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Indian geeks will witness a rare event on June 7 when IBM chairman Samuel Palmisano hosts the company's global analyst meet in Bangalore.
Even as Palmisano fields queries on the Big Blue's growth plans from analysts, he may have to ponder over this googly from a tech wizard, who heads India's third-largest IT bellwether. "How do you build a larger global cadre of people in emerging markets, which are prime growth markets?" That's what Wipro chairman Azim Premji asked, when quizzed what would be his agenda if he was in Palmisano's seat.
Premji has been constantly espousing the potential of the emerging markets. In an interview recently, he said that growth won't "come from Europe or the US but from emerging markets".
Sure, but back home, with increasing competition, players are going up the value chain, diversifying into allied activities and hiring like never before. And global players are setting up manufacturing facilities to make the most of a growing market.
The Indian IT market, which includes hardware, software and the IT enabled business services (ITes) including business process outsourcing (BPO), recorded a 22% growth in revenues to $12.4 billion during 2005-06, from $10.4 billion in the previous fiscal, according to National Association of Software and Service Companies (Nasscom), the IT industry body.
The International Data Corporation (IDC) predicts that the domestic market will grow at 17% during 2004-09 and will move to $18.86 billion (Rs 84,878 crore) in 2009.
Today, half of India's IT market consists of hardware. According to Nasscom president Kiran Karnik, IT spending and staff hiring by businesses and government departments in India are rising at rates higher than in North America, Europe and Asia-Pacific countries.
IDC predicts a 19% jump in India's IT spending during the current fiscal, which will drive up the current 9% growth in IT spend --- estimated at $112 billion --- in the Asia Pacific region for the year. This, when the worldwide growth is projected to be about 5.5%.
At the same time, PC sales grew by 30% at 4.6 million in the sub-continent during the last fiscal, from about 3 million two years ago. No surprise, therefore, that the global giants are rushing in to take part in the action.
Intel president and CEO Paul Otellini, who was in India this week, affirmed the global chipmaker would promote low-cost computers for greater PC penetration.
As the world's third largest economy, India holds huge potential for IBM, which has set high targets. Employing over 38,500 techies to work on its offshore projects worldwide, the global firm has been aggressive in grabbing total outsourcing contracts in the Indian market.
The 10-year $750-million BPO deal with telecom giant Bharti is a case in point. "Multinationals such as IBM and Hewlett Packard have made inroads in the domestic market than home-grown IT service providers," says Siddharth Pai, partner and managing director of sourcing advisory firm TPI India.
Even Indian firms have significant presence in the local market, argues Wipro chief strategy officer Sudip Nandy. Its India arm Wipro Infotech, HCL Infosystems, TCS subsidiary CMC and Tata Infotech are competing with HP and IBM in the domestic market. "We have bagged more total outsourcing contracts similar to the HDFC deal," says Nandy.
For now, the multinationals have an edge in both hardware supplies and at implementing software contracts over domestic firms.
Analysts say Indian IT firms need to face up to the MNCs by investing in capabilities in their own backyard. Ignoring the local market will be at their own peril. "Ignoring the domestic market is a short-sighted approach for the Indian majors as the tax incentives they gain by focusing on software exports will not last beyond 2009," says Pai.
The imperative is there for all to see. In the three years since taking over the top job at IBM, Palmisano has joined Indian IT services firms to make offshoring mainstream. IBM has grown from 6,700 in 2002 to over 38,500 professionals in India and added BPO firm Daksh in its kitty to compete with domestic IT services firms like TCS, Wipro and Infosys on their global delivery model.
Other global firms like Accenture, EDS and HP have also ramped their offshore presence. Accenture has nearly 25,000 people and EDS would have a headcount of 14,000 after it completes the acquisition of mid-tier IT and BPO firm MphasiS.
Now consider Indian ITes-BPO exports, which grew 48% from $3.1 billion in 2003-04 to $4.1 billion in 2004-05. It touched $6.3 billion in 2005-06.
Wipro's Nandy, however, is not impressed. "The multinationals adopted our model of offshoring as a defensive move. But they are still not clear on whether they need to be aggressive or defensive," he says.
But with the scale they have achieved in India, multinationals can compete at the price point offered by Indian IT services firms. "Indian firms like Infosys or Wipro are expected to earn margins of 24% for their shareholders, while an IBM or Accenture has to give only 10% to their shareholders. So they have the extra leverage to quote lower prices than Indian firms," says Pai.
So what's the road ahead? The total addressable market for global offshoring is approximately $300 billion. Of this, $110 billion will be offshored by 2010.
"India has the potential to capture more than 50% of this opportunity and generate export revenues of approximately $60 billion by growing at 25% year-on-year till 2010," believes Noshir Kaka, partner, McKinsey & Co.
The country's software exports have risen from $9.5 billion in 2002-03 to $25 billion in 2005-06. To achieve this $60 billion target, the top tier domestic firms - TCS, Wipro and Infosys have begun treading on multinational toes by going up the value chain.
Like Infosys's US subsidiary, Infosys Consulting, gives strategic directions to clients in building IT infrastructure. Wipro has invested heavily on R&D, deploying over 10,000 engineers to become one of the world's largest outsourced R&D units. It works on projects from designing mobile handsets to semiconductors, where the value generated is higher, including owning or sharing intellectual property.
"We are also adding more specialised or value-added practices like consulting. For instance, 7% to 8% of our revenues today come from consulting, and the kind of work we do there is similar to the work that IBM does," says Premji.
But not everyone is gung-ho on this move. "Indian service providers need to stick to what they are best - delivering services," says Pai.
Indian IT firms have also been active on acquisitions abroad. In April, Bangalore's mid-tier telecom software firm Subex Systems bought its British rival Azure Solutions for $140 million, making it the biggest overseas buy by an Indian IT entity. "This shows that Indian firms are daring to go and buy companies in markets they operate," said Nasscom's Karnik then.
Wipro itself has strung together a stream of buyouts in the $20-$50 million range to bolster niche expertise.
The big pie continues to be software. TPI has estimated that nearly $100 billion worth outsourcing contracts in the US would come up for renewal.
The silver lining is that Indian software firms are already being invited to bid for contracts such as the ABN Amro deal for TCS and Infosysm, and the General Motors contract for Wipro and indirectly Satyam.
The deal sizes of around $250 million and less may be small in the multi-billion contracts, but the initial entry has been made in the big league.
Agrees Pai, who says that clients no longer decide on handing over IT contracts and assets to one single vendor.
"The work is split and in some cases they keep the assets in a separate balance sheet. It is selective outsourcing," he says.
TCS created a landmark $868 million back-office outsourcing deal last year with British firm Pearl Group that included TCS taking 1,100 people on its rolls.
But will Indian firms take the risk in future for other projects too? "Yes and no. It depends on the profile of work and the project," says Nandy.
The stockmarkets have definitely given India's software trinity the thumbs up for their moves. The Infosys share has risen 33% in the last one year, while TCS is up 45% and Wipro 33%. The Bombay Stock Exchange IT index itself has returned 37%.
The stockmarkets have certainly endorsed the IT majors' trajectory.
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