The nuts and bolts

The overall composition of the export environment did not change significantly. In software services exports, customized software development and software maintenance remained the prime breadwinners with close to Rs 15,547 crore coming from here. In fact, notwithstanding analysts’ predictions of this being the slowest growing segment worldwide, Indian exports of customized software and maintenance services actually grew by 51%. Revenues from consulting and other services doubled, though in gross terms they were still low at Rs 6,774 crore. Growth in turnkey projects, though, remained disappointingly low at 24%.

The US continued to be the hot destination, with 63% revenues coming from there. But for the first time, the rest of the world brought in over a tenth of the revenues. Delivery modes changed slightly with products getting 11.5% of the revenues as compared to just 4.6% last year. Project revenues actually dropped marginally from 63 to 62%. Revenues from consulting services—the uppermost step of the value-ladder for software companies—also dropped significantly from 25% to 18%.

Revenue models remained largely unchanged with fixed cost projects still accounting for a relatively small portion of revenues.

During the year, one of every four global giants outsourced their software requirements to India. The country exported software to 102 countries around the world, with almost 62% of exports to North America. In the applications segment, Web-based and e-commerce applications continued to draw in the big bucks. This can be attributed to the fact that the B2B sector has emerged unscathed through the dot-com bust. However, because of the dot-com debacle, the contribution of e-commerce applications to total revenues remained more or less the same—19%. Enterprise resource planning picked up a little as did datawarehousing, currently being termed the wave of the future. The latter’s share in total revenues grew from 1% to 5% and is expected to grow further this year. As far as verticals are concerned, Indian exporters have a large exposure to the banking and finance sector. This sector, as well as manufacturing and services (which includes insurance), also brought in significant revenues. Most of these figures, however, do not reflect the major changes that began by the end of the third quarter and were obvious by the fourth—the first tech-led US economic downturn and it’s fallout.

Bad times ahoy!

Just when things were going great, the US economic slowdown hit Indian shores. By Q4, sales cycles became longer, projects got cancelled and a price-competitive Indian industry found itself being bargained further down on costs. This had three major consequences: squeeze on margins, greater focus on offshore development and a new look at Europe. More than 260 of Fortune 1000 companies outsourced their mission critical software development to India in the year 2000.

Billing rates for Indian software programmers have traditionally been among the lowest in the world. Margins have increased over the years partly because India moved up the value chain and partly as a natural consequence of inflation. By the end of last year however, Indian software exporters found themselves facing severe margin pressure. Added to that were high rates of recruitment. As a result, companies like Infosys, DSQ, iFlex and Cognizant saw their operating margins plateau out or increase marginally by 1% or so. Some others like Mascot Systems actually saw a significant drop in margins. The only two companies that witnessed a notable rise in operating margin were the ones who have always been aggressive at price points—Tata Consultancy Services and Wipro. Tata Consultany Services’ operating margins rose from 27% to 48%, while Wipro’s margins also moved up from 26% to 34%. Longer sales cycles and a squeeze on margins had created an intensely competitive environment by the end of the year.

This meant that the greatest deal of competition to Indian exporters came from other Indian exporters. This phenomenon continues in FY 2001 and most companies will now be looking for their numbers in volumes than in margins.