Selective gains

While IT will do well, all firms will not

Research and analyst firm Gartner Inc., has predicted that there will be a strong recovery for the IT sector in the near future.

Partha Iyengar, research, vice-president at Gartner India, says that companies will loosen their purse strings next year with CIOs and IT chiefs taking advantage of the development to invest in technology to make their business stronger and more innovative.

Importantly (for Indian software firms), by 2005 the number of enterprises that enter into new outsourcing relationships is expected to increase 30 per cent.

Currently, around 20-30 per cent of buying decisions are focused on vendors who have offshore delivery capabilities. Iyengar expects this number to increase to around 70 per cent by 2005.

But the accent now is on what is known as global delivery outsourcing. For perspective, the global delivery model includes the ability to provide onsite work, which is work done at the client's centre; onshore work, which is done in the same state/country but not at the client's site; nearshore work, which is done in a nearby country generally with the same time-zone; and finally offshore work, which is done at the service provider's own centre which is generally in its home country.

The reason some corporates demand a capability to do work onshore or even nearshore is that it may be too risky to take the work offshore, and if it's instead done at a place within the same time-zone and having the same set of laws and regulations, it gives added comfort. India will surely be among the main beneficiaries because of the model becoming mainstream.

But as of now, according to a rough estimate, only about 30 vendors in India have the model in place. Many of the remaining firms may find it difficult to survive in such an environment, unless they forge alliances or operate in a niche segment.

Iyengar says, "There are currently more than 2,300 publicly traded software companies in the world, that's about 50 to 60 per cent too many. Although the statement pertains to vendors throughout the world, a similar trend can be expected in India as well.

This is because there is little differentiation in the kind of services Indian software players provide, and interestingly, there isn't even a recognition of this fact.

From the point of view of small-sized players, they could either create a niche, or form alliances or get taken over, or in the worst case, just get eliminated.

This is a very strong possibility because over time, the going will get tougher for the smaller players.

With the resource (labour) pool already tightening, it will become difficult for them to retain talent, which will only add to the problems of being lower down in scale of process capabilities. As Iyengar puts it, from their point of view, it's the law of diminishing value.

However, a look at the stock price movement of IT stocks between the June-December brings out a rather alarming trend.

The top five gainers in the list were all penny stocks before the rally began, quoting well below their face values. All of them had a market cap of less than Rs 7 crore, and for three of them the market cap was less than Rs 1 crore.

Going further down the list, there are plenty more examples of penny stocks having gained more than 100 per cent in the current rally. It looks like the experience of 2000, when investors in tech stocks burnt their fingers, was not enough.

The re-rating of large-sized Indian IT firms is, to at least some extent, justified given the latent offshoring demand - the global IT services market is around $550 billion, of which only about $20 billion is done offshore and India accounts for about $12-13 billion of this.

According to Gartner, large sized players will benefit most from the increase in offshoring. But betting on small-sized players is taking one risk too many.

With contributions by Mobis Philipose