Source: stuff.co.nz

One of the pillars of modern India, and one the country is relying on to complete its transformation from an economic backwater to a global superpower, is its IT industry.

From humble beginnings the industry has grown beyond what anyone imagined 20 years ago. It is currently worth about US$47 billion, or about 5.4 per cent of India’s gross domestic product, and is still growing at about 30 per cent per year. It employs 1.6 million people directly, and many more indirectly.

Its phenomenal growth has led India to take IT to heart as a national industry, and everyday Indians have a real sense of pride now that its large tech companies are rivalling the established IT giants like IBM. This is proof to them that India can play and win on the global stage.

India’s first IT company was Tata Consultancy Services (TCS), which sprang into life in 1968 as an offshoot of the giant Tata group. The industry was virtually nonexistent until the 1980s, when India’s low labour costs and many fluent English speakers made it an attractive place to set up call centres and perform routine software development.

The seeds were planted then, but the growth of the Indian IT industry really began to skyrocket in the past 10 years on the back of Y2K and the first Internet boom.

The country’s IT exports grew eight-fold in seven years – from US$4 billion in 2000 to US$32 billion in 2007 – while the size of its workforce has increased tenfold. It added 300,000 new employees in the past year alone.

In this period TCS’s revenues have doubled every two years and it now makes more than US$4.3 billion each year, with close to US$1 billion in after-tax profit, with a market capitalisation of US$26 billion, making it one of the biggest IT firms in the world. It has more than 100,000 employees, one third of these being hired in the past year.

Satyam, another Indian IT giant, took 17 years to make US$1 billion in annual revenues, but only two years after that to reach US$2 billion. It should hit US$3 billion this year, one year later, while hiring another 10,000 to 12,000 more staff to add to its 56,000 employees. Revenue growth sits at about 45 per cent annually.

It is tempting in the West to end the story of India’s IT boom there, but it’s really just getting started. Both TCS and Satyam expect revenue growth to continue at the pace set by recent years for the short-term. The industry hopes to hit US$60 billion in exports by 2010, but there is every sign it will get there early.

According to Nasscom, India’s national IT industry group, about 20 per cent of the world’s estimated total IT spend of US$1 trillion is outsourced. About 45 per cent of this is sent offshore, and about 80 per cent of this offshored work goes to India. India’s IT firms say there is still room for revenue growth in traditional outsourcing fields, but there are a lot of other IT tasks Indian companies are keen to do as well. The falling price of bandwidth makes this more and more attractive.

TCS is increasingly doing remote management of customers’ infrastructure, for example managing 30,000 computers worldwide for German business software giant SAP, handling almost everything from India. “Other than plugging in a desktop, you can pretty much do everything from far away,” says Pankaj Baliga, TCS’s vice-president.

Today’s Indian firms aren’t just “body-shopping” organisations, content with call centre work, routine software development and IT support contracts, though there is still a good deal of that.

Firms like TCS and Satyam are now going after high level consulting deals – and winning them.

The consulting market in Western countries like New Zealand, long the domain of well paid locals either self-employed or belonging to multinationals, looks set to be increasingly outsourced to Indian companies using a mix of Indian and non-Indian staff, based both in India and on-site.

Only about 3.5 per cent of TCS’s US$30 billion in annual revenues is currently from this sort of high- level consulting work, but the company expects it to grow to as much as 10 per cent within a few years.

“We’re no longer just filling RFPs,” says Virender Aggarwal, director of Satyam’s operations in Asia Pacific, Africa, India and the Middle East. “More and more companies are expecting us to do high- end work. Now they’re asking us where they need to go.”

Another emerging revenue stream is knowledge process outsourcing, Mr Baliga says. This sees Western firms giving data from financial systems or clinical drug trials to Indian IT firms for analysis. They analyse it more cheaply and then send the results back.

Other Indian firms are filing and researching patents for Western firms at about one-third the cost.

The knowledge process outsourcing market is estimated to be worth about US$2.5 billion each year, and some pundits predict it will quadruple within five years.

“There’s going to be a lot of work that today we are not even visualising that will have to be outsourced,” Mr Baliga says.

Many companies also see huge growth ahead for the outsourcing of engineering services, such as the design, modelling, and testing of airplanes and cars.

Companies like Tata and Larsen and Toubro (India’s biggest construction and engineering firm) have access to both the IT and engineering skills, which they say gives them an edge over the competition.

Indian IT firms are no longer the poor cousins of IBM and Accenture, using a low-wage economy to pick up the low-value scraps.

Companies like TCS, which operates in 45 countries with 67 nationalities on staff, are multinational IT firms that see themselves as the equals of any Western ones, that just happen to be based on the subcontinent.

As this new breed of multinational moves further up the value chain, existing IT giants will have to adapt and compete, or risk being overhauled.