thing.

About The Author

Anil Budur Lulla