Software gets better

The first crop of results for software companies could not have been better. Both TCS and Infosys have recorded an increase of more than 50 per cent in net profit, and boosts to the top line of almost similar magnitude.

These industry leaders seem set to achieve similar growth for the entire year""on a large base, because these are now billion dollar companies.

Exceptional growth by small companies is creditable enough; it becomes remarkable when the same is achieved by large companies that seem capable of maintaining this pace.

The message is clear: Indian software has emerged stronger, now that the slowdown in technology spending has ended. Companies that have pioneered and perfected the distributed development model have transited from simply securing and executing projects to becoming strategic partners of their larger customers.

This has given stability to their growth prospects and prompted them to hire up to 10,000 people in a year.

That the biggest software companies have been performing the best indicates the extent to which consolidation has taken place in the industry.

The performance of medium and small companies presents a mixed bag. While Mastek and Sonata have performed creditably, players like MphasiS and iGate (which seek to provide both software and BPO services) are yet to get their act together.

It is not as if innovative business models based on emerging technologies are not being rewarded; the turnaround of Aztec is indication of that.

The undifferentiated medium and smaller companies don't have a role but they never did after the Y2K boom ended. The revival of tech spending has had another impact, not apparent from published results.

The technology services companies are gung ho again after their bad patch, and leading them in the new year will be Sasken, which is slated to go public.

The downside in all this is two-fold: the rising rupee and employee costs. The successful companies have managed to maintain margins but the future will remain challenging.

If software success is likely to march in step with buoyant growth in the overall economy and continuing foreign inflows, then everybody will have to live with a currency creeping upwards.

Indian software is no longer cheap and its future will lie in continuing to provide greater value. The challenge posed by rising employee costs is reflected by the emerging competition from new low-cost destinations like Vietnam, Russia, and some of the new East European members of the EU.

The big players are meeting the new challenges by blending acquired consulting capabilities with their solution offerings. As a result, the distributed development model is getting near shore capabilities.

Wipro and Infosys are investing significantly in the acquisition and integration of strong consulting groups.

The soft underbelly of Indian software remains its excessive dependence on the US market at a time when the dollar is likely to remain weak. The industry should aggressively look east.

The China development centres of TCS and Wipro mark a beginning but more needs to be done. Japan, for example, is waiting to be seriously engaged.