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Decoding the Domestic IT Market Opportunity

Mid sized IT companies have played an important role in the development of the domestic IT industry that is estimated to be around INR 1200 Bn as of FY10. However the Indian market has its own evolution path in terms of key services, customer segments, competition and operating model. Mid sized service providers must take cognizance of these differences and make appropriate adjustments to their business model to continue to profitably address the domestic opportunity, say Kaustav Ganguli & K. Raman (Practice Head Infocomm, Media & Education) of Tata Strategic Management Group.
The domestic Indian IT Market, estimated at INR 1200 Bn as of FY10, is expected to grow at a healthy rate of 18% per annum over the next 3 to 5 years. Indias IT spend continues to be driven primarily by hardware (40% of total spend), followed by services (39%) and software (12%) (Refer Fig 1.). A developed market like the U.S., on the other hand, has most of its spends directed towards services (44%) and software (34%). It would seem that India, at a macro level, is trying to catch up first on creating the right kind of IT infrastructure, even as it spends simultaneously on software and services. Under IT services the top spend areas for Indian companies are System Integration (24%), Infrastructure Management Services (36%) and Application Management (20%). This is in stark contrast with the export market where Custom Application Development, with 51% share of the export market IT services spend, and Application Management, with 28% share, continue to be the dominant service lines. As organizations & institutions leapfrog levels of IT maturity by procuring integrated solutions, combining complex hardware, software & services, majority of Indian enterprise & government customers are opting for players capable of end-to-end play (hardware, software & services) in turn-key system integration projects. In terms of customer segments, Banking, Financial Services and Insurance (BFSI), Government and Telecom are the top verticals in India accounting for 74% of overall spends. What is worth noting is that even amongst top verticals in the Indian market there are differing degrees of IT maturity & spend behaviour.
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Figure 1 : Domestic IT Market Size and Segments Indian Domestic IT Market (Rs Bn) Domestic IT Revenue Split (%)

18% 1044 729 1094 1200

FY07

FY08

FY09

FY10

Total: Rs 1,200 Bn

Source: Nasscom Report

The other key thing to note about the Indian market is the increasing adoption of IT by the Small & Medium Enterprise (SME) segment. The SME segment accounts for almost 1/3rd of the total domestic IT spend (Refer Fig 2.) and is expected to grow at a rate very similar to the overall market growth rate (18% per annum for 2010 to 2013). Globally, however, the SME segment accounts for a higher share (44% as of 2010) of the total IT spend. This suggests that Indian SME segment spends on IT, while increasing at a fast clip, may still have significant potential for further growth. To sum up, the Indian market demands end to end capabilities across various verticals and for different levels of IT maturity. This offers a structural advantage to large sized IT companies as they would typically possess the breadth and depth of services to cater to the different need types of verticals having differential IT maturity. However the Indian IT Market has traditionally not been the focus of large Indian IT players. The top ten listed IT players from India (in terms of annual turnover) who account for 62% of industrys exports from India command only 23% of the domestic IT market share. While the largest Indian IT companies continue to focus on opportunities in foreign markets the domestic market, at least in the immediate term, offers an attractive opportunity to the small and mid-sized IT companies. In order to address the opportunity effectively mid sized companies need to develop capabilities to address the unique needs of the Indian market. Focus on Select Customer Segments
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To get a higher return on resources deployed mid sized companies need to have a sharp focus on the customer segments they would like to cater to. The customer segmentation may have to go beyond traditional industry verticals and focus on specific sub-verticals or organization sizes (by employees or by annual turnover) within such sub-verticals. This is because different verticals and different sizes of companies within such verticals are in different stages of IT evolution and would have different needs to be catered to. For example if a company wants to focus on the government sector it may need to go further and also make decisions on the type of projects, the states it wants to focus on, the target agencies & entities in the government and also the offerings for the sector. Alliance Strategy for Missing Capabilities As majority organizations in the domestic market prefer end-to-end solutions, mid sized companies in the short term will need to create effective partnerships to take care of missing capabilities. These companies would also need to acknowledge and accept that their roles could be varied depending on the opportunity. For example, the mid sized companies could play the role of service providers to other IT companies in some cases and address the needs of the end customer in others. Such complex relationships would mean that companies must have a clear idea of the alliance & partnership strategy they need to adopt. Innovations on Delivery In order to protect margins and ensure profitability companies will need to innovate on
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delivery models. The innovations need to ensure that common process, platform, human resources and infrastructure are leveraged for multiple customers. One of the best examples of delivery innovation in Indian IT has been in the Managed Services space. Here, companies have leveraged their expertise in Remote Infrastructure Management (RIM) to drive down delivery costs and boost margins. The model banks on greater sweating of centralized technology and human resources in a shared services model for multiple customers. Given the lower price points in the domestic market, service providers will have to work on such innovative delivery models for higher profitability. Talent Management Strategy The other factor that would decide the relative success of companies in the domestic market is in the realms of talent acquisition, management and retention. IT companies are fast realizing the fact that value in customer engagements get driven by employees engaging with customers and not in back-offices. Hence there is an increasing focus on developing a holistic strategy towards attracting high-quality talent, engaging & motivating them, and ensuring higher returns on investment in such talent by retaining them. Innovations on Pricing Models In more cases than not, Indian Enterprise Customers, especially those amongst SMEs, find it difficult to make significant one-time investments in upgrading their IT infrastructure or applications portfolio. Our analysis shows that an average medium sized Indian enterprise with an employee size of ~300 has an annual IT budget in the vicinity of Rs. ~42 Lakhs this obviously places constraints on the extent of one time capital investments that such a company can make towards IT upgrades. This underlines the need for opex-based or pay per use pricing model in the Indian market. Needless to say such migrations in pricing models need to go hand-in-hand with changes in the delivery architecture as well. The other emerging trend in pricing models is with regards to increasing usage of performance-based or outcome-based pricing especially in the area of IT services. Service providers need to be alive to such new customer requirements with
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respect to pricing and effect changes in offerings & delivery.

appropriate

Learnings from Successful Companies The success stories of the largest Indian IT companies focused primarily on international markets are well-chronicled. However, in the domestic market we also find examples of medium or small sized companies that have grown successfully by making strategic choices in some of the aforementioned factors. Apart from clearly identifying and implementing a goto-market approach for select customer segments, many of these companies have relied on effective partnerships, innovations on delivery & pricing, and a holistic talent management strategy for their growth. For example, Allied Digital and Glodyne are two examples of companies who have derived majority (94%: Allied; 75%: Glodyne as of 2009) of their revenues from the domestic market. One thing that clearly marks out these companies is how they effectively leveraged implementation partnerships with other IT majors for initial entry and ramp-up in their identified customer segments. As far as innovation in delivery model is concerned, one of the most successful examples is found in the Managed Services space where leading service providers like HCL & others like Allied Digital and Glodyne pioneered the concept of Remote Infrastructure Management (RIM) to cut down delivery costs and boost margins. The other noteworthy example of delivery model innovation is unfolding in the SME space in the domestic market. Here, some mid sized companies like Ramco Systems are offering cloud based services on a pay per use model to its customers and others have started offering services in cloud consulting & integration. Though most IT companies in India are yet to adopt a comprehensive talent management strategy, the seeds of change in this area had perhaps been sown by HCL in 2005 when it announced its Employees First, Customers Second (EFCS) policy. The EFCS is based on the five pillars of employee empowerment, transformation, recognition, knowledge & support and endeavours to drive a unique employee organization thriving on a value-driven culture. Strategic Imperatives for Domestic Market Play
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It is clearly evident that the domestic market has very unique characteristics in its IT needs and spend behaviour. Companies which are looking to serve this fast-growing and attractive market have to make strategic choices primarily in two aspects. These two aspects are: 1. Where to compete: This would involve decisions on offerings & market segments (verticals / sub-verticals, enterprise sizes, geographies, MNC / Indian, public / private etc.) How to compete: This would mean identifying innovations in delivery & pricing models, entering into effective partnerships, and adopting long-term initiatives to ensure higher returns on talent.

Companies need to conduct critical analyses of the strategic options under each of these two aspects and institute an implementation program for the identified strategic choices to maximize their chances of sustainable growth in the domestic market. Firms that do this quickly can seize the advantage and emerge as the next generation of success stories in the Indian IT sector.
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About Tata Strategic: Tata Strategic Management Group is the largest Indian Owned Management Consulting Firm. Set up in 1991, Tata Strategic has completed over 500 engagements with more than 100 Clients across countries and industry sectors, addressing the business concerns of the top management. Today more than half the revenue of Tata Strategic Management Group comes from working with companies outside the Tata Group. We enhance client value by providing creative strategy advice, developing innovative solutions and partnering effective implementation. Our Offerings
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About the Author:


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K. Raman is the Practice Head of the Infocomm, Media & Education Practice at Tata Strategic Management Group. He has worked with various organizations in sectors undergoing rapid transformation like IT, Telecom and Education, helping them identify key shifts in markets and dimensioning the impact of such changes. In the IT sector he is involved with various mid-sized companies advising them on business model changes required for sustaining and accelerating growth. Kaustav Ganguli is the Engagement Manager with Tata Strategic Management Groups Infocomm, Media & Education practice. He has significant experience in providing advisory services on strategic issues to organizations both in India and abroad. He has had functional and consulting experience in IT / ITeS sectors and has provided strategic advice on issues related to growth, business model & profitability to several organizations in the Indian IT & ITeS sectors.

Nirmal, 18th Floor, Nariman Point, Mumbai 400021, I ndia Tel 91-22-66376712 Fax 91-22-66376600 url: www.tsmg.com email: raman.kalyanakrishnan@tsmg.com

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