IT- Pluses and Minuses – Feb 07

Posted: February 23, 2007 in The_Entrepreneur_in_Me


Dtd: 22nd Feb ‘07


Key Positives

  • Huge outsourcing potential: Offshoring has been well and truly accepted as a major strategic decision that can enhance the competitive advantages of global corporations. The value proposition of offshore development has been proved beyond doubt and as an industry, offshoring is still very much in the growth phase. Even among the global 1000 companies, the offshoring penetration levels are not that high. This is a significant point, since these are companies with IT budgets in the range of US$ 500 m to over US$ 1 bn. The global market share of Indian companies is also miniscule. Thus, these pointers are clear indications that there is plenty of room for the Indian software industry to grow, given the immense and untapped potential. Offshore outsourcing to India offers considerable economical benefits for those who are prepared to exploit the advantages of outsourcing.
  • Moving up the value chain: Indian software companies are consistently broadening their portfolio of offerings and moving fast up the value chain. Given that traditional services, such as application development and maintenance (ADM), are getting commoditised, it is imperative for these companies to move higher up the value chain into areas like consulting, package implementation and systems integration. Not only will this help Indian companies get higher billing rates from their clients, it will also give them an opportunity to work closely with the top managements of client companies.
  • Other positives: Among other positive factors for the Indian software industry, the major ones are large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages). The companies involved in IT outsourcing in India provide high quality work, meeting international standards and complying with the ISO & SEI-CMM standards. Three out of every four SEI-CMM 5 companies worldwide are located in India.

Key Negatives

  • High reliance on the US markets: The US market’s share in India’s software and services exports is fairly high, at around 60% to 65%. Even though it has come down a little during the last year but such a large degree of dependence on a single geographical location spells high risk for the Indian software sector. Over that, the backlash in the US against outsourcing of jobs to low-cost countries like India has raised some medium-term concerns for Indian software companies.
  • Decreasing competitive advantages: Increasing competition from global technology majors has not only threatened the Indian IT industry’s cost leadership, Indian software companies have also been made to face intense competition for talent. All these pressures mean flat billing rates and higher employee costs going forward. This is likely to affect margins and, consequently, the profitability of Indian companies. The BPO service providers have achieved maturity in practices like relationship management and knowledge management. They need to diversify to employee engagement, process improvement, recruitment, migration planning and workforce management. If this is not done, the IT companies could find maintaining the current client satisfaction level as challenging
  • High rates of attrition: High attrition, especially in the middle and senior positions, continue to damage the performance of Indian software companies to a certain extent. The average industry rate is around 18% which when compared to other industries is on the higher side. The companies, in a bid to overcome high attrition rates, are recruiting science graduates and training them, which means higher training cost and loss of billable hours. Apart from competition for talent from MNC technology majors, internal factors like job dissatisfaction and higher aspirations (in case of BPO companies) have led to such high attrition rates in the Indian software sector

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