Prospects for the Indian as well as the global IT industry are bright. According to the International Data Corporation (IDC), estimates for the global industry indicate that IT spending would grow at an annual rate of over 7% during 2005-10 and cross US$ 2 tn in size. It also expects offshore spending to touch US$ 110-120 bn by 2010. The success of the Global Delivery Model adopted by global IT companies and the increase in offshore spending by the US and European countries like India are expected to reap rich benefits. Besides, the vast availability of English-speaking skilled workforce and the lower cost of operation provide India an edge over others in the global IT market.

The size of the Indian IT industry (including hardware), currently estimated at US$ 47.8 bn, is expected to touch US$ 90 bn by 2010, of which over 65% would account for software and services exports. The increase in the IT sector will be backed by the growth in offshore spending, preference towards multi-vendor contracts and success of the Global Delivery Model.

Technology adoption by companies across sectors and rapid evolution of technology and applications will significantly drive growth in the IT sector. Spending on IT is expected to increase across businesses with new sectors driving the new wave of IT growth. These expectations were also reflected in our survey where 96% of the respondents believed that IT spending by companies will increase, while none expected it to decrease.

Source: D&B Research

The Banking, Financial Services and Insurance sector along with manufacturing and telecom are the traditional growth drivers for the Indian IT industry, and continue to remain the key growth sectors. Apart from these, transportation & logistics and retail are emerging as fast growing verticals for the industry.

Source: D&B Research

Among the service lines, the conventional Custom Application Development continues to remain the dominant service line that is expected to witness steady growth. This service line was identified as the most growing service with 53% of the responding companies identifying it as a key driver for the next year as well. This service line accounts for 49% of India’s IT services exports and will continue to dominate. The other service lines witnessing traction include IT Consulting, Infrastructure Management Services, Engineering & R&D and System Integration.

The Indian IT companies are expanding service offerings and entering newer geographies to strengthen their business model, reduce dependency on single location and offer end-to-end solution to their clients. This expansion is likely to be fuelled through mergers and acquisitions. In 2006, the India-based IT companies accounted for 91% of total acquisitions in the world, with a large number of the target companies located in the US followed by India.

Source: D&B Research

In our survey conducted for the publication, of the companies that responded to our query on the future growth strategy to be adopted, more than 51% of the companies indicated that they would grow organically. An equal number of companies indicated taking either the inorganic growth path or both. Nonetheless, mergers and acquisitions will continue to remain the most preferred strategy among the IT companies for the near future as this would be the fastest way to increase clientele, entry/expand into new geographies, increase product/service offerings and gain specialisation.

Availability of skilled human resource remains a key concern for the industry. The Indian IT companies spend around 35-45% of their revenue on employees and forms one of the most important factors impacting operating margin. Nevertheless, despite the continuous hike in employee costs, average cost per employee for Indian IT companies remain much lower than per employee cost prevailing in the developed countries like US and UK.

Source: D&B Research

Factors impacting employee cost include demand-supply gap, high attrition rate and increasing presence of MNCs in the domestic market. Software and services companies are trying to control cost by hiring freshers and training them in-house, which also takes care of quality issues. Training and development will remain the key to developing skilled human resources for IT companies.

Source: D&B Research

Growing orders coupled with increasing activities of MNCs will accelerate the demand for skilled manpower and retention of employees. Under these circumstances, managing employee cost will remain a key challenge for the Indian IT companies. Thus, it is believed that Indian IT companies will continue to face an average wage inflation of 10-20% annually at various levels.