Recession and India: Impact of Recession On Indian IT Industry

Recession and India
Impact of Recession on Indian IT Industry
The Jamnalal Bajaj Institute of Management Studies Mumbai University, Mumbai
November 2009
By Saeed Khan Information Systems Consultant Mumbai India
Table of Contents
1 Introduction 1.1 Background 1.2 Problem Discussion, Research Purpose and Research Questions
2 Literature Review
3 Impact on Indian IT industry
4 How Indian IT Industry can handle it?
5 Findings and Conclusions
References
Recession and India: Impact of Recession on Indian IT Industry Page 2 of 24 The Jamnalal Bajaj Institute of Management Studies, Mumbai, India - November 2009
1. Introduction
1.1 Background In economics sense, recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production a measured by s Gross Domestic Product (GDP), employment, investment, spending, capacity utilization, household incomes , business profits and inflati on fall during
recessions, bankruptcies and the unemployment rates rises.
Governments macroeconomic
usually
respond such
to recessions by a s increasing
adopting
expansionary inc reasing
policies,
money
supply,
government spending and decreasing taxation. Recession has many attributes that can occur simultaneously and includes declines in coincident measures of activity such as employment, investment, and corporate profits.
Recession has direct impact on Profitability of Comp anies. It impacts the expense power of company. Companies go to an extreme level of cost cutting for its survival. Usually companies try to shutdown some of its unit and layoff employees.
1.2 Problem Discussion and research purpose Recession in the West, specially the United States and Europe has significantly affected Indian IT companies which depends upon the outsource projects from these countries. The IT projects are a part of planned expenses for future growth of business. In this period, many US/UK based companies had cut-down on their IT expenses. This had a significant impact on Indian IT industry.
IT companies has taken various steps to control their outgoing. With this study, we will try to find out h ow the cost component been managed by Indian IT companies and what are the impacts of such a strategy on their business. In IT Industry, cost of employees package makes a major part of expenses. Many companies come with the concept of virtual bench, fired highly paid employees, put trainees on project by replacing experienced.
The research for this subject is done as an exploratory rese arch project. An Exploratory research provides good insights into the issue, situation o any r business ideas. To define the research problem, an exploratory research can be carried out. The problems are formulated clearly in exploratory research and it aims at clarifying the concepts, gathering explanations and gaining insights.
2. Literature review
What is Recession? The economic slowdown of the advanced countries which started around mid2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis. According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009. Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies like India. These expectations, as it now turns out, have been disproved. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this Great Recession of 2008-09 will be the worst global recession since the 1930s. A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also pr eceded by several quarters of slowing down. An economy, which grows over a period of time, tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers
lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less; as they fear stocks values will fall and thus stock markets fall on negative sentiment. Risk aversion, de-leveraging and frozen money markets and reduced investor interest adversely affect capital and financial flows, import-export and overall GDP of an economy. This is exactly what happened in US and as a result of contagion effect spread all over the world due to high integration in the global economy. [1]
Overview of Indian IT industry The size of the Indian IT industry, according to NASSCOM, is US$ 64 billion as of year 2008. It has been growing with an annual rate of 28% since 2001. The Indian IT industry can be broadly divided into two markets: domestic market and exports market. The exports market constitutes the largest segment accounting for 62-66% of the total revenue generated by the Indian IT industry. Within the export segment, geographical d iversification and maturity in services and operating efficiencies helped the IT services exports to jump 28 per cent to $23.1 billion, while the BPO exports were up 30 per cent to $10.9 billion. Engineering services and product exports clocked revenue of $6.4 billion, an increase of almost 29 per cent over FY07. The domestic IT market accounted for 34-38% of
revenue. The domestic market is gaining momentum, driven by overall economic growth, increased adoption of technology and outsourcing.
Indian IT Market Highlights The Indian software & services industry group generated total revenue of $64 billion in 2008. It contributed over 5.5 % of the overall GDP of India. It has been growing with an annual rate of 28% since 2001. IT Exports will account for 35% of the total exports from Indi . As far as job creation out of this growth is a concerned the sector generated 2 million direct jobs and around 7-8 million indirect jobs.
[2]
Investment Plans of MNCs in India Cost arbitrage and the availability of a large talent pool have attracted several MNCs to India. Big players like IBM, Accenture, CapGemini and Oracle among others have not only increased their headcounts in India but also outperformed their global performance in terms of revenue growth. Their Indian operations are witnessing strong growth as compared to their global business. Some of the major global companies like Intel, IBM and CSC are shifting their base to India.
[3]
3. Impact on Indian IT industry

The booming Indian IT sector is set for a slower growth in the current fiscal due to global economic slowdown, surge in crude oil prices and lower technology spending in the US. The near-term impact is non-trivial for the Indian service providers, who enjoy a relativ ely higher concentration of discretionary, stafforiented, contractual relationships. Compared to some of the Western providers, Indian IT service providers ar also less well-diversified geographically and e vertically. Going forward, service providers are likely to see their sales cycles lengthen; witness a slow or de layed ramping up of projects, experience consolidation in multi-sourced deals and not be able to command better prices from their clients. Large IT services players will be able to cope with tighter client spends, but it's the smaller IT companies which will face the heat. SMEs with commodity type offerings will find the business unsustainable. With a recession in the US, which accounts for over 60% of the business, - Fortune 500 and other companies may reduce overall IT budgets marginally and are unlikely to commit to new systems upgrades. Lower technology spending and rising unemployment rate in the US will lower the export growth rate by 5-6 percent. Its full effect will become known only a couple of quarters later. Within the financial services sector, and related industries that are de pendent on consumer credit for spending, there is likely to be a pull back on investments for the next several months. The return to growth for applications-oriented projects will come in all likelihood through a new paradigm for making such investment decisions, one that looks to maximize leverage in development, maintenance and operations.
Gartner Views: The top 20 IT services exporters saw a dip in their growth, growing 29 percent as against the 45 percent recorded in 2006-07, according to the Dataquest Indian IT Industry Survey 2008 Technology budgets worldwide are expected to increase 3.3% this year, slightly higher than in 2007. Many U.S. companies are taking steps to speed up their off-shoring programs in order to contain their labor by sending more of their IT jobs off-shore. In the worst-case scenario, the slowdown will turn into a prolonged recession that will indefinitely delay non-critical projects and lead to enhancement and in novation projects being cancelled. Gartner recommends that companies considering off-shoring work to India either look at branching out their off-shoring facilities to more countries, or that they negotiate multiyear annuity-based outsourcing contracts with vendors that let them raise rates by between 3% and 5% per year to account for employee salary increases.
Forrester Views: US IT buyers may spend less than projecte this year, reducing worldwid d e demand for computers, software and services. While US spending will climb 2.8 percent to $552 billion, missing an earlier forecast for 4.6 percent growth, global spending will rise 6 percent to $1.7 trillion, instead of the 9 percent originally predicted, the report said. The spend on IT services and outsourcing is expected to be $162 billion out of the $552 billion on total IT purchases in 2008. This is a 4% growth over the previous year and is the lowest rate since 2003.
'Indian services firms will feel the heat from the meltdown in financial services for sure,' Forrester Research analyst John McCarthy says. But Forrester analyst Christine Ferrusi Ross says the industry has to diversify from financials where most of them make their money at the moment and seek growth opportunities in utilities, manufacturing, telecoms and health care
NASSCOM Views: The global financial meltdown following the collapse of US investment banks will have limited impact on the Indian IT sector in the short and medium terms, but poses a challenge in the long term. In the long term, the export-driven software sector has to become risk-protected from such uncertainties by penetrating other geographies and expanding its service offerings to diverse verticals so as to retain its competitive edge and sustain the growth momentum Som Mittal, president Nasscom. In IT budgets, non-discretionary spend, which is about 70 percent, will continue to happen. In a downturn, discretionary spend on new projects, innovation or upgradation gets affected. The impact, if any, will be on the latter, Mittal explained. The UK and other European markets will recover in 2-3 years while the US will take another 12-18 months to emerge from the current gloomy conditions. The Indian IT industry may have suffered from the recessionary trends but it will recover in another 12 months. Moreover, after 12 months, the Indian IT industry will focus more on domestic market and less on international markets," said Ganesh Natarajan, chairman of NASSCOM and CEO of Zensar Technologies. As per the Nasscom forecast in June-July 2008,
software exports are projected to grow by $9 billion to $50 billion in fiscal 200809 from $41 billion in fiscal 2007-08 and $32 billion in fiscal 2006-07. As per the McKinsey report, exports are set to touch $60 billion by fiscal 2009-10 even if the growth rate remains lower at 23-25 percent.
Impact on employees and recruitment trends in recession Lowering of attrition levels by 6-7 per cent; broadening of the manpower base over the past five years the industry has grown from employing 4,30,114 in 20002001 to 2 million in 2007-08, thereby the percentage of new additions is tapering; increase in productivity and utilization levels hires are now being made closer to deals. The growth in salary hike has come down from 13.5 per cent last year to 9 per cent this year.
How it affects India Buyers will aggressively move toward off-shore destinations and service providers that can offer a global delivery model to access lower-cost IT labor for routine IT work that must continue for the business to operate. However, noncritical projects may be delay indefinitely, and for most organizations, any ed discretionary IT spending will be cancelled", said Allie Young, vice president and distinguished analyst at Gartner. "Plenty of opportunities are available in Latin America, Japan, China, Europe and also in some African natio ns," Ganesh Natrajan, Chairman of Nasscom added, urging the IT industry leaders to not be constrained by just US markets, but look elsewhere too. "By 2020, India can
alone fulfill the need of technical talent of the whole world. By that time the whole world would need 43 billion technocrats while India will have 47 billion surplus technocrats. Huge investments have to be made to train the available talent," he added. At a time when customers in the US and Europe are tightening their IT budgets, leading Indian tech firms are betting on their huge pile of cash to steer through the global economic crisis and also to explore M&A opportunities in a world reeling under severe liquidity crunch. Larger spends on training, R&D, a focus on consulting and higher value services could be the only way out for the IT services players.
In turbulent times, clients ex pect greater flexibility and b usiness value from service providers. The tighter governance and regulatory environment that will evolve as a result of the fina ncial turmoil will offer opportunities to service providers in the medium to long-term.
[4]
4. How Indian IT Industry can handle it?

Diversify Globally For far too long, Indian IT industry has focused on the US. Yes, US does account for about 60% of the total IT spending. However, IT spending of American companies is bound to slip with the slump. Its also been a long time since US firms embraced the outsourcing model, so further growth seem very limited. s With that in mind, the Indian IT firms need to focus their attention on the other markets, especially Europe. Using UK as the base, software firms can branch out onto mainland Europe. There will be a certain amount of language and cultural resistance in countries like France, Germany, and Netherlands, that Indian firms will need to grapple with. Language training and cultural orientation should form a big part of the foray into Europe.
The potential of near-shoring in the context of IT, also needs to be tapped fully. Customers are looking for IT service providers who are geographically closer and culturally similar. With respect to Europe, the East European countries satisfy both these criteria. Moreover, East Europe has a large number of skilled software programmers. According to Arkadiy Dobkin, CEO of outsourcing powerhouse EPAM, the so -called "Soviet heritage" o traditionally strong enginee f ring education is responsible for the region's large pool of trained professionals. The
cost advantage of India over such locations is also significantly diminished as salaries in Eastern Europe as not significantly higher than those in India.
The need for near-shoring is especially highlighted by the fact that many UK IT service providers have recently invested in 3 global delivery centers in Eastern Europe and Morocco each and 4 in China. Such near-shore locations will be able to service EMEA and South East Asia region and their capabilities cannot be replicated by similar centers in India. Many global firms want to continue offshoring, however they are look ing at non-India based partners as a way of addressing the issues of talent shortage, salary hikes and high turnover which are commonplace in India. Such firms are even willing to bac development k centers run by Indian giants elsewhere, purely from the standpoint of flexibility, business continuity and seamlessness in global operations. Hence, Indian IT companies should establish a strong presence globally through delivery centers in emerging regions, so as to acquire a bigger portion of the IT revenues pie.
Local Foray With the rupee gradually strengthening against the dollar, it makes imminent sense to enter the local markets with a purpose. Indian IT market is growing a compounded annual rate of 21%. Indian companies have been traditionally slow in embracing IT but are now implementing IT internally with a vengeance. Some large multi-million dollar contracts like the Bharti-IBM, Dabur-Accenture and SBITCS deals should make the rest of industry sit up and recognize the potential of
the Indian market. Some of these deals have been jaw-dropping huge TCS $140 million deal with BSNL, Wipros $80 millio and $60 million deal n respectively with HDFC and Dena Bank equal, if not exceed, deals of similar nature with international clients. The opportunity is not worth ignoring.
South East Asia is another region where IT big-wigs can focus their energies. China, Korea, Japan, Australia are big markets and Indian firms should attack them, all guns blazing. The region can not only be tapped for local markets, but also be used as satellite facilities to support their Indian counterparts.
Tighten Recruitment and Retention Processes Since the last few years, the composition of IT resource pool has undergone a substantial shift. Earlier, many reputed companies only recr ited engineers u through campus placements. These placements were also carried out in Tier 1 colleges. The selection proces was tough - base criteria was first class s academic qualification, followed by test of GMAT style logical questions, and a rigorous interview process. Only the top few got through. However, the demand for Indian IT services kept getting bigger. Post dot com bust and 9/11, business conditions in the US became tougher and companies wanted to focus on key operati nal and strategic functions a o nd outsource technical application development and support to the experts. India as an IT destination offered notable cost advantage, better flexibility, 24/7 support and improved accountability.
To cater to the rising demand, there has been a mad rush to recruit more people. Earlier, a 4 year engineering degree, the premier choice of top ranking students, was a de-facto selection criterion. Now, companies have started recruiting from non-engineering colleges. Recruitment cells are covering lower ranked colleges during campus placements. Consequently, the quality of new recruits has gone down noticeably. Figures suggest that only 25% of the total graduates in India have employable production-worthy skills. Not only are t e much celebrated h analytical skills poor amongst such fresh hires, but even basic communication skills are a cause for great worry.
Fewer contracts in a sluggish economic scenario would automatically drive down the break-neck speed of recruitment. However instead of a complete stop to all recruitment, the IT industry should use this period for peop overhaul. The le employees who have demonstrated continuous below par performance need to be put on notice. They must be mandated to undergo training programs to hone and upgrade their skills technical as well as inter-personal. In the absence of any significant improvements, they should be let go. At the same time, campus and lateral hiring of high performing individuals needs to continue. It will help restore the quality of talent that has deteriorated over the years.
Address the Skills Shortage At the same time, this quiet period needs to be used to get the existing resource pool ready for the next big wave. Most programmers are caught up in the daily
nitty-gritty to catch up on the late technical advances and reco st gnize the breakthroughs that will sweep the IT world. To address this gap, workshops and technical trainings to educate the workforce should be held at regular intervals. Similar sessions on soft skills and cultural orientatio programs should be n conducted to make the people more customer-centric.
Service Oriented Architecture, Software as a Service, Cloud Paradigm (or desktop virtualization) are em erging as some of the biggest IT trends. Additionally, platform consolidation is the biggest IT change that many CIOs have on their radar. Much of the work coming along will be governed by these trends. The software designers should be brought up to speed on these new trends and the programmers trained on technologies that underline these trends.
Improve Productivity Addressing the skills shortage amongst the existing employees will partly lead to better productivity. But a concerted effort is needed for flexible and savvy use of the existing talent pool. The recent growth of IT has left many organizations with massive shortage of middle level managers. Hence, techies have progressed to managerial roles far too quickly. At the same time, the inter-operability found in foreign tech heavyweights where senior staff continues to be technically handson even after 5-10 years is not to be seen. In India o rganizations such resources tend to be entirely locked up doing administrative tasks and managerial reporting.
Resolving this can be fairly s traight forward. Technical tasks should form a sizable portion of a project leads tasks. Technical advancement through training and project work should be an integral part of a managers appraisal criteria. For smaller projects, senior resources need to be encouraged to code themselves, thereby reducing the overheads.
Simple tools like word and excel, if used effectively provide fantastic productivity gains. Trainings on such desktop tools need serious thought. Some Indian IT organizations have world-class in-house systems. But there is still tremendous scope in making these functions quicker and simpler. What better time to get those things sorted than this slack period? Programming is one of the most intense and focused activities, and any hindrance to it availability of software, training material, access issues should be resolved speedily through a system that exists to support the programmer more than anyone else. There is a sense that the rapid and reflexive a doption of security management controls like ISO27001/BS7799 has done more harm than good by cramping creativity and adventurous spirit of the computer programmer. An elaborate review might be in order.
Upside down in a Flat World Cut-throat competition from global players and the falling dollar have squeezed the margins for typical run -of-the-mill work. Yes, consulting is a niche that eventually all Indian IT companies would want to get into. But basic factors like
maturity (dearth of experienced consultants), perception (image of application developers and implementers) and location (Failing of global delivery model in primarily client based work) will hinder any real attempt into consulting space. The trick is to innovate do things differently, and not necessarily do different things. In that regard, the fo cus on innovation of some of he top Indian t companies is a step in the right direction. Wipros Applied Innovation framework lays down a roadmap for system change to deliver sustainab business ic le benefits. An illustrious case in point is Wipros transformational engagement, with Credit Suisse. In this trailblazing flex-sourcing model, three primary ownership models (captive, outsourced, co-managed) have been employed to gether in effect to cater to different business requirements. It was a risky maneuver which has paid off handsomely. [5]
5. Findings and Conclusions

The size of the Indian IT industry, according to NASSCOM, is US$ 64 billion as of year 2008. It has been growing with an annual rate of 28% since 2001. It contributed over 5.5 % of the overall GDP of India. IT Exports will account for 35% of the total exports from India. As far as job creation out of this growth is concerned the sector generated 2 million direct jobs and around 7-8 million indirect jobs.
As per the Nasscom forecast in June-July 2008, software exports are projected to grow by $9 billion to $50 billion in fiscal 2008-09 from $41 billion in fiscal 200708 and $32 billion in fiscal 2006-07. As per the McKinsey report, exports are set to touch $60 billion by fiscal 2009-10 even if the growth rate remains lower at 2325 percent.
The recession hit every country and industry including India and its IT industry. The Indian IT industry largely constitutes Software exports like off-shore support, near-shore support. Major Indian IT companies like Infosys, TCS and Wipro, etc. survived this tough business itme by getting local IT contra cts. Indian IT industries are adopting innovative ways to beat the heat of recession.
Some of the measures Indian IT industries adopt in this crisis are:
Diversify Globally Local Foray Tighten Recruitment and Retention Processes Address the Skills Shortage Improve Productivity
This is indeed a tricky time for the Indian IT industry, but theres no real reason to panic. Top Indian IT bosses showed great character and resilience during the years following the dot com burst. They are wise enough to read the signs and realize that change is in order. With a slight course correction and an unswerving view on the long-term, the India IT industry can emerge stronger and bigger.
References
[1] Global Recession and its impact on Indian Financial Markets by Nidhi Choudhari Manager, Reserve Bank of India, Kolkata Article No: 177 ISSN 0974 9497 Year: August 2009 Volume 3, Issue
[2] NASSCOM.org
[3] D&B Industry Research Service (http://www.dnb.co.in/TopIT/overview.asp)
[4] Wipro Council for Industry Research http://www.wipro.com/resource-center/wipro-council-forindustry-research/pdf/recession_and_its_impact_on_it_industry.pdf
[5] Abhishek Toraskar, Consultant, Wipro Consulting Europe

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Recession and India

Impact of Recession on Indian IT Industry

The Jamnalal Bajaj Institute of Management Studies Mumbai University, Mumbai

By Saeed Khan Information Systems Consultant Mumbai India

3 Impact on Indian IT industry

4 How Indian IT Industry can handle it?

5 Findings and Conclusions

recessions, bankruptcies and the unemployment rates rises.

expansionary inc reasing

3. Impact on Indian IT industry

4. How Indian IT Industry can handle it?

5. Findings and Conclusions

Some of the measures Indian IT industries adopt in this crisis are:

[3] D&B Industry Research Service (http://www.dnb.co.in/TopIT/overview.asp)

[4] Wipro Council for Industry Research http://www.wipro.com/resource-center/wipro-council-forindustry-research/pdf/recession_and_its_impact_on_it_industry.pdf

[5] Abhishek Toraskar, Consultant, Wipro Consulting Europe

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