INDUSTRY AND ECONOMIC ANALYSIS

OVERVIEW OF INDIAN IT INDUSTRY

The Indian IT industry is growing steadily despite the global meltdown in the year 2008. When the whole of the world witnessed the negative growth, Indian IT industry still managed to register a growth of 5.5%. The industry is about to register the historic landmark of US $ 69.1 billion exports this year, according to NASSCOM President, Som MIttal. The domestic market is also slotted to witness 9% growth, this year. Potential size of Indias off shoring industry is estimated at US $ 120 to 180 billion by 2015. The industry currently employs around 8.9 million people and provides indirect employment to around 2.8 million people. It is expected to add another 2, 30,000 jobs in the next fiscal according to NASSCOM. Indian IT/ ITES sector is growing substantially with its: Expansion into varied verticals Well differentiated service offerings Increasing geographic penetration The phenomenal success of the Indian IT- ITeS industry can be attributed to the favorable government policies, burgeoning demand conditions, healthy growth of related industries and competitive environment prevalent in the industry. The interplay of these forces has led to putting the industry on the global map.

HISTORY AND EVOLUTION OF INDIAN IT INDUSTRY

The evolution of IT industry can be studied in 4 phases:

Phase I: Prior to 1980

The software industry was literally nonexistent in India until 1960. Software used in the computers till that time, were in built with the systems. Government protected the hardware industry through high tariff barriers and licensing. However, in the West, the need for software development was gradually being felt as the software in built in the system was not sufficient to perform all the operations. The Government of India therefore, realized the potential for earning foreign exchange. In 1972, the government formulated the Software Export Scheme. This scheme made the provision of hardware imports in exchange of software exports. TCS became the first

firm to agree to this condition. The year 1974 marked the beginning of Software exports from India.

Phase II: 1980- 1990

Despite the government initiatives, the software exports were not picking up because of two reasons mainly: The exports of software, was heavily dependent on the imports of hardware, which was costly as well as the procedure for obtaining the same was very cumbersome. Secondly, there was a lack of infrastructural facilities for software development. To counter these, the government formulated a New Computer Policy in 1984, which simplified and also reduced the import duty on hardware for software developers. In an attempt to make, software industry independent of the hardware industry, the government in 1986, formulated Software Policy which further, liberalized the IT industry. According to this policy, the hardware imports were de-licensed and were also made duty free for the exporters. This along with the world wide crash in the hardware prices reduced the entry barriers substantially. In 1990, government established Software Technology Parks of India. This scheme was formulated to increase the exports of software and services.

Phase III: 1990- 20005

This decade made several significant changes in the economy, including trade liberalization, opening up of Indian economy to foreign investment, devaluation of the rupee and relaxation of entry barriers. These changes attracted many foreign entities (MNCs) to our nation. These MNCs in India, introduced Offshore Model for software services, according to which, the companies used to service their clients from India itself. This model further graduated to Global Delivery Model (GDM). Global Delivery Model is a combination of Onsite and Offshore Model. In this model, the Offshore Development Centre is located at various locations across the globe. During this period due to the entry of many players in the Indian market, the competition got intensified. Therefore, the players started investing in research and development to distinguish their services from others.

Phase IV: Post 2000

The global problems like the Y2K, the dotcom crash and recession in the US economy, proved to be a boon to Indian IT industry. The Y2K problem demanded the existing softwares to be compatible to the year 2000. Due to the shortage of US based programmers during this period, many mid sized firms were forced to utilize the services of Indian firms. This had placed the Indian IT industry on the global map.

Post 2002- 03, the industry had registered a robust growth rate because of increase in the number of clients, large sized contracts and a strong global delivery model.

INDUSTRY SEGMENTATION
IT industry can be broadly classified into three sectors: Software IT Services IT enabled Services (ITeS) - BPO

SOFTWARE
Software Products 1. Infrastructure Software 2. Enterprise Application Software

IT SERVICES
Project Oriented Services 1. IT Consulting 2. Systems Integration 3. CADM 4. Network Consulting and integration 5. Software Testing

ITeS - BPO

Customer Interaction services

Engineering and R $ D services Financing and accounting IT Outsourcing 1. Apllication Management 2. IT Outsourcing 3. Others (SOA, Web services, E-Commerce) HR services Training and Support 1. Hardware Deployment and support 2. Software Deployment and support 3. IT education and training KPO services

1) SOFTWARE
IT Software comprising of the (a) Software Products and (b) Engineering and R & D Services, forms the smallest sector of the Indian IT industry. (a) Software Products: The market for software products is growing rapidly as the Small and Medium Enterprises (SMEs) as well as large organizations are utilizing the services of software in simplifying their works. The sector is highly concentrated with the top 10 firms, dominating the market.
IT Software comprises of the:

(i) Infrastructure Software The Infrastructure software connects the people and systems across an organization. It helps inefficiently executing the business processes, share information and the manage the various touch points with the customers and the suppliers. It can be of the following types: Application development Application integration and middleware Business intelligence tools Database management systems Data integration tools IT operations Security software Operating-system software (ii) Enterprise Application Software: It is software specifically designed to solve an enterprise problem. The application software performs various business functionalities like accounting, production scheduling, customer information management, etc. The Enterprise application softwares currently available are: Customer relationship management Enterprise resource planning Supply chain management Project portfolio management Content, communication and collaboration E-learning (b) Engineering and R & D Services: This sector has recently originated in India. Many players are trying to tap this market by developing their engineering capabilities.

2) IT SERVICES
India is one of the leading providers of IT services. The basic model followed is known as off shoring wherein Indian firms cater to the specific requirements of its clients by employing efficient project and quality management skills for its execution. This segment comprises of: (a) Project- oriented services: These services are delivered as individual projects. The services are catered according to the needs and wants of the clients, and the expertise of the vendor. These services can be delivered onsite or offshore, or can be a combination of both also. These services include the following services:

(i)

IT Consulting: The players in this service line advise clients to streamline their business using IT. They help them in devising IT strategy, IT architecture, IT assessment and planning etc. IT consulting in India is still at a very nascent stage. Major companies which are involved in this service are Wipro, TCS, Satyam, and Infosys. Systems Integration: This comprises a whole bouquet of services which are very specific to the requirements of the end user. The ranges of services included are: Integration of various systems deployed by the organization- CRM, ERP, and SCM etc. Integration of business processes and logistics. Configuration of customized software o Database Maintenance o Integration of legacy systems with the new software or hardware.

(ii)

(iii)

CADM: These services include designing, upgrading and maintenance of software to suit the user requirements. These services dominate the project oriented services market. These services are best suited for off shoring, that is why, these services dominate the Indian export basket. Network Consulting and Integration: These services offer planning, construction and designing of data networks. The range of services in this service line includes: o Network architecture design o Network connectivity o Systems Management o Project Management o Network Maintenance etc.

(iv)

(v)

Software Testing: It checks the quality of a software product or service. It is basically a technical investigation to identify and rectify errors to meet specific quality parameters. Software Testing operates in three spheres: O Response Testing: Ensures that parameters from which the responses are elicited from the target audience are operational as well as efficient enough. O Security Testing: Ensures that all the security parameters are risk free O Load Testing: Ensures that the software can handle the load density so as to reduce the down time

(b) IT Outsourcing: When an organization contracts another organization for managing, deploying and maintaining its IT architecture or system, it is called as IT Outsourcing. It includes: (i) Application Management: It includes management and execution of all activities involved in deploying, maintaining, and upgrading a firms IT systems. (ii) IT Outsourcing: The services offered in this segment vary depending on the requirements of the client. The services offered in IS Outsourcing can be:

Desktop Management Help Desk Support Management of Operation systems Management of Applications systems Management of Anti Virus systems Back up equipment service etc.

(C) Training and Support: It includes three segments: (i) Software Deployment and Support: It involves installing, configuring and maintaining software on the clients systems. (ii) Hardware Deployment and Support: It involves deploying specific hardware devices on the clients systems. IT education and Training: It is designed to educate and train the in house team for organization Information Technology systems. It is imparted to provide organization specific skills.

(iii)

3) IT- ENABLED SERVICES

It consists of those services which are delivered using software as a means of production and Internet as a means of transmission. According to AT Kearney, India is considered to be the most preferred destination for companies which are looking for off shoring their IT and back office functions. The factors favoring the growth of this sector in India are: Low cost advantage Technically skilled work force English speaking population Superior service maturity Friendly governmental policies supporting FDI Robust infrastructure A thriving indigenous software industry

a)

Customer Interaction Services: These services include all the activities related to managing relationship with the customer i.e. capture, storage and analysis of customer information.

b)

Financial & Accounting Services: These services manage financial and accounting aspects of businesses. These services are slowly and steadily gaining pace in the Indian IT industry. It is the second largest contributor to exports in the ITes segment

c)

Human Resource Services: It entails all the activities pertaining to human resource
management. It includes managing employee records, payroll processing, hiring, staffing and training and development of the employees etc.

d) Knowledge Process Outsourcing: The KPO segment offers a bouquet of services, ranging from

market analysis, strategy consulting, business research, content management, medical transcription etc.

PRESENT INDUSTRY
As the year 2012 comes to an end, the Indian IT - ITeS industry has made significant progress during the last decades. According to The National Association of Software and Services Companies (NASSCOMM) India has captured a sizeable share of 58% in 2011 which was up from 51% in 2009 in global technology sourcing and business services market. The year 2012 was marked by slowdown in global economy resulting in weak growth prospects of several world economies including India. The recovery process of Indian economy which began after the financial crisis of 2008 as reflected in the performance of FY11 again took a pause in FY12. Yet the IT-ITes sector not only showed resilience amidst the slowdown but also marked a new milestone of crossing US$ 100 billion revenues in FY12

GROWTH OF THE INDUSTRY

The IT-ITeS exports depicted a remarkable revenue growth rate of18% in FY11 and 16.95% in FY12 amidst slowdown in global business environment where around 80% of export revenue comes from western developed economies. Yet persistent uncertainties in global economic environment coupled with fluctuations in value of rupee against US$ is expected to reduce corporate IT spending and thereby result in moderate growth rate of revenue in coming years. The growth in IT IteS services export is expected to be 11-14% in rupee terms.

Higher technology adoption by the Indian government and corporate sector to drive the domestic market According to NASSCOM, currently revenue from the domestic market for the IT-ITeS sector (including hardware) is estimated to account for a share of around 32% at about US$ 31.7 billion, growing at CAGR of over 9% during FY08-FY12. Improved IT infrastructure, increase competition among corporate and enhanced government focus has aided in greater technology adoption in India and making IT services as fastest growing segment in the domestic market.

The quality of IT infrastructure in the country has improved with enhanced Internet connectivity and introduction of 3G services which in turn has driven the growth of BPO segment. Growing usage of mobility devices, netbook, notebook and connectivity devices is expected to contribute to the hardware market growth. Further domestic software segment is also set to rise with advanced applications such as cloud, mobility etc. The focus of the Government, especially on projects involving e-governance across states, provides an opportunity for vendors to expand their foothold in the domestic market. Emerging technology initiatives through the Unique Identification Authority of India (UIDAI) opens avenues for companies in the rural market in the coming years

GROWTH OPPORTUNITIES FOR THE INDUSTRY

There are two ways in which the industry can witness growth: Increasing the domestic sales Moving up the value chain The industry is right now predominantly export oriented. When we look at the growth in exports and the growth in domestic sales, we can observe that the domestic sales growth is left far behind. So if the domestic sales increase, growth of the overall industry will happen. Therefore, the players as well as the government should take initiatives to increase the domestic consumption. The Indian IT players are pre dominantly involved in rendering lower end services to their clients. Therefore, the industry can grow only when it starts moving up in the value chain. Presently, the Indian IT industry is basically focusing on the Application Maintenance and Infrastructure Management. But the focus on rendering higher end services will help in strengthening the brand image of the industry.

Businesss Intelligence Application solutions, Design and Business Applicatio development, process Pacakge redesign n managem implementatio n Innfrast ent, ructure system integratio and network n manage ment

Business and IT Strategy

ESTABLISHED IT HUBS IN INDIA

Rank City Description Popularly known as the Silicon Valley of India and leading software exporter from India. Bangalore is considered to be a global technology hub of India. Hyderabad is a major it hub in India which is also known as Cyberabad which consists of many Multinational corporation companies such as Google, Facebook, Microsoft, Amazon and Electronic Arts, etc. Chennai is a major destination of India and is the BPO hub of India. Chennai has the largest operations centers of TCS, and Cognizant. The Financial capital of India, but recently many IT companies have established offices. The National Capital Region comprising Delhi, Gurgaon and Noida are clusters of software development. Major Indian and International Firms present in Pune. Pune is also CDAC Head-Quarter. One of the largest cities in India, Kolkata contributes significantly to IT exports. The capital of Kerala, now houses all major IT companies including Oracle, TCS, Infosys, and contributes in IT export of India

Bangalore

Hyderabad

Chennai

Mumbai

Delhi

Pune

Kolkata

Thiruvanathapuram

COMPETITIVE LANDSCAPE OF THE INDUSTRY

The competitive landscape of the industry can be understood using the Porters five forces model.

Bargaining power of buyers

Rivalry among players

Indian IT Industry

Bargainin g power of suppliers

Threat of new entratnts

Threat of substitutes

Threat of New Entrants:

When the barriers of entry are low, the threat of new entrants becomes very high. Since in IT software and services, the players enjoy significant economies of scale and the switching costs are also very high, therefore, the entry barriers for the IT Software and Services are very high. In contrast to this, in ITes- BPO, lower economies of scale are reached and the switching cost is also very low. This leads to very low entry barriers. Therefore, there is high threat of new entrants in the ITeS- BPO sector while it is low in the case of IT software and services.

Rivalry among players:

When the number of players increases in a sector, the intensity of rivalry also increases. With the increase in rivalry, the players resort to a number of strategies being followed by the players to acquire new customers or to retain older ones. Earlier players used to provide customized services to attract customers, but now this practice, also fails to attract them. Therefore, they resorted to providing end to end solutions, niche services etc.

Bargaining Power of Suppliers:

Suppliers for the industry can be categorized into: (a) Knowledge Professionals, (b) Hardware Manufacturers and (c) Telecom industry players. Knowledge Professionals have a high bargaining power in the IT Software and Services sectors because they demand high level of skill and expertise to render their services. In the Ites - BPO sector, the level of skill and expertise required is low, therefore, they have a lower bargaining power on the industry. For the IT industry to function properly, proper hardware infrastructure is required. Therefore, the bargaining power of hardware manufacturer grows. This is supported by the fact that hardware manufacturing industry is very concentrated (HP, IBM, Dell etc.)While a robust telecom network is a pre-requisite for proper functionality of the IT industry, but the presence of a number of players in the industry reduces their bargaining power.

Threat of Substitutes:
Since the IT industry is driven by technology, which itself is ever evolving, therefore, there is a high risk of substitutes for the industry.

COMPETITIVE STRATEGIES
After studying the competitive landscape of the industry, the following competitive strategies can be followed by the players:

1. Consolidating Business from Repeat Clients and win new clients:

TCS, Infosys and Satyam have a major chunk of their revenues from their repeat clients. In the year 2007, the revenues from repeat clients for TCS, Infosys and Satyam were 96.8%, 95.0% and 90.0% respectively. These figures highlight the importance of Customer Relationship Management. In order to retain their clients, the companies increase the size and number of projects and also, extend the range of services they offer.

2. Focus on Niche Service Lines:

Some mid size players have adopted this model where they render specialized services rather than offering end to end services. This helps them to differentiate themselves amongst other players.

3. Mergers and Acquisitions:

M& A help in consolidating the whole industry. It enables firms to expand, enhance its skill sets, expand its service offerings and enter new geographies.

4. Higher Capital Expenditure:

This can help in enhancing business activities as well as increasing the operational effectiveness of these companies

5.

Setting up ODCs:
Offshore Development Centers have helped in instilling customer satisfaction to a great extent. It also has helped in reducing the operating expenses of the companies.

5. Wide Spectrum of Services:

The players are constantly extending their bouquet of services to attract the new clients as well as retain the existing ones. They are also offering higher value added services which ensures greater earnings and on the same time lower resource utilization as well.

MAJOR THREATS TO THE INDUSTRY

1. High Attrition Rate:
Staff shortage can prove to be a major bottleneck to the growth of the industry. According to McKinsey & Co., only 25 percent of the technical graduates are competent enough to work in the offshore IT industry in India. In the BPO sector also, only 10- 15 per cent of the graduates are suitable for employment. Therefore, managing attrition rate is becoming a big task for the IT companies in India. High attrition rate results in loss of skilled manpower, loss of skill sets etc. Apart from loss in skill sets, cost of recruitment, training and development of the new recruits also becomes a major investment for these companies.

2. Competition from other emerging nations:

Chinese IT hubs like Beijing and Shanghai are set to overtake Indian hubs by the year 2011, according to a report by IDC. These cities are competing with India on account of their stable socio- economic environment, excellent infrastructure, low attrition rates and skilled talent pool 3. There is a need for improvement in the urban infrastructure. According to McKinsey, further growth of the industry has to come from small districts, outside the Tier 1 and Tier 2 cities.
4. Lack of fluency in languages other than English, e.g. French, Spanish, Italian etc. is proving to

be a weakness of the Indian IT industry.

5. Overdependence on US Economy:
Almost 70% of the IT industry revenues come from USA. Therefore, any downscale in the US market, adversely impacts the Indian market too. E.g. recent downsizing and job cuts due to recession in the US market.

6.

Lack of Product Innovation:

India specializes in services but not in products. The nation lacks in product innovation, which can be considered a major area of concern. It will be difficult to maintain competitive advantage if product innovation doesnt occur.

7.

Limited Domestic Market:

The domestic market is still in the nascent stage in India. This makes the whole industry vulnerable to export market only

RECOMMENDATIONS
1) Building Domain Knowledge:
If the players in the industry have to move up the value chain, the first pre requisite is building up domain knowledge. Only this can help them in satisfying their customers and in turn winning their confidence. Once this is achieved, they will become repeat customers for them.

2) Investing in Research and Development:

This will help in innovating new products and services which will help in the growth of the company as well as the industry as a whole.

3) Knowledge Management:
The industry faces a high attrition rate which deprives the company of its talents. Knowledge management is a technique which helps in retaining the knowledge in the firm, even when these knowledgeable persons leave the organization. It is a technique of assembly, preservation, transfer and management of data and knowledge in companies. A boost in the domestic sales can occur with more favorable government policies and also improvement in the infrastructure which is a pre requisite for the growth of IT industry as a whole.

CONCLUSION
The Indian Information Technology industry represents one of the most successful industries showing consistent rapid growth. In a report, Perspective 2020: Transform Business, Transform India, prepared by Mc Kinsey, the export revenues of Indian IT industry will touch US $ 175

billion by the year 2020. The domestic sales revenue will also contribute US $ 50 billion by the year 2020. Therefore, we can say that the industry is shining and will continue to do so as well.