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Boom ahead for Indian software

Subir Roy | September 08, 2004

Indian software seems headed for a period of sustained high growth, which industry leaders in listed companies are not spelling out because they do not want to end up making forward-looking statements.

National Association of Software and Service Companies has of course projected at least a 25 per cent growth for the next five years but the organisation has in the past turned out to be over-optimistic.

The present optimism, even among the hard-nosed, stems from the fact that global IT spending is out of the woods and has resumed a modest growth of around 3-6 per cent a year.

This spending is broadbased, that is both IT users and technology companies, those which spend extensively on R&D to develop new products, are upping spending.

That is why, not just software services companies but also those like Sasken that cater to technology companies are seeing a boost in their toplines. There is every likelihood that over the next several quarters the rate of growth in global IT spending will go up. This will create a primary buoyancy in IT.

But the Indian story goes further. Because of the success of offshoring, the Indian IT exports have rebounded last year and going by the way the leading companies are revising their guidance, this is likely to be repeated and even bettered in the current year. And there is no reason to expect that this growth will slow down next year.

This optimism is based on two perceptions. One is that the reaction against offshoring in the developed economies will persist but firms will nevertheless continue to outsource more and more as it makes very good business sense.

There is always the possibility that US economic recovery will continue in fits and starts but under tight business conditions the need for firms to outsource to cut costs is even greater.

In view of this, higher volumes will definitely come the way of Indian IT companies in the coming few quarters but the optimists are betting for a longer period of buoyancy.

This is because they see Indian software companies continue their journey up the ladder of improved processes and quality so to as to reap the gains of higher productivity. If customers are happy with quality and delivery and vendors make a better margin out of it, then there is reason for all round optimism.

Two developments have made this possible. Because of systems improvements, mid-level Indian managers, that is those with around three years' experience, are able to perform as team leaders that is those normally with five years of experience.

Again, because of systems improvements, they have more youngsters working under them than in competitor countries. This has given a boost to the productivity achieved by Indian companies.

Additionally, large Indian companies are relying a good deal on training beginners and putting them through the grind. As a result of all this, Indian companies are able to keep a control on cost which would not have otherwise been possible given the need to raise wages.

If the present rapid growth continues for too long, a skills shortage is bound to emerge. But industry experts are betting on the fact that no serious skills shortage will emerge in the next two years.

This is a key aspect of Indian competitiveness, which needs to be kept in sight all the time. To plan for the future, companies, industry bodies and the government need to put their heads together and devise a plan whereby skills can be upgraded and expertise in new emerging technologies imparted in order to keep the juggernaut rolling.

The next major challenge for Indian software will be to acquire the necessary consulting skills so that Indian firms are able to offer more of business solutions rather than simply technical ones. Wipro first and Infosys thereafter have acquired consulting groups and are addressing the issue.

Ambitious software companies across the board are hiring domain experts to enhance their business solutions capabilities. The expectation is that the consulting capabilities will take about a couple of year to mature which is when the leading companies will have to be in a position to bid for bigger deals on their own and not as lesser members of consortia.

What we are seeing is historically the second phase of volume led growth. The first was Y2K and dotcom, web based growth, which lost its momentum from 2001. The second is now, propelled by the rise in IT spending and the pickup of offshoring.

This opportunity has been seized by Indian companies with their ability to upscale and continue to deliver to quality through process improvements. The next stage of growth will be business solutions driven. The industry is not yet fully prepared for this but it may be in a much better position in two years' time.

Somewhere in the hazy future beyond two years -- the happy hunting ground of forecasters who get enough time to revise their forecasts so as not look silly -- lies what is perhaps the final phase of growth -- product driven.

Some of the fledgling Indian product companies like Ittiam and Tejas Networks are by all indications getting ready to announce that they are cash positive and beginning to foresee steady revenue streams based on the utilisation of their intellectual property.

It is not as if five years down the line an Indian Microsoft will begin to raise its head but a situation where 15 per cent or more of industry revenue is accounted for by product companies is not at all difficult to visualise.

If there is a single overriding Indian capability, which will be driving this sector then it is entrepreneurship. At each stage, starting from the transition away from body shopping, it is the entrepreneurs who have kept transforming and taking their companies to qualitatively higher and higher levels.

Government is now bending over backwards, the state governments are falling over each other, in trying to woo the software industry.

N R Narayana Murthy and Azim Premji in Bangalore today are like New York Times high priest James Reston in the late sixties.  More important visitors came to see him than the US president.

As long as there is no dearth of technology driven entrepreneurs, there is likely to be growth.

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