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The US presidential nominee, Barack Obama called the ongoing series of events leading to the US financial meltdown as the most serious financial crisis since the Great Depression of the 1930s. While no one can forecast with accuracy as to how long America and the world economy will feel the tremors of the present US economic crash, it is almost certain that the Indian IT Industry wont escape unscathed.

As a matter of fact, Indian IT companies have been facing the brunt of the uncertainties following the US and European economic slow downs for over a year now. The tumbling of rupee against the dollar; Bear Sterns going down and being acquired by JP Morgan; and now the latest declaration of bankruptcy by the Lehman Brothers and the acquisition of Merrill Lynchtwo of the largest American financial institutions. This has meant that some of the large clients that were being serviced by various offshore players have actually either been acquired or have gone bankrupt. As a result of which their business has been exposed to a lot of uncertainty.

Add to that some of the damage control measures initiated by the US. Which may not necessarily help Indian IT companies. The mortgage companies like Freddie Mac, Fannie Mae and now AIG getting nationalized is not great news for the Indian IT companies as their chances of outsourcing could be affected due to political interests. Though the good news is that re-stabilization of the dollar, resulting in the billing going up, has given some cushion to service providers. But the sad part is that the bad news looms larger than the good. Most economists believe the crisis will not fade quickly.

Perhaps the worst fears about the impact of the crumbling US economy on Indian service providers surfacing from all corners, are not just apprehensions but hard hitting reality, which, sooner or later, the Indian IT industry will be seen grappling with. Even though the industry hesitates to admit that the crisis will impact them in such a huge way. Most of the IT companies, refrained from saying anything, a silent period".

The underlying fact remains that under existing circumstances it will be nave to think that Indian service providers would not be examining the current situation threadbare and assessing their losses.

While they may or may not make it sound that big, what is significant here is that it is sure to have an impact on the way Indian service providers strategize in the longer run.

There will increasingly be an approach toward diversification Diptarup Chakraborti, principal research analysist, Gartner

The Road Ahead
Going vertical wise, the Indian companies will most likely look at diversification of their vertical base. BFSI till now has been giving the chunk of business, but other areas, were not that big for them. What is expected to happen now is that IT players will be seen putting in a lot of marketing efforts in the others too.

A significant point here is that already financial institutions across America and Europe are cutting costs. Among the large American and European companies surveyed by IT consulting firm Forrester Research in September, 43% have cut their overall spending on technology products and services in 2008. And, this was before the collapse of Lehman Brothers. In the given scenario, it does make a lot of sense to have greater exposure to other verticals.

Tholons executive director, Anand Lavi adds, BFSI is the largest in terms of IT spendingfirms should and will have an exposure to this sector anyhow. However, healthcare, engineering services are others areas that they will be focusing on.

Sumeet Salwan, director, advisory services, neoIT says, All these companies have had active exposure to most verticals, the IT players will gear up to manage big client deals only in the low-lying ones that include travel, hospitality, life sciences and so on. Other than this the other verticals where there is huge scope is media & entertainment, retail, telecom, and life sciences & healthcare.

Cognizants president and CEO, Francisco DSouza, too corroborates: In financial services, we will maintain a cautious view for the remainder of the year, principally due to the continuing turmoil in the industry and the likely possibility that the economic situation will extend beyond the US to impact our customers in Europe.

Apart from this, Indian service providers are expected to consolidate in a big way by gaining niche skills, scale and clientele, and moving up the value chain from application development and maintenance (about 50-60% of revenues) to high growth, high margin areas such as consulting, infrastructure management services, packaged implementation and engineering, BPO.

Besides this there might be some changes in the way companies serve the clients. HCL plans to service its clients on a revenue share or outcome based model. The service has been piloted with four clients resulting in a cumulative savings of $580 mn. We will approach our existing clients who are under significant cost pressures, says Suresh Sundaram, vice president, corporate marketing, HCL Technologies.

There are different opinions on revenue models that might evolve in the wake of the crisis. Though some analysts feel there wont be major impact, others believe IT companies may be pushed into signing more of fixed-price contracts as this will benefit both the clients as well as the service providers at this difficult juncture

Sundaram points here, As companies go for cost reduction, there are two options before them. One can either reduce cost using pricing, which is not going to be a much appreciated idea or one can restructure the contracts to fixed price contracts. Therefore, you can retain the margin and at the same time your customer can also get the benefit."

This will be clubbed with the large outsourcing deals. Lavi says, Going forward, most companies would wholeheartedly try and win end-to-end outsourcing contracts. This is expected to involve infrastructure management, handling operations, IT support and also new application development. Looking at SaaS/hosting model also would be an option.

Understandably, to compete with the likes of IBM and Accenture, Indian service providers need to have a broad based approach by concentrating on winning large end-to-end outsourcing deals, having a diversified mix of verticals and geographies.

Industry analysts say, off the record, that one of the most obvious fallouts and change is also going to be in the attitude of the bigger IT players towards the domestic market, which they earlier did not perceive as being very lucrative.

Infosys, for instance, has already started growing the Indian market at a faster rate than ever before, and this happened way back in 2007 when the dollar started fluctuating. Sources point out that Infosys, in particular, is gearing up by having good people to capture sales in India. TCS too is working around this.

Ignoring any big account coming from India would reflect imprudence on the part of the big companies. However, contrary to this, earlier bigger players including Infosys, TCS, Wipro, were completely US market driven, at the cost of discounting projects coming from India. This was simply because big projects coming from the domestic market could never be as big as those from the US, says an analyst.

Interestingly, Indian service providers had already started focusing on other markets in the wake of Americas dollar crisis; the need for that become even greater now. Clearly, IT companies have already started the process of dialog and are re-engineering their way forward. Milan Sheth, partner advisory services, Ernst & Young, says that Wipro has already embarked on reorganizing itself; while Satyam on the other hand has been creating newer industry verticals, for instance the sports vertical it created. HCL Tech has been focusing a lot on Japan while TCS on Latin America and Chinaall these are signs that IT players are well on the way of re-strategizing.

India so far has had a limited exposure to Europe. However, in the wake of the crisis, heads will turn towards France, Germany, and Belgium too.

Further, it is believed that more and more companies will now look towards a more integrated business model, which would provide to the entire spectrum of horizontals and verticals. Setting up near-shore centers, to tap markets of Europe, APAC, and the Middleeast would be given higher priority.

BFSI is the largest in terms of IT spendingfirms should and will have an exposure to this sector anyhow Anand Lavy, executive director, Tholons

This will fall under the strategy of having a geographic diversification. Says Gartners principal analyst Diptarup Chakraborti, There will increasingly be an approach toward diversification and exposure to markets of APAC and the Middle-East, and lesser of America.

Sumeet Salwan, director, advisory services, NeoIT substantiates, If you look at large companies, q-o-q, their dependence has decreased on the US market and they have been looking at the Indian market as it changes.

India, most believe, will continue as an important offshore center, and there is lot of scope for IT companies to tap, which they will now do along with trying to capture other offshore centers like Continental Europe, Latin America, Brazil, Japan and China.

HCLs Sundaram points out, As a company we have always asserted that it has never been dependant on one geography for its revenue. As part of our Blue Ocean Strategy we have built our strength in the APAC and ANZ regions along with US.

Looks like opportunities are plenty, arising out of the present crisis. Most IT companies will try and brace up for the lot of integration, and consolidation which will happen in the aftermath of the US economic breakdown.

Sundaram too feels the opportunities will be in abundance once the crisis subsides. He compares the present crisis with the dotcom bust of 2001-03. We are at the same stage today as the slowdown that was witnessed during the dotcom bust, says Sundaram. The good part is that, it was followed by four to five years of great health, as people realized Indian IT could give quality services. Sundaram adds, Similarly, the next couple of years will be watershed years for the industry where more companies will look for outsourcing which will augur well for India."

However, most analysts believe that there are hardly any short-term measures a company can employ to overcome the impact of the crisis at present except altering and making changes to the hiring pattern. It will be more interesting to see how they handle it in the long run.

On the operational side, companies will clearly be cutting costs in order to secure margins. This would mean that they would try and bring down the anticipatory hiring down, and also employ measures like increasing the utilization rate, moderate salary hikes up to 8-12%, and strictly checking admin expenses.

We will approach our existing clients who are under significant cost pressures Suresh Sundaram, vice president, corporate marketing, HCL Technologies

Syntels Keshav Murugesh, COO, explains, Most obviously companies in the offshore space will need to focus on becoming more efficient through productivity, utilization focus and harvesting of reusable tools and components. What looks most certain is that every employee will have to focus on being a co-innovator with the client and ensuring the client is able to access new efficiencies as a result, he says.

There is no doubt that hiring will be done with great caution. In many cases there might be delayed hiring. However, companies probably will not change the employee pyramid too much. Lateral recruitment might slow down and college recruitment will be lower in most cases, but other than this the firms obviously would need to have a bench-strength to scale up and respond to new projects.

Gartners Diptarup Chaktraborti, principal analyst, feels that laying off people will not be done on a significant scale. Larger companies most definitely would not do that. Look at HCL and Infosys, they are still in the acquisition mode, he points out, smaller companies though might adopt a just in time model, which probably would mean hiring only when they have projects.

What almost looks certain is that campus hiring at least this year will be hard hit, as companies try to minimize costs. Cautious hiring is most likely going to be the mantra, it seems, till the time crisis fades.

Urvashi Kaul
with inputs from Shashwat Chaturvedi and Shrikanth G urvashik@cybermedia.co.in

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