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Indian Outsourcers Struggle to Evolve as Growth Slows

Indian technology outsourcing companies look to create off-the-shelf software instead of peddling services of programmers

BANGALORE, India—As its growth slows, India’s technology services outsourcing industry is struggling to become less dependent on peddling the services of inexpensive programmers and trying to enter new businesses like off-the-shelf software and helping customers with big data and cloud computing.

India’s leading outsourcers, including Tata Consultancy Services Ltd. and Infosys Ltd. , said last month that their profit growth was squeezed last quarter by dwindling demand from the U.S. and Europe.

The National Association for Software and Services Companies says the industry’s revenue growth—which was more than 30% seven years ago—will be less than 15% in the fiscal year ending March. Many analysts think even that figure is optimistic.

Executives agree, there is just not as much demand for the information-technology services provided by thousands of Indian programmers that can build bespoke software solutions for each company.

Companies “are not pouring incremental money,” into their IT infrastructure, said U.B. Pravin Rao, the chief operating officer of Infosys, at a Nasscom leadership conference in Mumbai this month. “Earlier we used to see increases in technology budgets. But today, it’s unheard of.”

Bangalore’s outsourcing industry—which grew at breakneck speeds for years and changed the way the world of IT works—has matured. While it will continue to find ways to peddle the talents of India’s inexpensive programmers and engineers, it needs to find new businesses if it wants to thrive.

Industry leaders met at the conference in Mumbai earlier this month to talk about the next steps.

“The ways in which services are delivered to customers need to be reimagined,” said Krishnakumar Natarajan, the chief executive of medium-size software exporter Mindtree.

In the traditional outsourcing model, armies of programmers were sent to company sites around the globe. Working in tandem with code writers in India, they focused on stitching together and maintaining systems built around software from global software companies such as SAP and Oracle Corp.

The Indian industry is now moving towards having fewer basic code writers but more statisticians and specialist programmers who can create off-the-shelf and branded software.

“The difficulty before these service providers is shifting from somebody who tinkers with, integrates and maintains somebody else’s software to becoming the people who actually produce the software,” said Siddharth Pai, president for the Asia-Pacific region at outsourcing advisory firm ISG.

Indian companies will be looking to compete with SAP and others by carving out their own software niches with competitive pricing and specialization. Among the new areas of focus will be software for banking, logistics and cloud computing.

Big data could also be an opportunity for Indian companies. Firms need software to manage and mine reams of data generated as their systems go online.

Tata Consultancy and Infosys, for example, are both looking to hire thousands statisticians, specialist code writers and data scientists to create software that can scrub and crunch data.

“You need to build statistical models to understand the correlation between usage pattern X and person Y and after that be able to take it to the next level where you can predict the behavior of person Y,” said ISG’s Mr. Pai.

Of course entering a new business doesn’t automatically lead to new revenues. A few years ago Infosys and other software companies set their eyes on the highly profitable technology consulting business of International Business Machines Corp. and Accenture but failed to make much headway. Consulting was hardly mentioned as a new avenue for revenues at this month’s software conference.

It will take a few years, analysts say, but the companies that can reinvent themselves will remain relevant and become global software brands. Those that are stuck in the labor-intensive businesses will continue to see their revenue growth and profit margins continue to dwindle.

“Unless these companies make the shift to selling patented software and products as well as retune for digital transformation, a shift to higher growth may be hard to come by,” said Ray Wang, principal analyst and founder of U.S.-based Constellation Research Inc.

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