Software Industry : Sailing Through Turbulent Waters

Are the days of astronomical salaries and exponential growth over? Well, it's game on in the Software industry with fears of an impending US recession, appreciating rupee and job cuts, apart from the old challenges of attrition, connectivity and IT infrastructure consolidation. We look at all of them and the reasons for staying optimistic yet

Saturday, March 01, 2008

At the time of writing, we find the bulls and bears to be locked in an intense battle of supremacy at stock markets across the globe. The ripples haven't missed the Indian shores as we witness an increasingly bearish sentiment with even IPOs failing to make the cut! Serious rumors of an impending recession in the US and a resulting cut on IT spends by the companies there, is going to impact the Indian economy on the whole and the ever so heavily export oriented software industry in particular. The initial signs look ominous and panic buttons seem to have been pressed, with reports of workforce retrenchment by TCS and IBM, and an overall reduction in remuneration by IT companies. Ever since the software industry evolved, companies have worked as a cheap offshoring development center for the US. This was made even more lucrative due to the favorable time difference between the two countries, which ensured that work ensued non-stop 24-hrs a day. Quite obviously, the Indian software industry has a majority of its clients in the US, who account for over 60% (Source: NASSCOM) of their revenues. As compared to this, the UK accounts for 18% and continental Europe, just 12%. So, you can very well imagine how severely an economic recession in the US would affect bottomlines here. Let's check out some of the numbers. The current fiscal has seen business growth of large software companies falling behind targets. A major factor to have impacted the earnings during this period is the appreciation of the rupee against the dollar, to the tune of 8.6% as compared to just 1% during the same period in 2006. The other reason is the slackness in demand arising out of the US, due to the slow economic growth there; Q4 of 2007 saw the growth falling to 0.6% annualized yield as compared to 4.9% during the previous quarter.

Software companies have traditionally offered the best salaries across all verticals. And this head forms almost 50% of their total revenues. But given the current circumstances, this is going to be the first expenditure to be curbed. TCS' aggregate wage bill has declined by about 4% during the first nine months of the current fiscal, compared to the corresponding period in 2006-07. Consequently, their wage share as part of total income fell from 43% to 33%. Likewise, the growth rate of wage bill of Infosys fell from 54% to 23% and that of HCL Technologies was down from 38% to 24%.

So, there would be cost pressure on the $40 billion IT export services industry in the near future and there would be proactive steps taken to control costs. During the budget announcements from large US enterprises, the IT intensity (spends on IT as percentage of total revenue) is expected to go down. And from whatever they order, clients would expect more bang for the buck!

Diversifying businesses
Retrenchment of employees isn't the only solution to tide over the crisis. You need to tap alternate sources of revenue to stay close to the 30% growth that the industry has witnessed y-o-y. Well, the top management of large software companies feel they've diversified enough across other global markets to ensure that the impact of a recession on their business is marginal. Most companies have already increased their stakes in the European, ASEAN, African and Latin American markets to cushion against any slackening in the US demand. They might even think of increasing stakes in Japan, the third largest IT & ITeS market in the world, that currently accounts for only 4 per cent of the total exports from India.

We provide consultancy on everything; from software and hardware to planning and implementing the technological fixes, to providing technical support What are the challenges in data management and security specific to the software industry? The exponential growth in Data Volume increases the challenges in backup and restoration; in ensuring the balance between cost and criticality is maintained; duplication of data; and protecting customer IP. How do you ensure round-the-clock connectivity across branches? We use managed service from a single service provider for connecting our branches and multiple technologies to ensure connectivity, especially last mile. We use technologies like Wireless/ VSAT/Internet/VPN/RF etc to get the branches connected to our corporate network. With rising Rupee, profits take a hit. How do you plan to diversify to new businesses? Well, we work on a model which looks at cutting costs for our customers without compromising on quality. We are forging closer customer relationships to be able to compete in providing high-end consulting services and moving up the value chain. We provide consultancy on everything from software and hardware, planning and implementing the technological fixes, to providing technical support. Jethin Chandran General Manager-IT Planning Wipro Technologies Any plans to increase your share in the domestic software market? From the beginning we have been a major player in the domestic market. We have total outsourcing deals from clients in India that span data centre management, applications development, branch support (for banks, insurance companies etc), consultancy and infrastructure management.

There's also the huge domestic market to be looked upon. TCS plans to increase its domestic market revenues to $1 billion in the next couple of years from the $500 million at present. And their strategy for achieving this would be to offer a mix of services and solutions rather than focusing only on the infrastructure part. The company is currently targeting BFSI, telecom, manufacturing and government organizations. But there's a strong case for increasing stakes in retail and infrastructure, sectors that are constantly hogging the headlines.

IT spends as a percentage of revenue vary from 3.5% in manufacturing to 5-6% in retail to 9.5% in BFSI. As the BFSI is the largest spender on IT, the subprime and the mortgage crisis in the US has really hurt. These are the sector specific business challenges that companies have to watch out for. The companies working for the BFSI sector in the US are likely to face the heat in the near future.

Internet advertising has a huge potential. Last year 8% of the total advertising spend across the globe was on Internet with a viewership of 20% Rajdeep Endow Director, Sapient What are the new business opportunities that Sapient is focusing on? We have been traditionally very strong in the IT consulting, process and system design space and that remains a priority. However an area that's witnessing intense activity is Internet advertising. Last year 8% of the total advertising spend across the globe was on Internet with a viewership of 20%. So can you imagine the huge potential there. In fact, in 2008 in the UK, ads through Internet would outscore those through television. We have a distinct advantage in this business as we are a technology firm that would drive Interactive advertising over the Web, thereby gelling together technology and advertising expertise. Around 35-40% of our revenues come through this business. How do you ensure seamless data access to various stakeholders across the globe? We believe in globally distributed project deliveries and so our workforce is distributed across different locations. We have a Sapient Peoples portal in place that is centrally hosted and can be accessed across the Sapient network globally. You can login to the Sapient network through a corporate VPN. The solution is built on Microsoft SharePoint 2007 (MOSS) and has a Web-based corporate repository of data that allows a role based access to information a person is looking for. For eg, employees can get different kinds of analytical reports through our Report Center. Clients can have a web-based access to our project repositories. We use MS Communicator for IM, that provides secure inter-branch communication. Most of our voice communications are based on VoIP.

There could yet be two different sides to the coin. On one hand, the pressure on the US companies might lead to more offshoring and so the large IT companies should manage an 18-20% revenue growth in dollar terms; while on the other, a longer than expected recession could have a severe impact on the revenues of IT companies, particularly the small and mid-size ones, who don't have specialized offerings or are heavily exposed to a particular sector. Don't be surprised if this segment gets the hardest hit in 2008.

What we discussed were the new economic challenges before companies and what they could actually do to alleviate those. Apart from these, there are still some of the decade old challenges that companies can have a fresh look at. Motivating and retaining a highly skilled and young workforce, sprucing up technology to accommodate a phenomenal growth rate year-on-year, communications challenges and IT infrastructure consolidation are some of those. Being a knowledge driven and knowledge intensive industry, the stellar software industry is playing a pioneering role unto itself with nobody to look up to for help. It has performed incredibly over the past two decades and the next decade promises to be no different. So, rather than calling these as challenges let's tone them down as hurdles.

Respecting the various legal requirements around the world for data retention is a challenge. As these requirements are complex, some judgment has to be used Mike Webb CIO, Aricent Being a knowledge intensive industry, you generate tons of data each day. What are the challenges in data management and security? A challenge here is respecting the various legal requirements around the world for the retention of various types of data. As some of the requirements are not black and white, so some judgment has to be used. We are often working with, and have access to, our customers' intellectual property as well as our own; so everyone in the company understands the importance of security and their personal role in compliance. We have implemented strict authorization controls at both the network and application levels. What technologies have you deployed for consolidating your data center? We have an active ongoing program whereby, as we retire server equipment, we see it as an opportunity to consolidate into fewer, more powerful servers and high density servers using blade technology. Similarly we have consolidated our disk storage needs into storage area networks... and all our backups world wide are managed by a single centralized backup system. How do you address connectivity issues across your various branches? Aricent is a global organization with substantial centers across many different countries, so it's essential that we have a completely robust, secure, high speed network. We have recently implemented a state of the art MPLS network connecting each of our offices. It has automatic fall back to IP-VPN. Our branch offices are connected on fiber and metro Ethernet links from different ISPs for redundancy. The network is highly standardized from an equipment and management perspective.

Nurturing Your Employees
The skill-intensive nature of the industry means that companies spend several months training manpower for future projects and there's a typical idle period before an employee becomes profitable. In the last few years, the IT industry has grown at a rate of around 30% a year. Such is the nature of the industry that you typically require employees with diverse skills to cover the different verticals. The recruitment of skilled manpower has never been an easy task and keeping them on board is even harder. In addition, you have competition within the same industry with employees switching over to competition. And now with the pressure on margins, the need to increase revenues per employee and the focus on high-end work, only highlights the need to handle the human resource with care.

Infosys spends over $140 million a year in training employees at its Mysore campus. The challenge large companies face is in converting the raw talent into skilled professionals that the industry needs. Some of the issues that can be sorted out to meet this goal have been listed as under:

1. Ensuring anytime, anywhere communication amongst employees: When we talk of collaboration and communication amongst employees sitting across different locations, the first thing that crosses the mind is knowledge sharing. Most organizations have set up portals help employees share information on HR and admin issues, finance, project specs and social causes such as observing anniversaries, people's welfare and so on. With broadband internet availability across all major cities, employees find this to be a very convenient platform to come together and collaborate.

2. Training in diverse skills: Monetary benefits apart, IT employees are very keen on picking up new skills to enhance their profile. This is also one of the main reasons why they switchover (and not just higher salaries!). Interestingly, if they are provided the opportunity to pick up different skills within the same organization, they are more than keen on continuing with the same organization. Sapient has made communicating with employees and focusing on their career path, an HR priority. Badly hit by a high attrition in Q3 2006, they've since targeted mapping employees' individual career goals with that of the company. HR guys across the industry try to accommodate diverse training programs for employees during their tenure. For eg, an employee who is working on infrastructure management might be interested in learning the latest in Java technologies and vice versa. So, the large software companies, with a plethora of projects on different platforms, can find out a way to keep employees motivated on this count.

3. Developing new managers: The software industry is fairly young, both in terms of resources as well as ideas. So, don't expect legacy management techniques to be effective here. This is typically an industry of individuals where employees need more of guidance than direction. Hence, when it comes to driving large projects, companies often find it difficult to find a unifying force that would gel the different talent together. So, developing managers out of developers is an interesting challenge that companies face.

4. Combating stress: As is typical of any knowledge industry, stress is the number one factor that impedes employee progress and affects their ability to work continuously with the same focus. Being an industry with a very young workforce, thankfully they've worked around this beautifully and achieved resounding success at work. However, this just might be one of the sleeping monsters waiting to rear its head during the next decade or so, when the industry starts maturing. More so, when there's already talk in the air about deriving more out of less. Not that companies are not aware of this or are not doing anything to reduce stress from their employees' work. Around 50% of the companies have adopted flexible timings for their IT workforce while another 20% take teams for regular outings and offer recreational activities like indoor games, gyms, coffee houses, etc. Yet another 25% use innovative ideas such as removing monotony from work, nominating employees for conferences, keeping them motivated through trainings and encouraging employees to use recreational and sports facilities available on campus. Some have even gone to the extent of offering work from home as an option to women folk, however, they are wary of going all out on offering this to a majority of workforce as they are not sure about the flip side that it may bring along.

5. Reaching out to prospective employees: The heady mix of money and technology catapults many a youngster from the smaller towns and cities to metros in search of opportunities. However, job satisfaction apart, family compulsions sometimes get the better of people, who are left with no option but to hunt for jobs nearer to their native places. This is a problem being faced by large companies with huge manpower. So, you not only witness companies such as Infosys, Wipro, TCS, etc having offices across all over India but also multiple offices within metro regions. Sapient has offices both in Gurgaon and Noida, to save employees from commuting hassles.

Nucleus recognizes the contributions made not only by the employees but also by their families in bringing success to the organization R P Singh President, Global Delivery Nucleus Software You have a young workforce. What steps have you taken to check attrition? Nucleus Software has established quite a few innovative HR techniques to retain the workforce. The company recognizes the contribution made not only by the employees but also by their families in bringing success to the organization. We conduct an annual Nucleus outing where employees and their families are taken out on a team oriented training program. Also, each month we recognize employees for their achievements, and felicitate them at quarterly parties in front of their families. This fills the employee and his family with a strong sense of pride. What technologies have you deployed for consolidating your IT infrastructure? We have deployed techniques like Storage Area Network (SAN) and have introduced the use of Blade servers for proper consolidation. For virtualization, we are using MS Virtual server 2005. In future we intend to use servers & storage with LPAR (Logical Partitioning). With rising Rupee, profits take a hit. How do you plan to cut down on costs and increase profitability? In the short term, Nucleus is taking measures like hedging with a mix of forward contracts and options. We deal with Dollar:Rupee options which are not based on any other derivative product. To remain competitive over a longer period of time, we are looking at pruning costs through apt utilization of infrastructure and people. We are looking at organic growth and small acquisitions in the near future.

Ensuring state-of-art connectivity across branches
Not that scaling up businesses by tapping potential markets across the globe doesn't come with its own set of challenges. The companies need more bandwidth over their WAN links, greater amount of scalability, and with scattered IT skills, they need to ensure a high-rate of mobility for their workforce. Keeping these concerns in mind, most organizations have moved over from the legacy TDM-based networks to MPLS-based networks. The migration to MPLS technology provides benefits such as cost savings, any-to-any communication, QoS and traffic isolation amongst multiple clients. The technology enables secure Virtual Private Networks (VPN) to be built and allows scalability that will make it possible to offer assured growth to its customers without having to make significant investments. Rather than setting up and managing individual point-to-point circuits between each office using pair of Leased Lines, MPLS VPN customers need to provide only one connection from their office router to a service provider edge router. An MPLS network in addition to improving traffic speed, makes it easy to manage a network for quality of service (QoS). A company can also put together a virtual ODC concept on this network to enable usage of skills across different locations in India. This would allow the workforce from one location to work from other location using the same network resources. This helps in addressing the high lead times of resource fulfillment, high training costs and a high turn around time.

Consolidating IT infrastructure
With IT industry growing at 30% during the past decade, the need for resources of all kind-human as well as infrastructure is huge. But scaling up infrastructure, both in terms of real estate and physical equipment, comes at a huge premium. The companies need to have a look at the latest technologies to extract the maximum out of their current resources. Virtualization is currently very hot in the field of infrastructure consolidation and is being increasingly used by software companies to optimize the utilization rates of their current infrastructure. You can use virtualization techniques for: servers, storage, networks, applications and desktops. Server virtualization is far more impactful than the others and according to vast majority of CIOs, improves server utilization by upto 40%. It allows one to load multiple OSes and apps on a single hardware server, eliminating the need to purchase separate servers for different tasks. Lesser hardware also reduces power consumption in the data center, and thereby reduces cooling requirements. Moreover, it saves time while rolling out new applications and creating their replicas. Consolidating their IT infrastructure is one of the ways through which companies can do more with less. This would not only lead to savings on physical space required to house all the equipment but also lead to savings on costs of procurement, deployment and maintenance. This is easier said than done as it could run for several years and for old companies, end-of-life servers, inefficient backup/recovery mechanisms to provide business continuity, bandwidth support for users due to the wide range of services offered and the heterogeneous systems could be some of the challenges.

Page(s)   1