India's IT industry will continue to face challenges in areas such as labor and delivery costs and competition from foreign companies, but this does not mean it should give up its focus on software and services. They do need to evolve with their customers' buying behavior and innovate to stay competitive though, analysts urge.
The Times of India published a commentary in August saying top Indian IT companies such as Infosys, Wipro, Tata Consultancy Services (TCS) and HCL Technologies, have been overly reliant on the low-hanging fruits of applications development and maintenance and remote infrastructure management for the past 10 years.
While those were good markets to get into in the past, they are considered commodity businesses today, which is why local IT companies have found it difficult to cope with the uncertain market conditions. It added that TCS, HCL and Cognizant might have shown good results in their recent financial reports, these were down to short-term gains such as clinching contract renewals.
Weak economy, rising competition
Arup Roy, principal analyst at Gartner, disagreed with the analysis though. He said the cost challenges for India's IT companies are mainly from the uncertain economy and market conditions, which has led to the inflation of prices and resulted in increased delivery costs. The companies mentioned above are affected because they are based in India--one of the largest delivery centers in the world, he explained.
Furthermore, these companies also have to grapple with labor cost issues as many large IT companies and development centers recruit some 30,000 to 40,000 workers annually.
Roy pointed out these companies have also faced increased competition from large multinational companies (MNCs) which have or are setting up offices in India as the country continues to open up and develop its economy.
Despite the rising competition, the software and services sector remains "extremely successful" and this has helped local tech companies do well over the past decade, Kunal Biswas, co-founder of market research firm The Banyan Tree, said.
A National Association of Software and Services Companies (Nasscom) study in February, for instance, predicted the aggregate revenue of India's IT-BPO (business process outsourcing) will cross US$100 billion in 2012, Biswas noted.
Reiterating Roy's point, the co-founder said the growth rate of India's IT-BPO sector may be slower this year compared to previous years but this is "understandable" considering the weak global economy, particularly in the United States.
The recent spotlight on Indian IT companies only happened because Infosys--"the icon of [India's] IT sector" according to Biswas--along with Wipro have not performed up to market expectations, he added.
Take advantage of emerging markets
So rather than turn their collective backs on software and services, India's IT companies should understand and adapt quickly to the changes in customers' buying behavior, Roy advised. Such behavior changes quickly due to volatile markets, so vendors need to change their services accordingly or risk losing more business to foreign competitors, he warned.
They should also look to be more aggressive in the marketplace. This can be done by examining investment areas that promises high yield such as creating a new service line based on an area they have domain expertise in that others do not, he elaborated.
Biswas added the country's IT service providers need to look beyond their traditional vertical strongholds in banking, retail, healthcare, and telecoms as these are now made volatile from external market conditions.
Instead, they should look to emerging sectors such as automotive and engineering to provide innovative software and services, he urged TCS, for one, has already made inroads into these two segments and Biswas believes other players would soon follow suit.