IT Enabled Services
India's sunshine sector, ITeS, continues to chart double-digit growth. It has recorded revenues of US$ 39.6 billion in 2006-07, up 30.7 per cent against a projected growth of 27 per cent, according to the National Association of Software Services Companies (Nasscom). With growth in the sector being stupendous, the average increase in salary levels in the ITeS sector has been between 16 and 18%.
The industry body has projected a revenue of US$ 49-50 billion in 2007-08 at a growth rate of 24-27 per cent. Of the US$ 50-billion revenue projected for FY08, Nasscom estimates that ITeS/BPO exports will contribute between US$ 10.5-11 billion. The domestic market is expected to reach US$ 10 billion at a growth rate of 20-22 %. Marking the growing importance of India as an outsourcing hub, two US-listed Indian outsourcing firms -- Cognizant Technology and EXLService -- have made to the list of the world's 100 ‘hot growth’ companies. The two Indian firms are among 10 software and services firms that have appeared in the list of companies from around the world.
India holds a dominant share of the global offshore IT-ITeS sector (65 per cent of the global market in offshore IT and 46 per cent of the ITeS market). However, at US$ 31.3 billion in FY07, Indian IT-ITeS exports account for less than 3 per cent of the global spend on IT and ITeS. If India maintains its current share of the global offshore IT-ITeS market, IT- ITeS exports from India will exceed US$ 60 billion by FY10 and US$ 86 billion by FY12. Further, growing at current trends, Indian IT-ITeS exports are projected to reach nearly US$ 330 billion by FY20 (nearly 14 per cent of the projected worldwide spend).
Indian IT companies are also expected to move up the value chain and concentrate more on high value added services. Nasscom forecasts that India’s offshore IT-ITeS industries will grow at an annual rate of 24 per cent to 25 per cent and sustain nearly 10 million jobs by FY12.
According to Economic Survey 2006-07:The software and ITES exports from India grew from US$ 12.9 billion in 2003-04 to US$ 17.7 billion in 2004-05. Software and ITES exports from India estimated at US$ 23.4 billion during 2005-06 was up 32 per cent from the previous year.
Exports: According to Nasscom, the ITeS/BPO exports grew by 33.5 per cent to clock a revenue of US$ 8.4 billion in FY07, marginally higher than the growth of 33.3 per cent in FY06. Of the US$ 50 billion revenue projected for FY08, Nasscom estimates that the IT software and services exports would contribute US$ 28-29 billion, followed by ITeS/BPO at US$ 10.5-11 billion.
The IT industry's contribution to the GDP rose from 4.8 per cent in FY06 to 5.2% in FY07. Growing at the rate it is now, the total IT industry can touch US$ 100 billion by FY10, says Nasscom.
For exports, the US and UK are the largest markets. Further, the share of Europe has been increasing steadily. For FY06, revenues from the Americas totalled 67 per cent, Europe 25 per cent and rest of the world, 7.7 per cent.
The growth in large deals and unbundling of multi-million dollar contracts has resulted in Indian players growing their share of the pie in contracts of over US$ 50 million to 7 per cent in 2006, as compared to 1 per cent in 2002. Multinationals announced investments worth over US$ 10 billion in FY07, but the amount will be invested over a period of a few years.
To achieve US$ 86 billion in export revenues by FY12, the IT and ITeS industries will need to employ nearly 2.5 million professionals and attract capital investment worth US$ 20 billion.
PPO (Person-to-Person Outsourcing): Small offices, home businesses and even individuals are utilising PPO services everyday through various means such as online tutoring and home and landscape design services. Even invitation cards for weddings and other parties, personal assistant secretarial services like scheduling appointments and maintaining calendars are now being outsourced.
Many of these professionals work from their homes with a broadband connection and given the low overheads, individual contracts are often of low value – between US$ 100 and US$ 5,000. But since the number of end consumers and small businesses is enormous, the total addressable market in the US alone easily exceeds US$ 20 billion. Evalueserve’s research and analysis shows that between April 2006 and March 2007, the revenue from this sector was more than US$ 250 million and it is likely to grow to over US$ 2 billion by 2015 — a cumulative annual growth rate of around 26 per cent.
Domestic Market: The domestic IT industry has moved away from hardware-led growth and is deriving greater momentum from the software and services sector. The last 12 months since June 2006, have seen an explosive demand for domestic BPOs, largely driven by faster GDP growth and by sectors such as telecom, banking, insurance, retail, healthcare, tourism and automobiles.
The domestic BPO segment is growing at 35-40 per cent a year and employs 1,50,000-2,00,000 people. According to Nasscom, domestic BPO revenues almost doubled to US$ 1.18 billion in 2006-07 compared to US$ 600 million in 2005. The domestic market is expected to reach US$ 10 billion by FY08, at a growth rate of 20-22 per cent. Some global BPOs such as Aegis Communications Group, Firstsource Solutions, Infovision, Intelenet, IBM-Daksh are now aggressively looking at the local market for BPO business. Goldman Sachs and a clutch of other private equity investors have invested US$ 25 million in IT software and technology support company Cybernet-SlashSupport (CSS).
However, hardware still constitutes a large portion of the domestic pie at US$ 7.6 billion compared to US$ 5.6 billion from services, US$ 1.6 billion from software and US$ 1.2 billion from BPO. At these levels, the domestic BPO industry has logged a sharp 30 per cent growth, IT services 25 per cent and hardware 12 per cent over FY06.
Employment:The industry continued to be amongst the largest employers, directly employing more than 1.6 million and indirectly creating employment opportunities for an additional 6 million people in related industries.. The sector has witnessed a 26 per cent growth in manpower in FY07 compared to a 22 per cent growth in FY06.
As before, the industry's growth is led by export services, which is forecast to be US$ 18.1 billion in FY07. However, engineering services, R&D and software product development services have made a substantial contribution to export revenues. Revenues from this segment are expected to account for US$ 4.9 billion, compared to US$ 4.0 billion recorded in FY06.
ITeS Drives Real Estate
Having saturated large cities like Delhi-NCR, Bangalore and Mumbai, the ITeS action is slowly shifting to small towns and Tier II cities, like Chandigarh, Vizag and Jaipur, which are driving future growth. A number of IT and ITeS companies are expanding to newer locations as they grow to deliver high-end services in the value chain driving growth in commercial real estate.
While the sector accounted for 75 per cent of the total office space absorption in Pune in the fourth quarter of 2006, Bangalore continues to be the major IT/ITeS hub of India with 70 per cent of total absorption of office space by such knowledge-based companies.
The IT India Advantage
Evolution of global delivery model.
Unbundling of large IT outsourcing deals with larger India-based delivery shares.
Large contract values due for renewal over the next two years.
Large client wins.
Cross-border mergers and acquisitions.
Movement of the industry towards a stable pricing model.
Gradual positive shift in the outsourcing debate.
Having aligned their internal processes and practices to international standards such as ISO, CMM, Six Sigma, etc., companies in India are seeking to further increase the quality and productivity benchmarks by introducing adaptations more suitable for remote service delivery.
Indian ITES companies are looking at rapid growth through mergers and acquisitions, either of domestic players or niche-service companies abroad. The big players are on the prowl and already a string of acquisitions have been finalized. Some of the acquisitions that have hit the headlines are:
Zensar Technologies, a leading global IT and business process outsourcing services provider, announced the opening of its Polish operations, based in the city of Gdan’sk. It plans to invest over US$ 2 million in developing global delivery capabilities, create over 350 new jobs in the first 30 months of its operations.
Hexaware Technologies, a provider of IT and BPO services, is planning to acquire an IT company in the US or Europe for US$ 20-40 million.
Hyderabad-based technology solutions provider, Prithvi Information Solutions Limited (PISL), is planning to close four acquisition deals in the US by December this year, for an aggregate consideration of US$ 40-50 million.
Paradyne Infotech has acquired a US-based software services company with a turnover of around US$ 10 million.
Bangalore-based Subex Systems acquired UK-based Azure Solutions for US$ 140 million.
NIIT bought out the US-based US$ 80-million company, Element K, for US$ 40 million.
Sasken Communication Technologies acquired Finland-based Botnia Hightech for US$ 45 million.
Transworks acquired Canada-based Minacs Worldwide for US$ 125 million.
Servion Global Solutions, a player in communications software, has acquired California-based 5by5 Networks, a technology company.