Software rides high

Indian software companies have turned in almost uniformly good results in the third quarter of the current financial year. As several companies have posted handsome sequential (compared to the previous quarter) improvement on top of robust year-on-year growth in their numbers, the current run rate appears to have set the industry on course for an exceptional performance in the year as a whole. This will make it two years of high profile performance, and indicates that the industry is well set to achieve the new targets that the latest Nasscom-McKinsey report has set out for the five-year period till 2010. It is only in one out of the last five years, in the aftermath of the bursting of the tech bubble, that the industry saw its growth momentum slow down.

In the last quarter, Infosys has again posted exceptional results of the kind that have become almost routine, by raising both the top line and bottom line by over 30 per cent. Wipro has recorded similar top line growth and both companies have bettered their guidance. TCS has seen a drop in its bottom line but has attributed it to the previous year's quarter having been boosted by windfall foreign exchange gains. Two large companies that have not always been in the limelight in the recent past, HCL and Satyam, have turned in exceptional performances, too. HCL has also announced the largest outsourcing deal secured by an Indian firm till now. Two smaller companies, Sonata and Infotech Enterprise, have turned in handsome results, marking a clear turnaround for Sonata. Whichever segment of the industry you focus on, the going seems to be as good as it can get.

However, strategists have outlined a set of challenging transformations which the industry has to achieve if it is to keep growing at the present pace. These challenges are likely to get tougher as leading Indian companies start competing in earnest with the likes of IBM and Accenture for large deals. The leading global service providers have by now developed and stabilised their own versions of distributed development. This has enabled them to control their costs even as they continue to get better blended rates than Indian leaders. The comfort level of global CEOs with global vendors continues to be high. The Indian advantage tends to reduce as deals get bigger and require not just offshoring but near-shoring as well. Indian leaders have begun to do that, but have a long way to go in setting up development centres all over the world so that they can call themselves truly global companies.

The major challenge for Indian firms is to ground their consulting skills, which will enable them to win billion-dollar deals at rates that the global leaders command. This is necessary as Indian firms set up more near-shore facilities that raise costs. There is no reason why the leading Indian companies should not be able to achieve this. The entrepreneurial drive and imagination they have shown so far in continuing to graduate to higher and higher levels, is their primary asset. Their weakness may turn out to be the difficulty they are even now experiencing, in hanging on to their middle-level managers.