Transform or stagnate: Indian IT's growth dilemma

Intense competition from better-equipped competitors who provide solutions across value chain Devjyot Ghoshal / New Delhi March 21, 2012, 0:31 IST After decades of riding storms and chasing deals, the Indian information technology (IT) juggernaut is being confronted with a grave challenge. Having cornered some 10 per cent of the $700 billion global outsourced IT services market—and in the process, matured from greenhorn start-ups to billion dollar entities straining for more growth—it is now time for Indian IT majors to compete with the international big boys, such as IBM and Accenture, for some $193.4 billion of contracts up for renewal through till 2016. TAXING TIMES * Expiry of income-tax benefits under the STPI (Software Technology Parks of India) scheme * Introduction of a Minimum Alternate Tax (MAT) to Special Economic Zone (SEZ) units * Additional Dividend Distribution Tax for SEZ developers * Concerns related to transfer pricing at captive centres set up by multi-national companies Click here to visit SME Buzz Also Read Related Stories News Now - Godrej goes off-beat while hiring - IBM & Ingersoll Rand to offer solutions - Avaya appoints Rajeev Mittal to lead India and SAARC business - Tata Steel India's most admired company: Fortune - Tears and tantrums on the tennis court - SPJIMR concludes placements But the question is: do the Indian players have what it takes to play in the big leagues? All signs point to a bleak future. The existing business model for the majority of the Indian IT sector, leaning heavily towards providing application development and maintenance (ADM) services with a high priority on cost saving and labour arbitrage has failed to remain a sustainable long-term plan. Take a look at dollar revenue growth for Indian IT companies. This, according to a report by UBS, has slowed from the 2004-08 highs of 30 to 35 per cent to the mid-to high-teens currently, driven by slower end-user demand and commoditisation of traditional services offerings such as ADM. Moreover, NASSCOM, the industry’s apex body, predicts that overall sectoral growth this year will fall to between 11 to 14 per cent from 16.3 per cent that it recorded last year. Not only are customers now demanding a wider and more complete array of services, but “even in the cost-plus value play Indian IT companies are now competing with the likes of IBM, Accenture, Capgemini and CSC,” says Arup Roy, Principal Research Analyst at Gartner, an IT research firm. “It is now a level-playing field. This is leading to a re-think, and driving the change or the so-called transformation in the sector,” he adds. What’s at stake According to a Standard Chartered Bank analysis, the next leg of growth for Indian offshore players will be driven by market share acquisition from global players in existing contracts coming up for renewal. And there are over 1,000 contracts that are with non-Indian vendors with a combined contract value of $193.4 billion due for renewal over the next five years, the bank estimates. However, for an industry that is slated to see its revenues touch $100 billion this year, India’s IT sector continues to be massively reliant on ADM-oriented deals, with low penetration in infrastructure (management of a company's IT systems and infrastructure) and total IT outsourcing deals. While this reliance on ADM may not have hurt Indian IT players so far, an inkling of the challenge ahead can be ascertained from the forecasted pipeline of deals up to 2016. Of the total estimated $193.4 billion worth of deals up for grabs, $93.5 billion and $67.8 billion are IT and Infrastructure outsourcing agreements, while only some $32 billion are application deals.