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TECH TALK: India’s Software Industry: Consolidation and Growth

February 13th, 2002 · No Comments

Software is the one industry which has made India proud over the past decade. We have seen in the last decade the result of leaving an industry unfettered by silly rules and regulations. By no means is long-term success assured for all of the players. Yet, as in every competitive industry, the challenges are great and so are the opportunities.

A recent report by Enam post last week’s Nasscom observed:

  • Despite the current slowdown, long-term fundamentals of the industry remain robust. There are various opportunities that are emerging in the immediate term; the off-shoring wave is likely to gain momentum due to heightened awareness of Indian cost advantage.
  • Indian IT players need to work significantly on their positioning and services offerings, as the new customer segment, with unique requirements likely to emerge.
  • The pricing environment is likely to remain tough due to the structural shift in negotiations from the Tactical to the Strategic level. This implies that growth is likely to be achieved by volumes rather than pricing.
  • Larger companies and mid sized companies with clear domain focus are likely to maintain growth as the buyers are becoming more discreet and a thorough due diligence process has been put in place to select offshore vendors.

The coming years needs to see more of the same – business as usual. Indian software services companies have conclusively proved that the business model of outsourced development and works – to the benefit of all. Writes Douglas Lavin about GE in India in a recent Wall Street Journal article:

General Electric Corp. hired 6,000 people in India last year,

bringing its headcount there to 10,000, to handle accounting,claims processing, customer service and credit evaluation and research for GE around the world.

This year it expects to hire roughly 1,000 scientists. The firm is so gung ho on India it posted signs around its GE Capital unit there reading “trespassers will be recruited.”

Indian companies are already aiming for larger projects – having built up efficient software factories in India, just like China has done in manufacturing. The supply of engineers remains abundant. The cost differential while diminishing is still significant. Execution is a skill which companies have honed well in recent times. The challenges to growth lie in being able to market effectively to the leading companies in the world and be able to provide an ever-increasing portfolio of services to the client base.

Consolidation has not really happened in the software sector – so far. The bigger Indian companies have chosen organic growth. What has perhaps prevented acquisitions so far have been the high valuations of other companies (in India and abroad) though these have become more rational in recent times, and the perceived management and cultural differences. In addition, talent has never been in short supply, so growth has meant continued recruitment and training.

Even as Indian companies continue to “actively look” at targets overseas, the reverse may start happening. There have been rumours in the Indian press of companies like EDS targeting investments in leading Indian software companies to accelerate their own growth, strengthening the belief that outsourcing software development to India is an irreversible trend.

Tags: Tech Talk

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