This Article is From Mar 02, 2017

No, India's Software Industry Did Not Die On Friday

Media reports about the demise of the Indian software industry are grossly exaggerated and very premature.

Let us take stock of the situation today. The Indian software export industry is about $110 billion. It employs around 4.25 million people. It has a 60 per cent market share of global outsourcing and is globally dominant. Of the 10 top software service companies globally ranked by market cap, five are Indian. Of the top five, three are Indian. All of them have a massive presence in India. Of the total number of employees, amounting to nearly 2 million, in these top 10 companies, about 70 per cent are based in India or travel out of India. The Indian offshore software industry dominates the software services world and has no parallel.

Concern has been expressed by certain observers saying that the software industry died on Friday after a short battle with digital technologies. If you look around, only one company has done well in the last one year, and that is Accenture. This is primarily because Accenture engages in enterprise transformation and at a pan-project level. With no proprietary technology to support, unlike an IBM, it is not tied down to specific solution sets, and so it has a lot more lateral flexibility than most other companies in its space. However, this does not imply that every other large company in this space is doomed.

At a time when the developed world is growing between 1.5 to 2 per cent a year, this globally competitive industry is growing between 7 to 9 per cent, more than three times OECD (Organisation for Economic Co-operation and Development) growth, and with most of its business coming from there! Despite Brexit, the banking crisis, and the threat of increasing federal interest rates, this is certainly an extraordinary achievement by any standard, especially when the industry has become massive and a universe in and of itself. When an industry is this large, it begins to reflect the growth of the economy and to grow 3/4 times the rate of economic growth is a significant achievement. To believe that a large industry can grow at 20/25 per cent a year in services with very low inflation is an unrealistic expectation.

Some commentators have stated gleefully that the end of the industry came when the business stalled in the last quarter and because they were unable to adopt a new stack of digital technologies. These all-knowing commentators seemed to lack a fundamental understanding of the industry because they made statements that the Indian industry would not have tanked if we had been able to embrace SMAC or Social Mobile Analytics and Cloud-based technologies early. The Indian industry has done very well on the legacy side of IT services. Web-based technology, which was cutting-edge not so long ago, is also now legacy! Indian IT also has a growing practice in SMAC.

While clearly dominating the global legacy segment, in the newer segments like SMAC, there is still plenty to be achieved. There are too many smaller players locally available across developed markets, while a few bigger players have also emerged. SMAC is certainly going to grow because it is all-pervasive and it permeates all technologies and most of the solutions have become horizontals. This is a natural evolution of the internet economy.

When the internet first burst forth, smaller companies in the United States enjoyed high valuations, took the lead, and then soon after that the Indian IT companies grew and took over in a very large substantial manner. Similarly, in SMAC, the Indian companies are now growing their skills, talking to their customers and evolving their practices. SMAC is permeating the entire offering across services, and in two or three years, SMAC will become the new horizontal layer.

Yes, in the last two quarters, growth has stalled - especially for the larger companies. But when you are an 18 billion dollar company with more than 370,000 employees, you are global, and you are growing at 6 to 7 per cent, in most countries of the world, they will applaud you for still creating jobs and for still growing. If you are a 10 billion dollar corporation working globally and growing at 7 to 9 per cent, and enjoying profit margins in excess of 20 per cent and generating free cash flows when the world's growth is so slow, in most countries of the world, people will applaud you and buy your stock.

What is happening to the IT industry in India is a mismatch between people's expectations of high growth on a very high base and the hostile external environment with rapid technological change. Certainly, the growth rates of the past are no longer feasible, and most of the large global IT service companies will grow in the range of an estimated 2 to 10 per cent. The Indian offshore players might grow at rates in the range of 7 to 10 per cent. One must understand that the growth in revenues of 7 to 9 per cent with an offshore model actually implies a growth of 11 to 13 per cent on a comparative basis for a purely onsite oriented company, in terms of hours that are actually utilized and billed. The use of revenues alone to map the growth of Indian IT is not the right measure, and neither is it right to compare the growth rates with companies in the West which are more or less local companies with local practices. The total hours billed is the pre-eminent parameter when the billing rates can vary from an offshore rate of 20-24 dollars an hour to an onsite rate of 70-90 dollars an hour for the same kind of work.

As far as technology is concerned, such shifts have happened before and Indian companies have done very well when faced with change since they have a younger and more trainable workforce and are much responsible with costs. They are the only companies that can handle the entire gamut of technology work in large global enterprises from main frames, AS 400, Cobol, UNIX, and C++, to web-based technologies and now SMAC. You will be truly surprised by how large these legacy systems are, and how much of the world's largest economies still rely on them. The total installed base of software on which global corporations operate is around $4 trillion, and this is not going to disappear tomorrow. Yes, the nature of work will slowly evolve, as it has often over the last 20 years, but Indian IT companies will understand this evolution and will manage the change.

At the end of it, Indian offshore companies are poised to assimilate new technologies. As when the internet economy first burst onto the scene, these companies are slightly behind the curve because they are still handling large complex systems. However, the skill levels here are tremendous, the management is extremely robust, the quantum of cash on the balance sheet is gargantuan, and they control high market caps that allow them to make acquisitions. This will make sure they continue to dominate the industry for at least the next 3 to 5 years.

All talk of demise based on a quarter or based upon a lower growth rate are figments of overactive imaginations.

(Mohandas Pai was the CFO and then the head of HR at Infosys. He is now Chairman, Aarin Capital Partners.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

Disclosure: Mohandas Pai is an investor in NDTV Convergence's e-commerce venture,