Sector structure

According to the National Association of Software and Service Companies (NASSCOM), the apex body for software services in India, the revenue of the information technology sector has grown from 1.2 per cent of the gross domestic product (GDP) in 1997-98 to an estimated 5.8 per cent in 2008-09.

The Indian IT-BPO industry grew by 12 per cent in 2008-09 to reach US$ 71.7 billion in aggregate revenue. Software and services exports (includes exports of IT services, BPO, engineering services and R&D and software products) reached US$ 47 billion in FY2009, contributing nearly 66 per cent to the overall IT-BPO revenue aggregate.

ITeS, which started with basic data entry tasks over a decade ago, is witnessing an expansion in its scope of services to include increasingly complex processes involving rule-based decision making and even research services requiring informed individual judgment. It now offers services such as knowledge process outsourcing (KPO), legal process outsourcing (LPO), games process outsourcing (GPO) and design outsourcing, among others.

According to AT Kearney, India continues to be the most preferred destination for companies looking to offshore their IT and back-office functions. It also retains its low-cost advantage and is among the most financially attractive locations when viewed in combination with the business environment it offers and the availability of skilled people.

Moving up the value-chain

India with its natural competitive advantage is likely to play a huge role in various segments of the ITeS industry.

• The Indian animation industry is rapidly growing as a major outsourcing hub with a growth rate of 30 per cent.
• The Indian KPO sector is estimated to become a US$ 10 billion industry by 2012, from the current size of US$ 4 billion.
• As per a Credit Rating and Information Services of India Ltd (CRISIL) study, engineering services outsourcing (ESO) is poised to be the next big opportunity in the Indian outsourcing services industry. The ESO sector is likely to grow at a compounded rate of 26 per cent and post revenues aggregating around US$ 7.5 billion by 2012.
• The market for recruitment process outsourcing (RPO) continues to grow at a healthy rate notwithstanding the tough economic condition with the number of deals signed rising this year, according to a study by global consulting and research firm Everest Group.

Deals

The cross-border merger and acquisition (M&A) involving Indian IT and IT-enabled companies increased by nearly 12 per cent between January 1 and December 15, 2008 to US$ 3.22 billion (in 98 deals) compared with US$ 2.88 billion (in 159 deals) in 2007. The average deal size in 2008 increased to US$ 32.86 million (as compared to US$ 18.15 million), according to Grant Thornton India.

Moreover, as top outsourcing customers in the US and Europe seek to renew their computer infrastructure management contracts worth nearly US$30 billion, Indian tech firms including HCL, Tata Consultancy Services (TCS), Wipro and Infosys are bidding against incumbent multinational rivals IBM and HP, for their share of the lucrative opportunity.

• Nasdaq-listed EXL Service has acquired American Express’ travel services captive in India for US$ 30 million.
• Etisalat DB Telecom, a new entrant in the Indian telecom space has awarded an end-to-end outsourcing contract to three BPO service providers—Tech Mahindra, Aegis and Conflux. The deal, spanning over five years, is valued at over US$ 161.3 million.
• Indian IT majors Tata Consultancy Services (TCS), Infosys Technologies and Wipro Ltd, besides global IT giants IBM and Accenture, have bagged a five-year US$ 1.5 billion outsourcing deal from BP (British Petroleum), the world’s third-largest petroleum refining company in the world.
• Infosys Technologies subsidiary Infosys BPO will acquire US-based McCamish Systems for an initial payment of US$ 38 million.
• The largest drugstore chain in the US, Walgreens, has entered into a 10-year outsourcing deal with India-based BPO provider , Genpact.
• IT major Wipro Technologies has entered into a multi-year outsourcing engagement with British American Tobacco, to help the company improve effectiveness and efficiency of application support services for its global business operations.