Software's new challenges

The export-oriented software industry has reacted in several ways to the negative impact of rupee appreciation on its financial performance, especially in the last (April-June) quarter. In the first instance, future foreign exchange earnings are being hedged more than before. This will take away some of the volatility in numbers. But there is ambivalence beyond the immediate horizon too, as firms seek to look into the future and take a view on the longer-term prospects for the rupee. The more robust firms, irrespective of size, feel that the situation can be managed if the rupee does not continue to appreciate the way it has done in the last three months. On the other hand, several forecasts project further appreciation and this has naturally caused concern in sections of the software exporting industry. The president of the National Association of Software Service Companies (Nasscom), Kiran Karnik, is worried in particular about the fate of smaller software and BPO firms, and says that if the Reserve Bank does not step in to stabilise the rupee, it may affect India's long-term competitiveness as a host for offshored services. Part of the problem is that the rupee appreciation comes after substantial wage increases and the negative impact of fiscal changes. And some leading international firms have told Nasscom that they may look at other geographies when deciding where to locate their next round of investments.

Against this backdrop, the contrast is provided by the continued optimism being projected by the software industry's leaders, which do not seem to share the fears about the long-term competitiveness of the Indian software and BPO industries. These companies are still in "can do" mode, arguing that if the Indian currency is gaining strength, the industry has to neutralise the impact of that by becoming more efficient and productive, and by negotiating better prices when contracts come up for renewal. This is true also of the medium-sized software firms, which have been doing quite well and have a clear idea of what clients want and how to move up the value chain and thereby improve their own productivity.

In this respect, Infosys' acquisition of the captive finance and accounts operations of Philips has turned out to be quite fortuitous. Such deals are usually in the making for months, but through its announcement on Tuesday Infosys has managed to address some of the concerns focused on whether it can continue its stellar run. The company has acquired an assured cash flow from Europe precisely when its dependence on the US market was seen as an area of vulnerability. Also, by taking over the entire workforce of the Philips units spread across the world, something that Infosys has never done before on this scale, it is signalling its desire to become a truly global firm that is insulated against specific country risks.

In one sense, the pressures in the market today may be a blessing in disguise since they will force the software companies to look at long-term competitiveness issues that go beyond price, as the big boys of the industry have already been doing. They may also encourage companies to look harder for opportunities in the relatively neglected domestic market, which would not have looked very attractive a year or two ago but which has been a source of strength in recent months for Tata Consultancy Services.