In The Spotlight

Its results time and the concerns continue 

Financial Express Article, 19/07/2010, Ganesh Natarajan

Nearly eighteen months ago, at a presentation to a packed hall of financial analysts in New York city, I had the dubious privilege as the Chairman of NASSCOM of justifying my confidence that in spite of the impending recession in the US and UK, the Indian IT sector was expected to grow in both revenues and profits. To a group of spreadsheet wielding industry watchers expecting predictions of doom, this confidence would have come as a surprise and it was certainly gratifying to meet some of them again on a recent visit and discuss the growth of the industry in the last financial year – a sure indication of the resilience of India’s most successful industry.

With the Euro falling and the Greek tragedy threatening to rain on the party of all Europe and eventually the US, the current earnings season has started with renewed confidence with confident growth numbers shown in early IT sector results. However, this time there can only be guarded optimism that a good start to the year that many of us have seen can and will be sustained. There are many more negatives too – externally there is the continuing unemployment woes in all our key markets and the clouds of protectionism and double dip recession still hovering over the US and internally, the unnecessary expectations created by premature announcements of big salary hikes has led to the inevitable feeling of let down amongst many young associates in the industry. Attrition levels are back to the glory days of the industry and it will take clear talking and logical thinking on the part of employers and employees to restore a modicum of stability to the employment situation. At a recent conference in Pune, many company heads agreed that the practice of rushing to college campuses well before the final semester should not be resumed and orderly departures from previous employers must be encouraged by the more responsible companies to avoid chaos descending in this volatile environment.

There are positive signs too that the industry as well as industry watchers can look at for encouragement. Strong steps taken by the new Government in UK and the slow but sure recovery in the USA are resulting in strong signals from CIOs and sourcing managers that they would be loosening the purse strings and starting projects that had been delayed by the economic uncertainty of the past. Volume growth is a given, at least in the first half of the year and if industry leaders resist the pressure to lower prices and compromise their long term profits at the altar of short term gains,  the twin impacts of continuing cost management and higher volumes will inevitably find a way to a healthy bottom line. Zensar’s own experience in the last fiscal as well as the first quarter of this year are ample proof that a judicious choice of market segment, new service areas and good client mix can keep bottom lines buoyant even in uncertain times.

The first quarter results of industry bellwether Infosys support this hypothesis. Revenues grew 5% quarter on quarter driven by an impressive 7.6% volume growth but margins fell sharply by 210 basis points, a combination of wage hikes, high attrition and surprisingly some level of price declines.  Reported attrition jumped up to 16% and the high utilisation level of 73% has worried analysts that there is not enough room for improvement. The results point to the fact that supply side pressures are a reality and there is no let up expected. The company as well as the industry will have to find new innovation led initiatives to keep both top and bottom lines moving northwards.

Non linear revenue growth is one of the answers to the dilemma of profitable growth that plagues policy planners in all companies in the industry. The luxuries of the past when significant rework and the misplaced pride of software developers  prevented reuse of programming work in multiple assignments may well be over and every piece of work has to count, not once but many times. The development of templates that incorporate the domain knowledge of the customer’s business, the creation of products for common applications across user domains and the use of collaboration frameworks within and across development locations to ensure seamless flow of work on projects – all these and more are the critical initiatives for all companies. The advent of cloud computing and its application to hosted applications in a Software as a Service (SaaS) format and processing through Platform BPO approaches should be embraced by the industry as one sure way of changing the conversation from number of Full Time Equivalent (FTE) resources deployed on services deals to measurable output as the basis for performance and payment by the user community. It is possible and indeed probable that double digit profitability for the industry can continue well into the year 2020 if these steps are taken.

This year will see the entire industry at an inflection point, when tough decisions will have to be taken and the CXO suite will meet often to take decisions on divesting unprofitable business lines and territories while sanctioning investments in new directions. There needs to be a willingness to evaluate the progress of key initiatives and turn on a dime to capitalise on new trends and opportunities. The second quarter which has historically been a good one for the industry will not let us down but the second half of the year will prove to be one more difficult period where the wheat will be separated from the chaff and the industry will face some more tests of its mettle and its versatility!