Indian IT Industry: Post Recession until Interim Budget 09

Post September 15, 2008 when Lehman Brothers filed for Chapter 11 Bankruptcy when recession was actually proclaimed officially(not that the slowdown had not begun earlier),you obseve the ratio of IT Outsourcing deals within the application space to the Infrastructure Managed Sevices space,you shall see the former going down with existing contracts being re-negotiated with billing rates down to the extent of 35-40%.In some projects, the billing rates are down to $16 an hour, which have been the lowest since the past several years and certain analysts forecast these to continue so for atleast until the first quarter of next year.Lets see some major factors. Packaged software deployment and maintenaince projects and other higher-end projects like SAP have faced severe pricing cuts of around 25%, which is again more than what it was earlier this year. Top IT firms are offering such rates in the form of introductory discounts for new clients, and for a year or two for existing clients so as to keep the cash flows going.However even by offering these attractive pricing discounts not many contracts in the pipeline have been awarded.

Regenotiated Contracts:
Some of the rates are even lesser than what the facilities personnel make per hour in their clients’ offices across the world and even in eastern European countries, where it varies between $16 and $22 per hour.as per a report in economictimes.With the onset of recession clients demanded flat rates in november slowly renegotiating at 20 percent by January 09 and eventually going hard for almost 30-40 percent discount.

Change in Recruitment Policies which are more in tune to the market vagaries:
Companies are achieving providing such steep discounts by controlling their overheads and its not been easy.Campus recruitment policies where fresh engineering graduates were hired as early duing the third year of graduation has now been forced to change as no one can now predict the future pipeline.Most companies have re-jigged their policies and now recruiting only in the final year and that to from only the elite engineering schools.Fewer and more calculated offers are being made with joining delays of almost 6-7 months.The world famous Infosys training program of 4 months has been extended for close to 8 months.

Hedging Woes:
The Indian IT industry comprosing of TCS,Infosys,Wipro,Tech Mahindra-Satyam,HCL Tech had all just about recovered from the vagaries of foreign exchange fluctuations with the rupee appreciating remarkably to almost Rs 40 per dollar in January 08 thus hitting their topline and bottom line.All of them indulged in hedging practices each at different rates and schemes but no one foresaw that the dollar would be trading today the July 7,2009 at 48.78 Rs to a dollar thus suffering enormous hedging losses in the past Quarters more so the last one of the last fiscal Q408-09. What did not help is that the major chunk of the IT revenues came from the BFSI (Banking and Financial Services Industry) and the auto industry which has seen the biggest impact of recession.GM filed for chapter 11 bankruptcy recently.

Tax Extension:
India's export-driven information technology sector breathed a little wth Pranab Mukherjee the finance minister announcing in the interim budget that the government will extend the Software Technology Park of India (STPI) Tax benefiits scheme beyond 2010 until the march 2011 by 1 year. Units situated in software technology parks falling under the scheme's umbrella are eligible for a 10-year income tax holiday, in addition to other benefits.The tax rate for Indian IT companies would have gone up 3-8% on the expiration of STPI scheme from 12-25%, depending on their operational structure had this been not extended.Though Nasscom was pitching for a 5 year break this will provide some relief till the industry can come back on track

Shining armour amidst the recession : Remote Infrastructure Managed Services

On September 15,2008 Lehman brothers filed for chapter 11 Bankruptcy and soon many
others followed with Bank of America taking over Meryll Lynch .Freddie Mac & Fannie Maie
were bailed out by the US Government. The US economy had plummeted and was now in deep
recession after a prolonged slowdown. The rupee had appreciated to the Rs 40 mark and this
had already hurt the margins of the Indian IT vendors since the past two years.

But today with the Dollar hovering around the 50 Rs mark most of them should have been the happier of the lot.But they still wear a gloomy mask thanks to the forex losses on account of some hedging practices for which no one can blame them.Another reason of worry would be the tax benefits that are available to the IT industry only till March 2010 after an extension already.

The slowdown if anything has had the most severe impact on the Indian IT Sector compared to any other Indian sector.With the impacts of recession looming ever so largely, slowly but surely companies have began looking at ways to reduce costs, shore up liquidity to account for unforeseen expenses & to increase operational efficiency. Many a CIO’s were now concerned about their IT Investments.

Most of the fortune 500 companies outsource their annual software development and
maintenance projects to Indian Software vendors led by TCS,Infosys,Wipro,Satyam and HCL
Technologies. However with the effects of recession more and more of these fortune 500 companies looking at reducing their IT Spends and also looking at re-negotiating their existing contracts.

With this macro-economic development that is having a significant impact on the Indian IT
Industry I strongly see the IT Spends being divided into two the non-discretionary and the that discretory spends,the latter being something that cannot be curbed or put for later by these companies .That is where the concept of outsourcing your discretionary spends to Indian vendors takes birth.i.e A company can do without a SAP Upgrade till next year but has to make sure the lights of the server that runs the application are on and also try to minimize the spends further.

When you talk about keeping the lights on let me start by going backward.In todays times a company may not be able to afford to pay for their application development projects.As Nortel Networks and now General Motors have filed for chapter 11 bankruptcy there is an immediate liquidity crunch and TCS for whom both were sizeable customers will feel the impact of existing sales receivables being delayed and new projects being pushed back.More than anything the uncertainty over their existing contracts would be a cause of worry.

But within all this there is a huge opportunity for Infrastructure outsourcing.Imagine your Laptops ,desktops and servers being managed by your internal team and it costs about xx dollars.But what if you want to save costs further then you have the option of outsourcing that to a team that sits in India.Isnt that a logical option that you would take if you were a CIO.Thats what defines the crux of Infrastructure Managed Services.

Infact Infrastructure Managed Services and Remote Infrastructure Management (RIM) is now being touted as the third mode of delivery of IT services after the ADM, from across the world which would reduce costs by smart IT Investments and offshoring IT functionalities.HCL Technologies,Wipro are some of the Indian vendors who are doing well in this industry.

Through this blog I will highlight the opportunities and strategies taken by companies and what lies in store ahead.With the little knowledge I have I hope I can share with you what I feel about this industry which I am a part of love and indebted too.