NEW DELHI: Software companies, led by Infosys Technologies and Tata Consultancy Services, are set to report higher revenues for the December quarter as firms such as British Petroleum increased outsourcing, but a stronger rupee and higher wages could reduce profitability, say analysts. Although profitability may fall, industry may cheer the revival of order flow after more than four quarters of uncertainty on new businesses as companies in the West grappled with recession and credit crisis. Revenues may rise as much as 4% on quarter, some analysts say.

“The macro situation has improved. The order book is better now. Companies might outperform vis-a-vis guidance,’’ said Harit Shah, research analyst at Karvy Stock Broking. The $60-billion Indian IT sector that depends on the US and Europe for most of its revenues, has been facing tough business conditions for more than a year as their clients such as Citigroup and General Electric were cutting costs as the credit crisis reduced demand. But the situation has improved in the past few months with steady flow of orders as developed economies emerged out of recession. But the appreciation of the rupee against the US dollar, would reduce profitability.

“We are seeing stability and an improvement in demand that we had talked about the last quarter,’’ said Suresh Vaswani, joint CEO, AT Wipro Technologies. The rupee’s rise from 49-50 levels in Q2 to 46-47 levels in the third quarter will impact margins. For every 1% strengthening in rupee, margin impact can be up to 50 bps in large companies, analysts said.

The rupee has been one of the best performing currencies in the region in the December quarter as global funds poured money into India expecting a strong economic growth. The quarter saw deals like British Petroleum global vendor consolidation contract worth over $2 billion shared among others by TCS and Infosys. Also, implementation of software packages such as SAP and Oracle which were onsite heavy are now about 60% offshore. IT companies like HCL Technologies have gained from this shift and HCL’s buyout of Axon helped.

The revival of order flow has also brought in higher costs for companies as they paid more wages, in some cases as much as 11% more, to retain talent to execute orders. And companies could not raise the fees they charged for services as they had to compete aggressively for new orders. “There will be a margin impact of about 25 bps due to salary hikes and variable payout,” said Shashi Bhushan, senior research analyst at Prabhudas Lilladher. “Pricing has been muted with a positive bias that is not too bad for this year,”he said.

The revival of businesses may ensure continued order flows, but may not necessarily lead to rising profitability as the currency movements may be adverse. “Margins are not sustainable as the rupee is strengthening,” Bank of America-Merrill Lynch wrote in a report. BoA-ML sees rupee/dollar at 45 at March end and at Rs 43 at end December 2010 and this will have a negative impact on margins in coming quarters.

Wages will climb up even as pricing will be under pressure. Discretionary sales and marketing spends will also move up.

Cloud computing is helping corporations create new, cost-effective business models. It has opened a world of opportunities for Indian IT companies

 Devant Mody, the head of sales and finance at Bajaj Finance is a happy man, he has been able to reduce the time taken to process applications for consumer finance from 45 minutes to just 5 minutes by adopting ‘cloud computing’ — techno-speak for online or internet-based computing. The program went “live” in April 2009, and “it has exceeded my expectations”, says Mody. “This strategy helped me make customers happier by allowing them to file their applications online and get approvals faster, besides reducing my capital expenditure since I did not have to add any hardware or buy new software licences.”

In Hong Kong, Mark Ross, vice-president & chief information officer of Sun Life Financial Asia, is no less happy. He was aware that most interactions in the insurance industry were still on paper or through call centres. To push customer service a notch further, he wanted his customers, internal users, insurance agents and partners such as banks to access critical information securely at any given time. He evaluated options available and decided that the cost of doing this in-house would be far too high and time-consuming. “Even before the financial crisis, it would have been difficult to convince the management of the large outlay required for an in-house system. After the crisis hit us, it wasn’t even worth considering. It had to be a cloud-based offering.” Ross now uses the cloud as an interface to the core system (records and so on). “There are no fixed costs. We did not have to buy hardware. And the actual implementation cost is just a third of what it would have cost had we added computers and servers,” says he.

Ross and Mody are two of a growing tribe of users who have started moving their information technology (IT) businesses to the cloud. This has helped them speed up their consumer-facing businesses (their core strengths), while reducing capital expenditure.

Clouding up
Despite its somewhat esoteric name, most people who use web-based email services, have watched a video online, shared snaps using photo-hosting services, read news online or watched TV shows on the internet may not realise that they are actually using ‘cloud computing’ services. Most players provide these services for free for individual users. For enterprise users, it’s generally a paid subscription-based model — Google Apps is an example.

“A true cloud offering,” says Jeremy Cooper, vice-president (marketing) of salesforce.com (vendor for both Bajaj Finance and Sun Life) for Asia-Pacific, “is one that is subscription-based, which involves no purchase of hardware, software but only needs an internet connection. It could also be a multi-tenancy model where a single infrastructure is used by many (like Google or Yahoo).”

Indian IT services firm Patni Computer Systems says it hopes to become the first company in the country to host all its IT services on the cloud. The company’s pilot is in place and the data reside on a large business-to-consumer (B2C) player’s data centre. Patni, according to Chief Executive Officer Jeya Kumar, plans to have all its internal IT services hosted on the internet with many B2C players by June 2010. The company, says Kumar, spends around Rs 190 crore on its internal IT needs annually. These include servers for storage, desktops, networks and bandwidth.

“We are our own guinea pigs when it comes to cloud computing. Once we are convinced that it is secure and fruitful, we will extend these services to our customers too,” says Kumar. Not only will Patni be “able to save around 30 per cent by way of capital expenditure and another 30 per cent on space when the process is complete”, says Kumar, but “when we acquire a new company, we will not need two data centres even if the headcount doubles. The complete new portfolio from the acquisition will be hosted on the web.”

Wipro too has built a “private cloud” for internal use. The software giant is now offering that expertise to existing customers to optimise the computing power of their data centres. Wipro is also building what it calls the “enterprise cloud” — a capability it plans to offer to clients who have already outsourced or plan to outsource their hosting or infrastructure management activities with the company, according to Girish Paranjpe, Joint CEO of the company.

“Creating a private cloud is something that Wipro can help clients with. Managing security within private clouds is what Wipro can do. It is much more efficient both in terms of costs and kind of provisioning. Earlier, we in Wipro noticed that once we placed an order for a server, it used to take 43 days to install. Now that we have capacity on demand, we have to just switch on, and it takes just 36 minutes,” says Paranjpe.

Many opportunities

Infosys has cloud computing-based solutions for the auto sector. And others such as HCL Technologies, Tata Consultancy Services and even Bharti Airtel (with its network PC) aren’t far behind. They will no doubt have stiff competition from global majors. Sensing the huge opportunity in India, IBM has already set up a cloud computing centre in Bangalore. Oracle is getting its act together, while Verizon launched its cloud computing service in India in August 2009.

The opportunities are simply huge. HCL Technologies CEO Vineet Nayar says cloud-based enterprise services provide an opportunity to create new business models and should not be seen as just another technology. It is a shift in the way IT delivers business capabilities.

Smaller Indian players are also fast taking the cue. Hexaware Technologies, for instance, has announced a strategic partnership with SOASTA, a leader in cloud testing, according to R V Ramanan, president of global delivery. Akash Saraf, CEO of Zenith Infotech, also a hardware vendor, concurs that the move to cloud computing “will certainly make maintenance obsolete.” Zenith recently launched its private cloud computing service called Proud. It is a single centralised computing system which replaces the need for customers to buy computing and networking hardware as separate components. Since the customer can run its entire IT infrastructure — desktops, servers, storage, networking and applications like enterprise resource planning, security and so on — it helps save on cost and maintenance.

The number of applications and the amount of content in the cloud now available to both consumers and corporations has grown to a critical mass, according to analysts at Booz & Company. Gartner says worldwide cloud service revenue will surpass $56.3 billion in 2009, a 21.3 per cent increase in revenue from $46.4 billion in 2008. The market is expected to reach $150.1 billion in 2013. The Indian market, according to Springboard Research, will register compounded annual growth of 76 per cent between 2007 and 2011 and reach $260 million (around Rs 1,300 crore) in by 2011.

Cost saver

“Companies love the cloud as they have only operating costs to pay. The cloud is a win-win for everyone. As more and more people are using multiple screens, desktops, laptops, mobile phones and TV screens to access their data, the cloud is inevitable. Corporate India can save lots of money by using the cloud,” says Vijay Mukhi who promotes ‘The India Cloud Initiative’.

Ascentius Consulting Principal Analyst Alok Shende: “We anticipate cloud computing to be adopted in segments that currently have low IT penetration and demand solutions with low complexity. Small- to medium-sized businesses will be the prime candidates. Large enterprises may have some initial concerns on compliance, data security and unproven reliability of cloud computing. However, there will be pockets such as back-up storage and hosted email service where large enterprises will be more open to employ the cloud.”

When a company needs more capacity during its peak season, it simply pays for it on demand. When business slows down and the company needs less capacity, its bill goes down because it uses fewer resources. In financial terms, this allows a company to move much of its infrastructure costs from being a capital expenditure to an operating expenditure.

Research firm Saltmarch Intelligence says data confidentiality and auditability topped the list of primary obstacles for the use of cloud computing technologies in their organisations, according to a survey of over 1,100 Indian Business Technology professionals. “Security incidents in the cloud have made clear that this new promising technology comes with complexity and security and privacy challenges. Cyber attacks are executed with precision and patience and security technology seems to fall behind the threat curve,” says Indu Britto, group publisher & senior vice-president, Saltmarch Media.

Vendors say they have the resources to make their data centres more secure than anybody ever could and resilience is better because data is distributed and backed up in geographically dispersed locations. Cooper of salesforce.com says: “That cloud computing compromises security is a myth. We have 1,800 customers who mostly comprise financial institutions and banks.”

Analysts also say that few firms have worked out “which data should go where from a business point of view. This failing means moving everything to the cloud would not provide any real benefits as the fundamentals have not been sorted out. It would merely “create a new set of network dependencies because the data is no longer in the same data centre”.

There are other hurdles too. Dearth of sufficient bandwidth, lack of robust networks, virtualisation and security issues could delay adoption of the technology. More than 30 per cent of large businesses have some enterprise applications in the cloud, but two-thirds do not have a security strategy for cloud computing, a survey conducted by IDC found.

Indian IT New Services Tougher Times

The year that passed by was one of the toughest in the decade for the Indian IT industry, which reeled under the impact of the worst-ever global economic crisis.

It was a reality check for the industry, with companies facing huge uncertainty on their business outlook for most part of the year as customers held back or cancelled investments in new technology.

Towards the close of the year, the industry began to show early signs of recovery, with customers starting to take decisions on IT spends.

Shares move upReflecting the sentiment, shares of IT companies such as Infosys, Wipro, and HCL Technologies touched 52-week high in the past week, as against yearly-lows in January-March. The BSE IT Index also touched the year's high of 5190 on December 24 as against 1987 on February 24.

The image of the industry took a hit at the beginning of the year due to the $1.4-billion fraud at Satyam Computers. The timely government intervention did mitigate the impact resulting in buy-out of the Hyderabad-based firm by the Mahindras.

On an optimistic note, implementing the learnings from previous downturn in 2001-02, the large and mid-size vendors managed to handle the changing market dynamics effectively by continuing to invest in newer service offerings and expanded their delivery footprint overseas. The smaller firms, however, bore the brunt of the downturn.

The economic crisis, triggered in September 2008, had forced the Indian IT firms to innovate, finetune their business model and tighten the cost structures as the volatile currency movement affected the earnings and pricing power came under pressure with clients seeking hefty discounts of 5-20 per cent.

Such a trend not only exerted pressure on the profit margins, but also forced the companies to shed their flab, resulting in an increase in forced attrition. Though wage cuts and pay hike deferrals were more pronounced till the middle of the year, the situation improved over the past few months, companies have started effecting wage hikes and firmed up their hiring plans for the next year.

Vendor consolidation

Vendors do expect stability in the pricing going forward in 2010. A clearer picture on the 2010 budgets was expected by the end of January-March quarter though some players feel that the 2010 budgets may stay flat over 2009. The consolidation in the market place is expected to benefit the Indian vendors as they are still able to offer the cost arbitrage when compared their global counterparts.

The large Indian players have gained from the recent vendor consolidation exercises at large global clients such as BP Plc, Nokia Siemens Networks, Telstra and Aviva among others.

New pricing models based on fixed price, pay-by-use and ticket-based pricing gained currency in 2009 as the outsourcers demonstrated cost savings to their customers from such newer engagement models. The Indian vendors expect their share of revenues from such newer pricing models to go up as compared to the traditional time and material projects, where billing is done on an hourly basis for the number of persons deployed on the projects.

Newer services

2009 also saw the Indian vendors launch newer services offerings on pay-by-use or Software-as-a-Service model through cloud computing initiatives.

Companies like Wipro have set up private cloud to test and deploy their applications internally to showcase to their customers.

The year saw the large vendors sharpen their focus on the domestic market, where the emergence of large IT deals acted as an offset to the slump in business from traditional markets in US and Europe.

Indian vendors also expanded their global footprint by setting up delivery locations in Latin America, where they see traction in the market place. The industry witnessed merger and acquisition activity on a moderate scale where companies picked up the captive units and smaller niche firms to enhance their competencies.

Indian IT Sector the New Reality 2010

NEW DELHI: India’s $60-billion technology services industry may have hoped for a rebound in 2010 after gloomy 2009, but days into the New Year,the initial optimism is fast wearing thin.

Industry officials, analysts and other experts believe that India’s IT sector, a habitual growth monster until the crisis period last year, is unlikely to return to the ‘business as usual’ situation that existed before the crisis and will have to soon recalibrate itself to a new reality and new growth strategies.

The US and European markets, which account for about 80% of Indian software exports, are yet to show signs of a pickup in demand for outsourcing that was expected in the run-up to New Year. Taking note, industry lobby group Nasscom said it does not see any immediate upward revision in the exports growth target, which it had pegged to an all-time low of 4-7% in mid-2009.

“It’s a demand environment that appears permanently damaged,’’ said Vineet Nayar, CEO, HCL Technologies. Other business services providers like Infosys Technologies, Wipro Technologies and Genpact share the same sentiment.

After a compounded growth of over 30% since the 2003-04 dotcom bust, software export growth fell to 16.3% at $46 billion last fiscal against 27% at $40 billion in 2007-08. Last year saw Indian companies embracing survival strategies, moving to fixed costs and bundling software services with back-office operations and remote infrastructure management, to retain customers and fuel growth.

HCL’s Nayar calls it coping with a new ‘normal’ where, “we will see lower ‘normal’ levels of expenditure, lower volumes, hard costs, lower margins and lower annual increases”.

Besides tough global headwinds, Indian providers are also up against a stronger rupee that will erode margins. A Bank of America-Merrill Lynch (BoA-ML) tech sector report expects the Indian currency, which has appreciated about 4% vis-à-vis the dollar in the last quarter, to strengthen further over the next few quarters at Rs 45 by March-end and Rs 43 by December 2010.

That is bad news for Indian providers, already coping with higher costs due to wage hikes and increased sales and marketing spends.

“Budgets could remain flat for sometime,” says Suresh Vaswani, joint CEO, Wipro Technologies adding that customers continue to demand more for less.

BoA-ML also notes that Indian majors will face stiffer competition from global vendors. New competitors such as Dell, which bought out Perot Systems in September 2009 to strengthen its services offering, are beginning to turn the heat on Indian IT. Dell, for instance, plans to target $20-50 million contracts, the sweet spot for Indian technology majors.

Others such as IBM, Accenture and HP now have strong low-cost service delivery options. Their deeper domain expertise also gives these firms another edge over Indian providers.

And Indian tech companies may be among the few sectors that see little hope in\ the recovery gathering pace. In any case, these companies don’t see a return to the giddy business growth of yesteryears. To corroborate this, HCL’s Nayar points to data from S&P 500 companies.

An analysis shows that 75% of S&P 500 companies recorded a negative growth in the June 2009 quarter. Though the situation is expected to reverse by this June, only 24% companies are expected to grow more than 10% from the year before compared to 50% of them in 2008.

“Clearly, we are looking at a market of different shape and size ahead,” says Mr Nayar. Increasing costs are another worry. The BoA-ML report sees wages and marketing spends climbing as companies target new service lines, markets and geographies.

So how will companies counter the likely stresses and strains of 2010?

Companies will have to evolve new business models to grow in a tough market environment, says Nasscom president Som Mittal. Wipro, for instance, sees new business coming from adoption of cloud computing, green and collaboration technologies. The company is also eyeing more business from the Indian and Middle East markets.

“Customers are not looking at just any vendor but also transformation partners who have their skin in the game,’’ says Mr Vaswani. Infosys, meanwhile, is ramping up its sales force and adding practice and product specialists to its ranks.
BoA-ML recommends that to cope with the new market dynamics, companies may require more locals onsite, better system integration skills, more contracts on pricing models like `gain sharing’ (pricing linked to revenue), automation for infrastructure services and so on.

“The way forward is disruptive innovation,” says Mr Nayar, adding that competing with established leaders in their business models can only bring incremental growth.

“Global CIOs today are not looking for technology solutions. They are looking for business solutions. So from offering new delivery models such as pay per use to taking over entire IT infrastructure of the client to large multi-year SAP implementations, we are doing it all.’’

Whatever the strategy, the beginning of 2010 is not different from that of 2009 — uncertainty dominating the minds of company heads, rather than the cautious optimism they were predicting in December.

“Countries and companies still have job losses to think about. If job losses keep rising, it’s a problem,’’ says Pramod Bhasin, president & CEO, Genpact.