IT firms spot growth leap

The future of Indian software looks brighter and brighter. The only thing that can hold it back is rapidly rising local salaries and an appreciating rupee. But on current reckoning, the best of Indian software seems set to be wining the bottomline game too.

"We see a more promising future in 2005-06 for Indian software and top software companies can look forward to a year of 40-45 per cent topline growth. Nasscom today is more bullish about 2005-06 than it was at the beginning of 2004-05," say Sudip Banerjee, president, enterprise solutions of Wipro Technologies.

What is significant is that if things actually play out according to this scenario, it will mean two successive years of 40 per cent plus topline growth for companies which are already in the billion-dollar league. Thus, TCS, Infosys and Wipro will in all likelihood be two-billion dollar companies by the time financial 2006-07 dawns.

Such rapid growth, on an existing high base, poses perhaps the greatest management challenge to companies like Wipro. With over 3,000 people joining every quarter, "training, enculturisation (teaching freshers the Wipro way of working), this is what keeps us awake here.

This is challenge number one, two and three. Scalability has been our forte. It is so far so good but this scalability is now being severely tested," he admits in response to the question as to how long billion dollar companies can keep growing at 40 per cent plus rates.

The latest spurt to bullishness has been provided by two factors: the outcome of the US presidential elections and emerging trends in the US economy. Within weeks of the elections, the US government has announced its decision to issue an additional 20,000 visas for professionals in the current year.

This is not just an indication that the mindset of the US government under President Bush and trends. Perhaps more significantly, "a shortage of IT professionals is emerging in the US.

We are back to the early days of the buildup to the technology boom" that peaked around the turn of the century, foresees Banerjee who supervises 50 per cent of the global software business of Wipro Technologies under vice chairman Vivek Paul.

This has clear implications for Indian software companies. "If the US skills shortage persists, there will be more offshoring and better prices for IT services vendor. We will also see the emergence of a sellers' market again. We see a much more stable future today, both in terms of prices and overall business," says Banerjee, recalling the severe pricing pressure witnessed in 2002-03.

"If skills shortages continue in local markets, then there is wage inflation ahead of them. In fact, it is already in sight. Once this happens, prices in those markets are likely to rise, leading to a rise in on shore rates and greater offshoring." That's good news for Indian industry leaders as more offshoring means better margins.

The minus points are rise in Indian compensations and upward movement of the rupee. While there is little that companies can do about the latter beyond reducing uncertainty through hedging, leading companies have a dual strategy to counter the rise in compensations.

The first is to shift to cheaper locations out of areas like Bangalore where both compensation levels and attrition rates are high. This is happening rapidly (Wipro, for example, has recently opened a large facility in Kolkata) and will have a moderating influence on the weighted average of compensation rates.

"We have been trying to lower base costs and also spread out selling and administrative expenses over higher turnover," says Banerjee.

The other strategy is the ongoing one of going up the value chain. Wipro is achieving this through a changing business mix in which there is more of infrastructure management, package implementation and consulting led work.

"Out focus will continue to be domain specific consulting solutions. Where we enter through consulting, we get downstream business and then take some of it offshore," explains Banerjee.