Technology has revolutionised the world today to penetrate the vast frontiers of even space and go where no man has ever gone before. However, in 2015, the global economy was characterised by volatility and turmoil. According to NASSCOM, developed and emerging countries experienced multiple headwinds as economic growth almost stagnated, global terrorism increased, inflationary pressures continued to build up, turbulence in currency and equity markets prevailed, commodity prices declined and unemployment continued to remain high. NASSCOM notes that, at the same time, the role of technology has also undergone a significant change and technology is no longer exclusive only to the corporate sector.
Consumers – leveraging mobile and 24x7 connectivity – are now the key influencing forces shaping technology spend. Governments have also begun to use technology as the platform for citizen outreach and government-to-citizen services. As a result, technology is emerging as integral to all businesses, to all parts of businesses, to government machinery and to consumers. Globally, the cumulative capital investment in technology is estimated to have reached $6 trillion in 2014. However, the global technology industry also faced a challenging environment in 2015. Industrialised and commoditised products are now a part of the technology industry as are multiple disruptive digital technologies.
NASSCOM notes that the shift towards digital is inevitable. Incremental expenditures over the next decade may be driven by digital technologies and these factors have also impacted global technology spend. Worldwide information technology and business process management (IT-BPM) spend in 2015 (excluding hardware) was clearly impacted by the volatility in global currencies resulting in a near flat growth of 0.4 per cent ($1.2 trillion) in 2015. Information technology (IT) services saw a slight decline in growth by 0.2 per cent. A shift to cloud-based applications has led to a decline in traditional IS outsourcing and Network and Desktop Outsourcing (NDOS) businesses, thereby impacting overall IT services growth.
In 2015, Asia-Pacific saw the fastest growth in total contract value of IT-BPM contracts with a 106 per cent growth, compared to 2014. NASSCOM notes that 2015 saw continued demand for overall global sourcing, which grew by 8.5 per cent over 2014. New delivery centers for global sourcing added in 2015 recorded a growth of approximately 12.7 per cent, compared to the additions in 2014, with approximately 26.6 of the new additions in India. According to NASSCOM, the Indian IT-BPM industry is projected to grow at 8.5 per cent in fiscal year 2016, an addition of $11 billion. The aggregate growth rate has been affected by the strengthening of the US dollar against the Indian rupee, which is projected to bring the domestic market growth rate down to approximately 3.2 per cent.
NASSCOM notes that exports (including hardware) are likely to record a 10.9 per cent growth to reach approximately $61 billion in fiscal year 2016, up by approximately $6 billion compared to the last fiscal year.
The IT services sector in India, according to NASSCOM, has grown two-fold in the last five years and is expected to reach revenues worth $75 billion in fiscal year 2016 with a growth rate of nine per cent over fiscal year 2015. Of the total Indian IT services market in fiscal year 2016, revenues from exports contributed 81 per cent. The exports market grew at 10.3 per cent during the fiscal year 2016 to reach $61 billion.
The IT services exports segment is estimated to have added over 76,000 employees in fiscal year 2016, at a growth rate of 6.2 per cent over previous year. According to NASSCOM, nearly half of the additions made during the year to the IT segment were attributed to the export segment. Over the years, people with specific skillsets have been gaining credence in the sector. With SMAC and other emerging technologies playing a crucial role in the growth of the industry, skill requirements too have undergone various changes. Requirements for people with cloud and mobile technology capabilities, business intelligence and data analytical skills along with domain knowledge have gone up substantially.
The Indian IT-BPM industry grew from an approximately $1 million industry size in the 1980s to a nearly $143 billion industry in fiscal year 2016. Further, the industry has gone from employing less than a million people in the 1980s to emerging as India’s largest private sector employer with approximately 3.7 million employees. According to NASSCOM, there are certain key factors, which define India’s attractiveness as a key IT-BPM service destination: An increasing population of 1.2 billion people with a large potential middle class and large number of mobile subscribers and mobile internet present a hard-to-ignore end user market for the world. The Government of India is expected to invest heavily in digital investments (such as Digital India, eGovernance); over the last quarter of a century of its existence, India’s IT-BPM has succeeded in creating a worldwide presence – onshore, offshore, nearshore – for its customers. Present in over 78 countries through about 670 offshore development centres, this industry boasts approximately 75 per cent of Fortune 500 enterprises as its customers.
The growth in domestic IT services was driven by IS outsourcing, cloud services and increasing adoption from all customer segments – government, enterprise, consumers and SMBs. The Government’s digital India and e-governance agenda has given a boost to the domestic sector in an enormous way. The government’s expected investments in digitisation, infrastructure improvement, implementing technology in healthware, manufacturing and agriculture sectors is expected to provide an opportunity of around $5.9 billion to the IT services sector. The e-governance agenda of reforming government through technology by enabling customer services, providing electronic delivery of services through e-education, e-healthcare etc is also expected to be a major demand driver.
According to NASSCOM, global IT services spend dropped approximately 0.2 per cent in 2015, to reach $650 billion in dollar terms. There are various factors that are responsible for this like large declines in price of oil, currency fluctuations, volatility in equity and investments markets. Traditional and matured verticals like BFSI, manufacturing and telecom continue to drive growth whereas share of verticals like healthcare and retail increased as SMAC adoption across industries increased. ISO and System integration growth dropped while owing to the adoption of SMAC technologies, CADM and IT consulting grew marginally. The segment was also affected by commoditization, increasing demand for cloud platform services and decrease in hardware maintenance services.
Driven by increased competition, some firms took the route of restructuring their businesses to improve profits and reduce costs, while some looked at inorganic growth and collaboration and investing in SMAC. The global IT sourcing market grew at nine to 10 per cent in 2015, compared to last year, with India accounting for 67 per cent of the overall sourcing market. The year was marked by spin-offs, buyouts, divestitures and focused acquisitions among service providers, which helped bolster the bottomline for the vendors and their customers. Driven by increased competition, some firms took the restructuring of businesses route to improve profits and reduce costs, while others looked at inorganic growth and collaboration, and investing in social media, analytics and cloud.
Where trends of IT spend in key vertical is concerned, ISG notes that the banking industry worldwide is in a state of flux. In Europe, a lower economic outlook, low interest rates, increasing regulation and regulatory penalties continued to impact the financial performance of large banks in 2014. In the Asia Pacific, and particularly in India, growth in new bank licences and grants of differentiated banking licences such as payments banks is expected to drive outsourcing spending. Ever-changing and increasing regulations, escalating compliance costs and higher capital requirements are impacting banks’ profitability and return ratios.
That creates pressure to reduce operating costs and improve return ratios. Banks now also need to cater to the millennial generation, which has demonstrated a preference for alternate and emerging channels. These pressures are driving outsourcing spend in the vertical, apart from spending related to compliance initiatives. NASSCOM notes that custom application development and management (CADM) is expected to witness approximately 10 per cent growth in exports for 2016, while having highest share in IT services export (48 per cent) in 2016. It also notes that software testing will see 12 per cent growth in exports for 2016.
There is a gradual shift from traditional landscape towards digital technology and service providers need to re-examine their business models, talent requirements and overall organization. Automation in the traditional IT services business could affect revenues in the medium term, which can be replaced by new digital services with early adopters of automation believing that almost a fifth of
them reported achieving cost savings of over 15 per cent from intelligent process automation.
Stepping in to grab a slice of the infotech market pie, Larsen & Toubro (L&T) Infotech Ltd made a public offering of 17,500,000 equity shares at Rs 705 to Rs 710 per share from July 11 to July 13. A M Naik, Non-Executive Chairman, said the company’s “Business-to-IT” model leveraged the domain experience and institutional knowledge of the L&T group across industries in developing and delivering IT services and solutions to clients while assisting them to ‘engage the future’ through focus on emerging technologies.
The company is focusing on a targeted client portfolio, higher contract values, emerging technologies (in the belief that digitization will increasingly become systematically critical in the future), infrastructure management service offerings, expanding its geographical presence and strengthening its brand name in the Indian and global IT services market where it has identified Germany, France and the Nordic region as important markets and is currently contemplating pursuing strategic acquisitions in these markets. While being historically dependent on North America and Europe for most of its revenues, the company is also eyeing expansion in potential markets like Australia, Singapore, Japan, South Africa, India and the Middle East.