Optimism at Nasscom-2001

By N. N. Sachitanand

BANGALORE, FEB. 25. With the U.S. economy slowing down, corporations paring IT spends, dotcoms going bust, e-commerce not living up to the hype, IT giants posting lower profits and new economy stocks taking a plunge, one would have expected long faces at the Indian software industry's annual stocktaking. Merril Lynch estimates that IT spending growth in the U.S. will slow to 12 per cent this year compared to 22 per cent and 26 per cent in 2000 and 1999.

But it was far from a wake at Nasscom-2001 held recently in Mumbai. Not that there were no references to reduction in contracts from pure play B2C companies and whispers doing the rounds of a hold on fresh recruitment by the Indian subsidiaries of global IT giants. And, in sharp contrast to last year's annual gathering, the venture capital brigade was lean and muted, their place in the sun being taken by sharp nosed analysts. There were even some warning noises about Chinese and Russian competition overhauling us.

High potential areas

However, the overall mood was one of optimism that the current dip in the IT market was temporary, a mere consolidation phase and things will be back to normal by the end of this year. The current Chairman of Nasscom, Mr. Phiroz Vandrevala, pointed out that, in fact, the financial downturn in the U.S. would provoke more of the corporations to outsource IT services to offshore vendors in order to pare costs and India continued to be the first preferred option for global IT services. According to him, India has high potential to garner a bigger share of the global software market in such domains and sectors as embedded systems, mobile commerce, engineering services, broadband, digital signal processing and IT enabled services. Indian software companies had a great opportunity, he felt, in exploiting the high value business of developing security systems for conducting e- business. The security services market is forecast to grow at a CAGR of 27 per cent until 2004.

Mr. Dewang Mehta, President of Nasscom, was as ebullient as ever and forecast a rosy future for the software industry. He pointed out that India is recognised as an important base for software development, not merely on cost basis but, of late, on the basis of quality and timely delivery. In 1999-2000, more than 266 of Fortune 1000 companies outsourced their software requirements to India and this number is likely to increase in the next couple of years to over 400.

Customised software

True, Indian software exports account as yet for less than 1 per cent of the global market but India's share in global cross- country customised software development market, according to a World Bank funded study, has gone up from 11.9 per cent in 1991 to 19.5 per cent in 2000. The Indian software sector has consistently achieved more than 50 per cent annual growth since 1991 and, according to a survey by McKinsey & Co., this industry should touch a turnover of $87 billion by 2008 (from $8.34 billion in 2000-01).

Significantly, software is slated to emerge as the country's largest exporting sector with its share of the country's export basket rising from 13.1 per cent this year to 23 per cent by 2003. This sector has already created 4.10 lakh direct jobs in the last ten years and the potential is to provide more than 2.2 million jobs by 2008.

Mr. Michael Finney, Head of European Tech Services Research of SG Cowen Technology Group, posited in his paper that the world is at the threshold of the third Industrial Revolution, which will accelerate as the pieces of the jigsaw puzzle, that is, broadband wireless, advanced applications and reliable network security, fall in place. As we move further into the third Industrial Revolution the users of technology and the manufacturers will become more distanced, with the gap being increasingly filled up by the technology services companies.

The market for such technology services is enormous and expected to reach $585 billion by 2004. The hottest horizontals in these tech services are e-customer relation management, supply chain management, knowledge management, networks, ASP (application service provider) outsourcing and e-applications and services. Indian software companies should bid to get a strong foothold in these sectors through acquisitions of hot small companies in the U.S./Europe or alliances with leading U.S./European tech service companies.

Yet another U.S.-based consultant pointed out that though there had been a slowdown in consumer and corporate IT buying in the U.S. in recent months, it was just a matter of time before the e- business juggernaut picks up again. Morgan Stanley expects the number of Internet users to rise by an average of 23 per cent over the next three years. B2B e-commerce is getting a firm foothold. A recent Forrester survey showed that in the past three months, 61 per cent of U.S. organisations have bought indirect materials online and nearly 40 per cent of manufacturers have purchased direct materials online.

In 2000, B2B e-commerce accounted for $333 billion, or just 2 per cent of all commercial transactions, according to AMR Research. But it is expected to take off once the infrastructure is in place. A recent U.S. survey showed that only 14 per cent of companies expect to decrease spending on e-business initiatives, while 23 per cent expect to increase spending in target areas. B2B e-commerce could reach $5.7 trillion by 2004 and the bulk of this will flow through private e-exchanges built by the corporations themselves.

It is expected that packaged software for e-business will grow from $13.5 billion last year to $44.7 billion in 2003. The biggest chunks of this market will comprise supply chain management (growing from $5.3 billion to $14.6 billion) and e- commerce (from $3.7 billion to $14.9 billion). However, many companies are cutting spending on processes that do not touch customers or suppliers - which is bad news for system software and traditional ERP vendors.

Man power problems

So, it is not falling business potential that the Indian software industry needs to fear. It is also not the lack of broadband connectivity. That is a temporary bottleneck which is now being aggressively addressed by private sector players laying optical fibre backbones all over the country. What should be of concern, ironically in a country which boasts of a large supply of programmers, is the growing shortage of qualified manpower.

According to a paper on Human Resources for the Knowledge Economy, the Indian demand for IT professionals is slated to rise from 3.40 lakhs last year to 8 lakhs in 2005. As against this, the intake of all technological institutions will train only 1.65 lakhs by 2002, of which the Tier-I institutions such as the IITs, IISc, and the IIITs will be only 21,000. Thus, to meet the manpower requirements in the future, technical education must at least triple in scale.

The biggest bottleneck that will be faced by the premier and Category II institutions will be the availability of faculty. In the next five years, the need is for 9,000 additional faculty, whereas the availability may not be even 4,500. An even bigger problem, especially for the Tier-I institutions, is the attraction and retention of faculty, because industry gobbles up the good professionals. For example, at IIT, Delhi, only 40 new engineering faculty have joined in the last five years, and the age profile of the faculty is becoming askew with 30 per cent of the faculty over 55 years of age. One solution that is mooted is more interchange of staff between industry and the institutes as well as a flexible regime for the faculty whereby they can also be free to lend their services to industry.

The problem is further compounded by the fact that high calibre Indian IT professionals are in great demand all over the world - witness the increasing number of delegations from several countries making a pilgrimage to this country to woo our IT professionals. In his keynote address at Nasscom 2001, Dr. Arun Netravali, President of the prestigious Bell Labs, pointed out that 12 per cent of the information scientists worldwide are of Indian origin and Indian engineers and professionals make up 30 per cent of the work force of the technology companies worldwide. How will the Indian software industry cope with this increasing external force attracting its top talent is a much more worrying question than a temporary dip in global IT spending.

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