The US slowdown triggered a new trend; it prompted Indian companies to look at Europe. The US is and will remain the largest destination till 2004 at the least—at present, it accounts for 46% of worldwide software exports and projections. However, all companies, including exporters, will now be looking at increasing their revenues from Europe. By the end of the year, many companies, including Wipro and Infosys, had set up offices in the continent—mostly in France, Germany and the United Kingdom. These countries together account for 60% of the European market. Indian software export revenues from Europe moved up marginally—from 21% in 1999-00 to 22% in 2000-01. With the concerted moves by most of the top software and services players into this market, the number is likely to rise more steeply this year.

However, the slowdown in IT spend has spread to Europe. A survey of top companies on both continents reveal that 40 per cent of European companies were reducing spending and even important projects were being shunted. Top rung software services companies—TCS, Infosys, Wipro and Satyam—all have exposure to Europe, ranging from 7 to 30 per cent of their total revenues.

Out of the total software exports of Rs 28,350 crore during 2000-01, almost 62 per cent was to North America (U.S., and Canada); 24 per cent to Europe; 4 per cent to Japan; and 10 per cent to rest of the World. Unlike in the U.S., Europe has no language advantage and this results in slower market penetration. The onsite work is high and require local workforce (to combat language difficulties). This will negate the lower resource cost advantage that Indian companies have in the US. Moreover, in Europe, Indian companies will be competing against East European countries, which share a similar low-cost structure but do not have language constraints. In the fiscal year 2000-01 total Indian software exports to Europe was worth Rs 6,800 crore—a growth of 68 per cent over 1999-00 revenues of Rs 4,030 crore.

A few companies were even eyeing the APAC market, though with a marked lack of enthusiasm. The Asia-Pacific market is billed to be the fastest growing market in the world right now. However, for software services exporters there are several points of discomfort. One, it is a exceedingly fragmented market with numerous countries, cultures and languages. Moreover, margins are very low. The next best option then was Japan where most Indian exporters are increasing their presence. Wipro has set up a dedicated ODC for a Japanese Telecom firm in Hyderabad, Pentasoft already gets 17% of its revenues from there while others like Mascot Systems, iFlex, Pentamedia and DSQ are increasing their presence here.

Homeward bound

In the last few years, overseas travel expenses of software export companies had shown a steep rise as more and more work was done onsite. Of late, however, there has been a slight shift towards offshore development as confidence in Indian exporters has increased and remote management methods and global delivery models have been further refined. Barring those application areas where onsite presence is a must, the industry hoped the mix of on-site and offshore revenues to be increasingly skewed towards the latter.

Both vendors and clients are now experiencing a sense of urgency. For clients attempting to save money wherever they can, on-site development is viewed as an expensive affair. Offshore billing rates for low-level legacy work, for instance, are $15-20 per hour, but on-site rates for the same work goes up to $55-70 per hour. For middle-level work like CRM customer relationship management applications, offshore billing rates are $30-35 per hour, compared to on-site rates of $100 per hour. For high-end work in consulting and core technologies, the gap is even wider—from $30-120 per hour offshore to $300-350 per hour on-site. On the other hand, while revenues are higher in on-site work, so are the costs. Overall, offshore work tends to get more margins than on-site work does.

More and more vendors are, therefore, looking at larger offshore components. During the course of FY 2000, on-site development came down from 50% to 47% (it was over 54% in 1998-99), with a commensurate rise in offshore development from 49% to 52% (it was 44% in 1998-99). Improving infrastructure and business imperatives are likely to push that shift even further in the coming year. The downturn might precipitate outsourcing decisions (from India) much earlier, as the realization has dawned among US Fortune 500 and Fortune 1000 companies that their legacy-related costs need to be reduced. "The number of these (Fortune 500 companies) who have understood the Indian offshore model have swelled in number and they are the ones who are likely to ‘ramp up’ outsourcing from India.

At the same time, the opportunity landscape has also broadened as Indian software companies have made a successful transition from enterprise computing (client server) to collaborative computing (Internet open standards) environment. From this stage, the move towards "user-centric computing" involving mobile, broadband and personalization have just begun. "This presents a new wave of IT service opportunities and Indian companies which prepare themselves for this, will be in the best position to ride the wave."

Looking ahead

The problems that began by the end of Q4 remain the major challenges of this year. The software industry had hoped for a quick and painless move up the value chain. Worldwide, the big growth areas are billed to be IS consulting, systems integration, packaged software support and maintenance, network consulting and integration as well as network infrastructure management.

Last year, most companies had also planned to lay greater focus on business processes consulting and business services outsourcing along with e-biz consulting. These are the areas Indian software exporters need to concentrate on. Yet, much of this year will be spent on chasing volumes. Companies involved in core technology areas, Wipro Technologies and HCL, for instance, target the R&D budgets of vendors but even those are beginning to get squeezed.

This year’s sizzling tech-spaces are embedded systems, wireless applications, mobile commerce applications, communication software, and optical networking. They not only offer big market opportunities (if the products take off) but also the excitement of working on futuristic technologies. Historically, VC activity has been focused on either services or on Internet start-ups. Following the IT boom, in 2001, significant venture capital funding is expected to chase opportunities in the products and technology space as Indian companies move up the value chain.

OEMs globally were spending billions of dollars to scale and stay atop emerging technology. Also, the trend in global markets is outsourcing. "Companies/OEMs are concentrating on end-products. The potential for Indian companies to slot themselves in such niche spaces to build specific solutions in segments like embedded systems and wireless solutions is tremendous. However, with India leaping onto the products and specialised solutions bandwagon, the IT industry in India is shifting gear to get into the non-linear growth mode. While better workflow engines, global benchmarking standards and greater focus on productivity come into play, technology and products will hold the industry’s and consumers’ fancy for some time to come.

When will things begin to look up again? No one really has a handle on that yet. Perhaps by the fourth quarter of this calendar year…For now, a great year is over.