Challenges of the Indian IT Service Industry

Recession in the global economy has directly affected an industry which has historically grown at double digits over the last decade; the Indian IT Service sector. Pricing and margins for tier 1 players like Infosys, Wipro, TCS, Tech Mahindra, HCL Tech and Cognizant are down by approximately 2% to 4%. The number of deals signed by the industry has also reduced drastically this year.

Some of the most important customers of Indian IT industry are from US and Europe which continue to be gripped by growing recessionary pressures, particularly the Banking and Insurance sectors. Recessionary pressures have forced them to lower their technology spending and shift to a fixed pricing and transaction based model. Gartner expects the IT spending to reduce to $3.2 trillion for 2009 from $3.4 trillion last year. Despite this, most of the contracts of Indian IT Service industry continue to be project based and discretionary. Clients have started consolidating their vendors and prefer end-to-end service provider rather than a discretionary service provider. They are increasingly involving senior management in decision making which has further extended decision and sales cycles. However, industry players are slowly shifting to transaction based models and longer-term annuity contracts. They now face the challenge of expanding their global delivery platforms and inorganic growth now seems to be the fastest and most efficient route to achieve this end.

Another major issue faced by this industry is talent crunch and high training costs. Infosys sacked 2100 employees and has announced plans to hold back promotions and pay hikes this year. To reduce training and bench costs which are considered to be the most inefficient cost areas, HCL Tech has introduced 'Just-in-Time' hiring strategy and also reduced the number of freshers employed. Lack of innovation also is an area concern of the industry as players continue to provide the same services. India was once a favorite outsourcing destination for BPO and IT services. Until 2008, the Indian IT service industry held a 51% market share in global outsourcing model. However, cost competitiveness and productivity benefits are slowly evaporating and as per McKinsey, talent crunch and lack of innovation will result in India losing 10% of its market share to other low cost countries like China and Philippines which are creating their own global delivery models.

Protectionist policies by the US government continue to threat the IT sector. Moreover, European countries are also considering adopting protectionist policies in a bid to increase local jobs and gain tax payers' confidence. Besides taking away the tax breaks, companies that have received federal bail out money now need to prove the lack of technical talent at home before they outsource work to locations like India.

To further aggravate the problems, unfavorable currency movements have played a spoil sport. Foreign exchange losses of top tier India IT companies range from Rs.201 crores for HCL Tech to Rs.781 crores for TCS. Industry experts opine that the Indian IT service sector will recover only once the global economy recovers. To sustain in such highly competitive market, players need to diversify and look for new revenue sources and opportunities to consolidate and move up the value chain.