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Overview of the IT & ITeS-BPO Industry

The Indian Information Technology (IT) and ITeS-BPO sector plays a vital role in the growth of the Indian economy. The industry’s contribution to the country’s GDP has grown significantly from 1.8% in 1999-2000 to around 5.4% in FY07. The Indian IT & ITeS-BPO industry has shown a growth of 28% with the total revenue aggregating to US$ 47.8 billion in FY07.

A changing global business scenario and the liberalisation of Indian economic policy, favouring the outsourcing trend, acted as key drivers for growth in the Indian IT industry. Cost advantage, availability of skilled manpower, quality of services, duty exemptions and a global delivery model, combination of on-shore and off-shore activities, with an increasing off-shore component, are some of the key factors that enabled the IT & ITeS-BPO to sustain growth. Global giants like Microsoft, SAP, Oracle and IBM have already established their research & development centers in India.

Source: NASSCOM, Dun and Bradstreet Research

Key Highlights of the sector in FY07

• Revenue from the Indian IT software and services sector (including the domestic and exports segments and excluding hardware) reached nearly US$ 40 billion during FY07 and is expected to grow by nearly 27% to US$ 49-50 billion in FY08.
• Services and software products are the main contributor to exports of the sector. The exports of the sector have increased from US$ 23.6 billion in FY06 to US$ 31.3 billion in FY07, registering a growth of 33%.
• Achieving increased traction in offshore product development and engineering services have supplemented India’s efforts in IP creation. The exports in this segment have increased from US$ 4 billion in FY06 to US$ 4.9 billion in FY07.

Row: Rest of the world
Source : NASSCOM

• US and UK are the dominant markets for IT & ITeS-BPO exports. However, revenues from newer markets are growing rapidly
• In FY07, MNC investments have crossed US$ 10 billion and are expected to increase in the next few years.
• The total number of IT & ITeS-BPO professionals employed in India was estimated to have grown from 1,293,000 to 1,621,000 in FY07.

Verticals

The major verticals served by IT & ITES-BPO industry are banking, financial services and insurance segment followed by Hi-Tech/Telecom and manufacturing.

Source : NASSCOM

Issues & Challenges

• Rising attrition rate is one of the major concerns for IT & ITeS-BPO industry. For instance, TCS reported an attrition rate of 11.5%, up from 10.6% from the previous year while the attrition rate at Infosys was 13.7% in FY07 as compared to 11.2% in FY06.
• Rupee Appreciation is also the major concern for the most of the Indian IT & ITeS-BPO players. Rupee appreciation not only affects the margin but also the competitive edge over the international firms.
• The continuation of the tax holiday is uncertain which may slow down the future expansion plans. With dissimilarity in tax regimes, the existing STPI units would opt to re-invent themselves as SEZ units. It should be also noted that low-cost competitors like China are rapidly emerging as an alternative destinations.

Future Outlook

According to NASSCOM, the Indian IT & ITeS-BPO exports are likely to touch US$ 60 billion by 2010. The growing demand for global outsourcing, favorable government policies, skilled manpower, quality services and the growing effect of technology-led innovation are some of the key factors for the growth of IT & ITeS-BPO sector. The favorable government policies have helped Indian IT & ITeS-BPO sector to grow rapidly. According to the Planning Commission of India, the Indian IT & ITeS-BPO sector would generate another 2.5 million direct employment opportunities. Thus this sector will require a huge investment.

Cluster Insights

The following Cluster Insights are aimed at grasping the pulse of the small and medium enterprises operating in their respective industries. The attempt is to chart their operational structure, business practices, future plans, etc., for which purpose, we have considered the companies profiled in this publication.

The key growth factors

• The average revenue growth of IT & ITeS-BPO companies during the last two years has been around 41%.
• 57% of the IT & ITeS-BPO companies have been involved in exports.
• 19% of the companies earn more than 50% of their revenue from the international market.
• America is the most preferred export destination.
• BFSI is the most preferred vertical.
• 53% of the companies were established between 1990 & 2000.

Ownership Pattern

The ownership pattern of the IT & ITeS-BPO companies in the NCR cluster is inclined towards the private limited company.

• In the last two years, private limited companies recorded a revenue growth of 42% whereas public limited companies recorded a growth of 38%.
• 22% of private limited companies earn more than 50% of their revenue from exports.
• A majority of the private limited companies cater to the BFSI verticals.

Sub-segment:

Majority of the companies provide software products

• 19% of the companies providing software products and 15% of the companies providing IT Services earn more than 50% of their revenue from the international market.
• In the last two years, companies dealing in IT Services have shown the highest revenue growth of 47% followed by companies dealing in ITeS-BPO at 45%.

Turnover Bracket

61% of the companies in the turnover bracket of Rs 5 – 10 mn are involved in exports.

Source : NASSCOM

• Most of the companies catering to the BFSI segment have a turnover bracket of Rs –50 - 100 mn while those catering to the media & entertainment vertical have a turnover bracket of Rs 5 – 10 mn.
• Europe and Asia (excluding Middle East) is the most preferred export destination for companies to turnover bracket of Rs 50 – 100 mn while America and Middle East is for the companies in the turnover bracket of Rs 5 – 10 mn.

Growth and Future plans

The companies expect an average revenue growth of 47% in the next two years.

• 42% of the companies from the turnover bracket of Rs 25 – 100 mn registered a revenue growth of more than 40% in the past two years.
• 19% companies expect their revenue to grow by more than 40% in the next two years.
• Strategies envisaged for future growth plans range from diversification, entering new markets, developing new marketing initiatives and acquisition. According to the study, 56% of the companies are planning to enter new markets while 15% are having diversification plans in the near future.

Cluster benefits and hindrances

Infrastructure and technology turned out to be the key beneficial factors from the cluster whereas government subsidies and funding were cited as the key hindrances.