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Software saga continues

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Business Standard New Delhi
Last Updated : Feb 05 2013 | 12:21 AM IST
The Indian software and services industry has produced results for the October-December quarter that are exceptional, and indeed better than anything in recent memory. The industry seems to be gaining momentum even as firms get bigger, seemingly violating some basic laws of economics. The result is that both the top line and margins are doing better, without any sign of a let-up, even as several leading players have become billion-dollar firms. Traditional explanations like low base, cost arbitrage and even quality assurance are inadequate explanations for this continuing momentum. The answer has to be sought in global currents and how Indian firms' capabilities have dovetailed with these. Offshoring is becoming mainstream, with more industries from more geographies latching on to this seminal idea. From the financial and telecommunications sectors, it is spreading to pharma and life sciences, hospitality and retail, and media and entertainment. After the US and Britain, continental Europe has joined the bandwagon. Indian firms have responded to the new opportunities by expanding their offering. They have moved into higher value-added services like infrastructure management, designing and implementing packages, enterprise solutions, and BPO that goes well beyond call handling. This has produced more orders from existing clients and larger deals.
 
Industry experts expect this trend of exceptional growth, matched by high margins, to continue in the medium term. There seems to be no holding the Indian software leaders back, and an analogy is being drawn with the challenge that Toyota is posing to General Motors and Samsung to Sony; the top software services Indian trio may well do the same to the likes of Accenture and IBM. The latter have responded by joining the enemy, so to speak, and adopting offshoring themselves, but this is affecting their top line growth as offshored professionals replace on-site hands.
 
Interestingly, the biggest challenge to Indian software and services lies in similar territory. Industry leaders are preparing for a backlash against offshoring emerging after a possible Democratic incumbent at the White House in January 2009. This is because large sections of the educated and articulate middle-class in the developed economies feel their future threatened by their jobs being offshored. There could well emerge pressure of the kind that produced "voluntary" quotas for Japanese car exports to the US. Leading Indian firms like TCS and Infosys are already expanding their global operations and seeking to become truly multi-lingual and multi-cultural as well. This will help, but what has to be actively budgeted for is a cut in visa numbers and a drop in the share of on-site revenue, as is happening to the global leaders who are now actively offshoring.
 
The other major challenge will be the emergence of competition from new geographies. The Philippines is better placed for handling the voice business. Russia will emerge as a challenge in software product development services, and Vietnam in lower-end software operations. India's advantage till now has been the ability to keep producing large numbers of engineers and, what is increasingly becoming clear, managers. Both are getting costlier by the hour. Till now, the antidote has been to keep productivity growth one step ahead of the rising curve of compensation costs. But productivity cannot keep improving unless skills keep doing so as well. The truly long-term challenge for the industry and the country is to keep producing technical graduates and managers in larger numbers and of better quality. The other challenges, like office space and telecom costs, are being effectively met.

 
 

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First Published: Jan 22 2007 | 12:00 AM IST

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