Innovate to beat slowdown
|
IT services sector offers new areas of opportunity for businesses
|
Clients are more likely to increase their offshore spending in order to get more with the same or fewer budget dollars.
PHOTO: S. R. RAGHUNATHAN
TIGHTENING BELTS: People at work at a software solutions company. —
The global financial crisis, which started with sub-prime mortgages in the U.S. in late 2007, has spread to the entire financial services industry there and across the globe in 2008, leading to a severe liquidity crunch. This has had ripple effects across industries. Major developed nations are already in recession or on the verge of recession.
In India, the gross domestic product (GDP) growth dropped from 9 per cent to 7 per cent in 2008-09 and the estimates for 2009-10 are between 5 per cent and 6.5 per cent. The impact is expected to be felt in select sectors such as IT/ITeS (IT-enabled services), which depend on the U.S. market, automobile and real estate.
IT services have many industry verticals and the impact is not likely to be the same across all. The impact will range from shrinking order books to pressure on pricing and, hence, margins. The options before IT companies are many and it is not necessarily pink slips or just cost reduction.
However, most IT companies have decided to tighten their belts and get going with the projects. Of course, spending on IT services has come down. In the next six months, the industry will have a challenging time. New customers will be more focussed on cost reduction and the existing ones will be keen to renegotiate. The factors that are common in the present scenario are cancellation of discretionary projects and reduction in existing contracts. These two issues will impact the Indian software outsourcing service providers.
Priorities
It is clear that the impact on the IT sector will be felt when clients go through a process of rapidly re-thinking business priorities and re-prioritising their technology and related spending. The industry will see an overall 3-4 per cent reduction in average cost realised. “In the current situation, enterprise cost optimisation has become the most critical factor for chief information officers,” says Partha Iyengar, Head of Research in India at Gartner. “Despite worldwide IT budgets remaining flat in 2009, the Indian IT budget is still expected to grow at a modest 5.52 per cent. The majority of this budget — up to 60 per cent — will be used to run the day-to-day operations, while 23 per cent will be utilised to grow the business and 19 per cent to transform the business,” he adds.
In such an economic cycle, IT companies are increasingly resorting to global sourcing to rationalise costs by adopting services such as application maintenance, IT infrastructure services (ITIS) and business process outsourcing (BPO). At the same time, because of liquidity or credit crunch, many industries are in rapid ’secular’ change that requires extensive deployment of technology.
Although discretionary decisions are taking longer to be made in the current environment, the need for services such as application maintenance, IT infrastructure services and BPO/KPO (knowledge process outsourcing) have not been affected, says R. Chandrasekaran, President and Managing Director, Cognizant.
Mr. Chandrasekaran feels that in the current circumstances, the pressure on companies to adjust to the new environment and adopt cost-saving initiatives will only benefit global sourcing. In difficult economic times, clients are more likely to increase their offshore spending in order to get more with the same or fewer budget dollars. Though cost is not the only motivation for outsourcing, the other key driver is the ‘value’ that outsourcing delivers.
However, it is inevitable that the spate of mergers in the banking sector has shrunk the addressable market for software vendors. This will have a cascading effect in terms of stiffer competition among existing service providers and higher pressure on rate. Since the overall volume of business is going to be low, the outsourcing industry will exhibit a single digit growth rate this year, feels Phaneesh Murthy, CEO, iGATE.
Client spending
As a general phenomenon during the current slowdown, clients’ spending will happen in areas of application support systems. For example, for Cognizant, in the fourth quarter, on a sequential basis, application maintenance grew 5.5 per cent, while application development declined by almost one per cent. Mr. Chandrasekaran believes this trend is reflective of the overall macro-economic environment, whereby customers are reducing discretionary spend in areas such as development, while increasing the amount of application maintenance that they outsource in order to reduce ongoing operating costs.
Has the meltdown hit other verticals beyond financial services? Yes. The most affected verticals are banking, the financial sector and retail. Any industry which avails itself of credit facilities, including real estate and high-end consumer goods, will be impacted over the next year or so.
Healthcare
The industry is optimistic that healthcare vertical will expand even in recessionary times. It is expected that significant investments in this sector will happen, with the earlier U.S. Government signing into law electronic medical records and the current President talking about fundamental transformation of healthcare. So, it is anticipated that a lot of focus will be on healthcare and over the next few years, budgets will go up in healthcare IT, says Mr. Murthy.
Mr. Chandrasekaran, however, hopes that over long-term, the financial services segment will revive, as most of the banking customers are actively re-shaping the financial services industry which gives the IT companies a number of opportunities as they work to transform their businesses.
In the current economic slowdown, newer areas of opportunity for the business will come from services. Customers increasingly want to partner those companies which can provide service innovation and have ability to bring new services to the customer base. This is of particular importance at times such as these when customers are reacting to the pressures of a weak economy and are looking for ways to limit costs and improve productivity.
This will enable the IT companies to negotiate the price across the table with their customers. Most companies are working with clients to provide creative pricing incentives around greater volumes, incentives for additional volumes, additional value and transformational services.
Even beyond discount, Sridhar Kulasekharan, Chief Operating Officer, Cybernet-SlashSupport, says that benefits-based pricing is rapidly being pursued even to the extent of guaranteed payments. Today, vendors make upfront payments to clients hoping to save project costs.
But a forward looking IT company might find an opportunity in the current environment of economic slowdown.
Some industry will see uncertainty as an opportunity to strengthen their businesses by leveraging opportunities to take market share, diversify further geographically, invest in talent acquisition, prudently take advantage of M&A opportunities and create innovation in new services, feels Mr. Chandrasekaran.
SHANTHI KANNAN
Printer friendly
page
Send this article to Friends by
E-Mail
Business
