No room at the top

Indias big software companies will only get bigger

The big change in the Indian software services industry is that there's no change "� at the top.

In 2000-2001, the top five Indian software companies were Tata Consultancy Services, Infosys Technologies, Wipro Technologies, Satyam Computers and HCL Technologies. Their market share of exports was 31 per cent in a total of Rs 28,350 crore. 

In 2002-2003, that share went up to 41 per cent in a larger export basket of Rs 34,800 crore. Few people are willing to bet that the National Association of Software and Service Companies' (Nasscom) 2012-2013 list of the Top Five will be any different.

Is Indian software entrepreneurship dying? Are there no fresh ideas around which big new software businesses can be built?

"This is an issue that is worrying us at Nasscom. There is no churn at the top nor are new contenders cropping up," admits Kiran Karnik, Nasscom's president.

"Ten years from now I do not see too much of a change in the software services game from India. The same names will prevail."

Not that there aren't success stories below the Top Five tier. There are names like the Rs 900- crore Patni Computers, Digital GlobalSoft, i-flex Solutions, Polaris and Mphasis "� all of which are thriving and doing quite nicely.

But, according to IT research firm Gartner, the next two years will see further consolidation even in this tier. Gartner expects some names to drop off the list owing to further consolidation.

Says Partha Iyengar, vice-president (research) at Gartner: "We expect further consolidation. In the next 12-18 months we see a tremendous amount of mergers and acquisitions in the software services industry and there is no scope for new entrants."

If the consolidation trend has arrived early in India, one reason for it is stronger competition back home from multinational rivals.

Several 800-pound gorillas from the global league "� IBM Global Services, Cognizant, Accenture and EDS, among them "� have borrowed a leaf from the Indian software companies' success book and set up shop here to cash in on the billing rate (and offshoring) advantages that the latter enjoy.

The results are already showing. In 2002, Nasscom created a new list to rank multinational (MNC) software companies in India on the basis of their exports.

MNC exports leaped by 131 per cent, from Rs 4,252.50 crore in 2000-2001 to Rs 9,855 crore the next year "� raising their share of the total export kitty to a hefty 27 per cent.

The obvious conclusion: MNCs can, in the long run, pose a challenge to their home-grown counterparts in the offshoring market.

To be sure, MNC software exports are currently tilted more towards IT-enabled services than software services. Software constitutes only 22 per cent of the total expor t revenues earned from IT services.

The balance comes from IT-enabled services like business process outsourcing (BPO) and call centre operations. But the MNCs are quite clearly busy ramping up "� both in terms of head count and salaries "� and this is beginning to hasten the process of overall industry consolidation.

You can see it happening already. Hewlett Packard recently announced the merger of two of its software entities "� Digital GlobalSoft and HP's own software services division.

Meanwhile, Digital GlobalSoft is being delisted from the bourses and all publicly listed shares are being acquired in an open offer.

When the big get bigger, the nature of the game begins to change. Hot ideas alone aren't enough; you need scale and size. This leaves very little room for smaller players to get into the act.

A sample survey across two Indian cities, Chennai and Kolkata, gives one a idea about the number of second-rung names that have just faded out of the public eye.

Among the Chennai-based software services players that have been reduced to fringe player staus are erstwhile big names like DSQ Software, SRA Systems, Future Software and Pentafour Software.

In Kolkata, once-promising names like Globsyn, RS Software and Skytech have not been able to maintain themselves in the public eye despite their initial promise.

So does this ring the death knell for software services entrepreneurship in India? Probably not, but there's little doubt that the big elephants are pushing the rest into niches.

Says Sridhar Mitta, managing director of the $100 million technology holding company e4e Inc: "The problem today is that there are no new ideas, but this does not mean that there are no entrepreneurs coming into the software services business. Increasingly, however, one finds that software services companies which are into niche areas are expanding only in those niches," he says.

Take the example of a company like RelQ, which offers testing services.

Today RelQ has expanded its offerings to straddle the application and product space "� but it continues to restrict itself purely to testing services.

Mitta believes that niche companies like RelQ can expand and grow only up to a certain level.

Agrees Gartner's Iyengar: "Niche players can grow, but the moment they start expanding their portfolio of services to mirror the larger players, they go out of reckoning. They just cannot compete with the bigger names purely because of the size and scale of operations of the bigger players."

It is a Catch-22 situation. An existentialist kind of situation where the more things change, the more they remain the same.

Kalpathi S Suresh, chairman and CEO of the Chennai-based SSI, agrees that size and scale are prerequisites for success.

"The recession has ensured that only players with size and scale of operations are getting the big contracts. We increasingly see the need to consolidate and are looking at various options."

SSI is now in the news for reportedly being in merger/acquisition talks with Bangalore-based Kshema Technologies. Another reaffirmation of the consolidation factor.

Suresh says that a series of external factors also contributed to the sidelining of small and mid-sized IT firms. A few years back, these companies went in for acquisitions to scale up operations, but soon ran bang into a recession after the dotcom bust.

The subsequent India-Pak standoff and the Afghan situation made customers slow down on offshore contracts involving India, believing it to be part of a war-zone. They began taking a second look at options in other countries.

Small and mid-sized companies were affected particularly severely as customers asked vendors for business continuity plans that needed further investments, says Suresh.

The pressure on billing rates hurt the Indian tier II and III players more than the big guns as they had less staying power. When customers discovered this, they went back to the big players.

Recent examples include Cognizant's customer acquisition of American Express from Silverline Technologies. SSI Technologies also lost a blue chip account like Merrill Lynch to TCS, partly because it wanted a stabler partner.

But size and scale may not just be the only factors. The team matters.

Says Nandan Nilekani, managing director and CEO, Infosys: "Entrepreneurship is about running a marathon, it's not a 100-metre dash. People who have entrepreneurial strengths should have a marketable idea and understand the window of opportunity for it. They have to bring together a team that has mutually exclusive, but collectively exhaustive, skills and work out a value system. It requires extreme dedication and commitment and a lot of hard work. It also requires luck; one has to be in the right place at the right time."

Software players like DSQ and Pentafour have had their run-in with controversy and are prime examples of the need for enforcing corporate governance norms.

Five years back DSQ hit the headlines when its auditors , Lovelock and Lewis, withdrew after finding that the company had avoided recognising crores worth of loans on its book of accounts.

But Nilekani also has some words of hope. "I believe that customised software services will continue to have tremendous entrepreneurial opportunities. The focus should be on finding the niche, a gap in existing services, and bridging it with a creative idea. I believe there is lot of potential in the country and I am confident there will be many more companies like Infosys in the future."

The rest of the industry, however, is not betting on it "� yet.