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IT Trends

By most counts, 2008 was a bad year for IT companies, mostly due to the credit-induced economic crisis in the US, their biggest technology market.

As we ring in the new year, ET spoke to IT company officials, analysts and industry experts to get a sense of the trends to watch out for next year in IT services, on the demand and the supply side.

While company officials and analysts say much of the business would continue to happen out of the US, they also see an up swell of demand in Asia Pacific and India.

For example, Cognizant, which derives a major portion of its revenue from North America, has been making investments in the last 12 to 18 months specifically in Japan, Australia and India to build its leadership team and sales engines. The company`s president and managing director R Chandrasekaran said this would be the additional growth engines in the coming years.

At the same time, HCL Technologies, which is seeing more growth happening out of Continental Europe and Scandinavian countries, said it would pitch itself as an integrated service provider (infrastructure and application to gain a pie of the domestic Indian market. Apart from government contracts worth millions of dollars, IT companies also see more action in the retail and FMCG space.

Traditionally, application, development and maintenance services have been the bread and butter of a majority of the software services providers in the country. While this area will continue to grow, the merging growth areas would be IT infrastructure services (IT IS), remote infrastructure management (RIM) and business process outsourcing (BPO). "A large number of infrastructure contracts would be off-shored.

Expect more discussions and debates on IT IS, RIM, BPO, virtualisation and unified communications as companies try to work efficiently across locations and lessen travel costs," said Frost & Sullivan ICT practice deputy director Kaustubh Dhavse.

While there is consensus that contract prices will be renegotiated, there is no clarity yet on whether there would rack-rate cuts or reduction on a project-by-project basis. Gartner India`s principal research analyst Diptarup Chakraborti said, "Rack rates look difficult to sustain at least in the short run and price negotiations even in existing contracts is likely to happen. Both old and new clients pressure is likely. Every client will seek maximum bang for his buck."

At the same time, Mr Dipen Shah, vice-president, private client group- research, Kotak Securities said that this would happen more in the case of small-cap companies who would be open to lower price points to save volumes.

For months now, Indian IT companies have been saying that the consolidation happening in America`s BFSI space, would result in more work transferred here, as banks look to save costs by moving operations low-cost destinations offshore. Some companies have been lucky to be a vendor of the acquirer and the acquired entity, thereby getting more business from the merged entity.

"In a few instances in recent large M&A situations in the banking industry, we has found ourselves in the position of being a very substantive provider to both the acquirer and the acquired entity. During the 3rd quarter (July-September), we began working on post merger integration work with a major BFSI client of ours who has recently completed significant M&A activity," Mr Chandrasekaran said.

Similarly, Infosys found itself on the safe side since it was servicing Lehman Brothers and Bank of America. Polaris, too, retained its Bear Stearns business, because it was already servicing Bear Stearns` acquirer JP Morgan Chase.

Typically, an Indian IT company enters into time and material linked contracts, where the billing is done based on the number of people working on a particular project. "In T & M projects, companies build in a lot of buffer, where if 20 people are billed, 15-16 would be working. But, now companies might negotiate with vendors to work on the same projects with lesser people. They will enter into service level agreements to ensure that quality is maintained even with lesser resources," said an analyst who did not wish to be named. Apart from this, fixed price contracts will also pick up. "Scale and capability – you cab lock it in revenue," Mr Dhavse said.

"About 86 per cent of the 15 deals with a contract value of over $1 billion signed in the year-ended June 2008 were structured as fixed price and output-based contracts, where the potential to earn better margins is higher through productivity gains," said Mr S Premkumar, Corporate Officer & Global Business Sponsor– Financial Services, HCL Technologies. Further, iGATE technologies global HR head Srinivas Kandula said, "We encourage our vendors to opt for `Pay by Drink` pricing model. Certainly, outcome based pricing model has the efficiency advantage."

IT employees nurturing hopes of onsite projects in exciting locales have to get used to the idea that more work will happen offshore. This trend will happen because of two reasons- increase in revenues from offshore friendly services and more focus in domestic software projects. While RIM, BPO and testing are offshore- friendly, consulting and ERP implementation are onsite intensive. Indian IT companies will also throw more resources in domestic software projects, as they find the demand inside show promise like never before.

"If Indian IT companies don`t look at the domestic market now, then the likes of IBM and Accenture will dominate. So they are bringing some of their bright engineers from onsite locations to the domestic market. There is an increase in the quality of employees working on domestic projects," said Mr Pari Natarajan, CEO of management consulting firm Zinnov. "The margins are better now because companies have a better idea about how to price their projects here. Also, they can use the processes and solution components that they used for their clients globally for the domestic clients," Mr Natarajan

The year began with rupee at Rs 38-40 to the US dollar and is ending at Ts 48-50 levels, leaving in its wake losses due to hedging and more confusion. While they contend that currency headwinds would continue, no one is willing to take a bet on the direction or pattern. Kotak`s Shah said, "It is very difficult to estimate."

Companies, on the other hand, did not respond to the question on currency headwinds. But broadly, observers say that the dollar appreciation against the rupee is unlikely to continue for long. "I don`t expect a sharp movement in the US dollar for another 6 months. It won`t go to a 15-20% upside. Rs 42-46 levels should make it profitable for companies," said Mr Dhavse

There has been a lot of discussion on the non-linearity model, where companies are trying to break the relationship between headcount addition and revenue growth.

Companies will push for this in the coming year by using automation tools, increasing the utilisation rate and improving employee productivity.

As a result, the campus intake would be flattish. Productivity measures could include an increase in working hours but no company has confirmed this.

Increments will be lower as well. But, some players disagree. "Often employees` productivity is largely influenced by their competency levels. So far, organizations have been thinking that productivity is a mere quantitative measure. As a result, the emphasis has been on number of working hours and days and not so much on `real productivity`," iGATE`s Kandula said.

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