While 2009 was tough on business growth, it triggered a thinking among quality practitioners—how can quality support business better? Can the process be optimised further to enable quick turnarounds? Can improved quality pass on the savings to customers? The recession additionally opened up opportunities for more off-shoring, which was a clear cost arbitrage for customers.

Sumeeta Hari Deloitte Consulting India Pvt Ltd

“A roller-coaster ride explains what it was like doing business in India in 2009. Companies were on the ride for the thrill and excitement and also completely prepared for the fall. Yet, they were in mortal fear of the free fall actually taking place. When they reached the base and looked back, all they experienced was relief at the fact that it had been short.”

The words of Y Shekar of Shawman Software aptly describe 2009 – a roller coaster ride, with faulty seat belts and erratic power supply.

Whether it’s the leaders of the IT-BPO industry, business analysts, or even the IT user community – all the stakeholders in the ICT eco-system have been quick to acknowledge that 2009 has had its fair share of ups and downs.

Companies large and small, have been impacted by the vagaries of 2009—market volatility, fluctuating global currencies and the uncertain international economic climate.

All four quarters of 2009 witnessed a significant plummeting of IT-BPO industry revenues, with vendor payments becoming a taboo topic, and known methods of cost pruning proving insufficient to keep bottomlines in tune with business projections. Even Q4, which appeared to hold out promise, failed to deliver, with industry performance showing only marginal improvement.

With demand going down for products and services, organisations across the world, in different industry verticals, unveiled measures to rein costs, improve productivity, retain old customers and gain new ones. Many did this even as they lowered IT spend, put on hold investment decisions particularly those related to IT, kept operational spending to the barest minimum and froze hiring.

Re-looking at value propositions

This environment, where customers embraced abstinence and frugality, proved to be tough for IT-BPO companies, who had to re-evaluate their value proposition for clients. The focus of the industry in the last two years was therefore on providing solutions that targeted client pain points more forcefully and provided them with higher value, at lower prices.

Ravi Pandit, Chairman and Group CEO, KPIT Cummins, agrees that during 2009, a landmark year for the IT-BPO industry, the sector experienced significant pressure on pricing, arising out of the cost reduction requirements of clients. “This actually resulted in a paradigm shift for the industry, forcing many companies to concentrate on core offerings, value adds and internal productivity and cost reduction measures.”

According to Pandit, while on one side there were cost pressures, on the other, the devaluation of the Rupee helped matters. 

Interestingly, these trend compelled solutions providers to become more innovative and come up with offerings that companies actually needed in these circumstances. Recognising current-day requirements, vendors developed out-of-the-box products and services that helped their clients go-to-market faster. In 2009, they supported them with subject matter experts and domain specialists and enabled users to maintain competitiveness, especially in the difficult quarters.

Looking ahead, companies demonstrating cost leadership will come out as true leaders in an economy that will be price sensitive. Domestic business in India will see growth upwards of 20 per cent across verticals, and the lion share will come from telecom–the fastest penetrating segment.

Aparup Sengupta Managing Director and Global CEO, Aegis Limited

Sumeeta Hari of Deloitte Consulting India Pvt. Ltd., believes that apart from innovation, the recession also pushed companies to refocus on quality. “While 2009 was tough on business growth, it triggered a thinking among quality practitioners—how can quality support business better? Can the process be optimised further to enable quick turnarounds? Can improved quality pass on the savings to customers? The recession additionally opened up opportunities for more off-shoring, which was a clear cost arbitrage for customers,” she says.

In her opinion, as the turn of events demanded, customers became very risk-averse in 2009, making de-risking a predominant factor, and increasing the need for multi-vendor scenarios.  “This too posed several challenges for quality.  The processes had to robust enough to ensure that the integration aspects became seamless, given that different vendors have different process maturity. Precise and proactive project management and communication was a significant improvement area.”

With companies being compelled to re-look at the manner in which they conducted their businesses, the sales function became more functional and visible during the year. “Organisational spend became more result focussed and delivery more efficient. Companies were buoyed by their survival instincts, and directed their energies towards efficiency improvements. Overall the mantra was customer friendliness, empowerment and satisfaction,” says Ajit Sathe, Head of Sales – Emerging Markets, Quinnox Consultancy Services.

2009, a year of contrasts

For many in the IT-BPO sector, 2009 was a year of contrasts. “Take the instance of client demand. While the first half of the year was very tough, with a high degree of client paralysis and focus on little more than immediate cost-cutting efforts, the second half saw businesses stabilising, longer-term cost reduction initiatives moving forward, and clients expressing a willingness to discuss development projects and initiatives,” comments Keshav Murugesh, CEO and President, Syntel.

Another major contrast observed by Murugesh is that while the demand side of the industry remained challenged, the cost side of the business was quite healthy, with stable wages and improving, currency and utilisation rates.

“In 2009, a number of interesting dichotomies were exposed as well. First and foremost, the lack of development activity over the past year created a gap at many companies between the current business environment and the technology and process environments that support it. Having said that, these challenges also provided an opportunity for many IT and BPO companies to deepen relationships with their clients, and become more and more involved in strategic initiatives designed to drive enhanced business value,” Murugesh adds.

According to Ramesh Subramanian, Vice President, Global Delivery, Systime, 2009 began with everyone’s worst apprehensions coming true. “It was a year where we fully expected a repeat of 1934 or worse, and expected very many nasty outcomes. Surprisingly, 2009 did not reflect our worst fears! The growing maturity of management and the sophistication of the tools for managers shone through. Many companies chose the right moments to make well-thought out investment decisions, and push through uncomfortable change programmes taking advantage of slow markets.
It is true in fact, that in 2009, a large number of IT-BPO organisations chose to set their houses in order, focusing on their core strengths rather than spreading themselves thinly or positioning themselves as “all things to all people”.

 “Many companies undertook spring cleaning, choosing to focus inward in order to emerge more capable and agile when their markets improved. On the customer side, we observed a ‘wait and see’ attitude. Manufacturing and Distribution industries did not experience a meltdown and are expected to emerge stronger in the post-recession environment. This trend meant a continuous pipeline of inquiries and work for us at Systime and we hope to partner with such companies in the years ahead,” adds Subramanian on a positive note.

Take the instance of client demand. While the first half of the year was very tough, with a high degree of client paralysis and focus on little more than immediate cost cutting costs efforts, the second half saw businesses stabilising, longer-term cost reduction initiatives moving forward, and clients expressing a willingness to discuss development projects and initiatives.

Keshav Murugesh CEO and President, Syntel

Another segment that remained insulated from the downturn was the Business Intelligence market. 2009 marked the fourth consecutive year in which Business Intelligence was the top investment priority in Gartner’s annual EXP Worldwide Survey, covering 1,500 CIOs worldwide.

This trend allowed companies such as MAIA Intelligence, an important contender in this space, to make gains despite the sluggish economic conditions.
“We have been offering the 1KEY Agile BI Suite, a business intelligence reporting and analytics solution to enterprises. Realising however, that the IT budgets of enterprise level customers were being squeezed, MAIA converted this challenge into an opportunity by launching 1KEY MIS Server, a powerful, yet compact and affordable version for small and medium businesses,” informs Sanjay Mehta, CEO, MAIA Intelligence.

The move enabled the company to build a base of marquee customers within the SME realm as well.

While pointing to the challenges of 2009, Jatin Jhala of Convergys comments that they have been all about restructuring value chains consequent to the global meltdown, a move that has had an impact on the IT sector in terms of scope, market share, pricing and competition. “When one viewed the regulatory and tax policies, IT did not appear to be a top priority sector of the Central and State governments in 2009. The year also exposed the fault lines in our education system at the high school and college levels, revealing major skill gaps in the fresh graduates joining the system. Overall, the environment was no longer as conducive to captives as it was five years ago,” Jhala says.

Looking ahead

In 2010, while the recessive trends will reduce, the world economy is not expected to grow substantially. This is turn will place pressure on all industry sectors, including the IT-BPO industry to sustain the kind of growth they have been accustomed to. “We can expect more consolidation happening in the industry, with non-Tier 1 companies getting sharply focused on select verticals and industry areas,” says Pandit.

It would appear that the IT-BPO industry is gearing up for an end to the global recession in 2010. The belief is that the world is exiting from the downturn, albeit slowly and that several positives will emerge from the dark period, especially for India. 

The Indian IT-BPO industry, according to Y Shekar of Shawman, will experience a major revival of business optimism as the environment becomes more stable. This is based on the fact that countries, believing in its success, will reaffirm their faith in India as a trusted sourcing destination. India’s environment too will remain conducive to large investments, especially by leading global players. The IT-BPO sector of India therefore needs to focus on the customer and improve client loyalty and profitability in order to achieve its goals and live up to the expectations of international customers.

For Sumeeta Hari of Deloitte Consulting, Off-shoring and Multi-vendor delivery will continue to remain high focus for Indian IT-BPOs. “Clearly the process robustness and detail around distributed delivery will be key. Customers are moving from staff augmentation to fixed bid delivery to value-based (risk/reward) delivery.  This means that there is money on the table to deliver value. The organisations that focus on operational excellence will have the confidence to play the big gamble. In-house focus on re-usability/innovation needs to take the top of the deck priority.”

Clearly then, companies that have taken advantage of the slowdown to cohere their infrastructure and support processes and create non-core activities will emerge as winners in 2010.  “Many Best Practices will be in evidence compared to past years. There will be even more focus on ‘Green’ technologies and practices, which might even become as important as cost efficiency in the coming years. In 2010, the search will be on in earnest to reconcile the two dimensions,” says Ramesh Subramanian of Systime.

With companies carrying over the lessons of the past year into 2010, the expectation is that it will be a more mature Indian IT-BPO industry that will emerge from the existing scenario. Business leaders feel that companies will change in accordance with the new rules of the game, where the customer will dictate the outcomes. “First, clients have fundamentally altered the way in which they prioritise and procure IT services. For the foreseeable future, Return on Investment (RoI) is the name of the game. Every new project must be result-driven and provide a demonstrable benefit to the business. There is no more room for ‘nice to have’ projects — all IT spending is being funnelled to business-critical initiatives,” states Murugesh of Syntel.

In his opinion, going forward, there will also be a greater degree of services specialisation, moving beyond vertical-specific into very narrow sub-industry niches and client-specific offerings. “At Syntel, we have identified and targeted certain strategic sub-industries that we feel are areas for growth. In addition, we have found that clients are more comfortable and derive more value from IT partners that have made targeted investments in services and skills that address their specific business situation.”

Companies like MAIA too are looking at narrow and highly specialised market segments such as Business Intelligence (BI) to build a differentiation and catalyse future growth. Business Intelligence is an integral part of the software glue that binds relevant information to intelligent decisions across organisations. MAIA believes BI will continue to make businesses smarter, especially in the post-financial-meltdown, pre-recovery economic phase. 

“The IT and finance departments will continue to partner with the business on analytics initiatives to address the growing demand for more personalised, relevant information and streamlined decision-making. Through BI, they can capitalise on current and growing industry trends like Green computing, data visualisation, cloud computing, etc.,” states Mehta of MAIA.

 In 2010, therefore, MAIA Intelligence is intending to make a mark with a SaaS-based version of 1KEY Online, its BI tool. Similarly, it is also looking at launching data analysis and audit tool; 1KEY Investigator, to address the emerging BI opportunities.

According to Sathe of Quinnox, in 2010,  customers can expect their partners to commit to the success of their projects:  this need would cut through domain, technology, location and people. He believes, that enterprise wide solutions improving efficiencies, SaaS, customer analytics, Green, energy-efficient systems, and effective use of BI to improve customer acquisition, and compliance—all leading to cost optimisation, would be the trends of the day.

“Looking ahead, companies demonstrating cost leadership will come out as true leaders in an economy that will be price sensitive. Domestic business in India will see growth upwards of 20 per cent across verticals and the lion share will come from telecom–the fastest penetrating segment,” says Aparup Sengupta, Managing Director and Global CEO, Aegis Limited.
Aegis, which notched up a CAGR of 51 per cent by virtue of its expansion into various geographies including emerging markets such as Africa and Sri Lanka in 2009, is expecting to build on its multi-country presence in 2010, focusing on both organic and inorganic growth.

Even as the IT-BPO industry is talks about a revival, one of the issues that still remains a point of concern is the availability of rightly skilled manpower and domain expertise in the numbers desperately required.

Talking about the paucity of IT-BPO talent in 2010, Shrutidhar Paliwal, Vice President, corporate communications, at training major Aptech Ltd. says it will pose a huge challenge for the sector. “This is one area that needs improvement, as one of the biggest concerns that faced us in 2009 was the human resource aspect.”

The customer landscape in 2010

Despite the 2009 recession, one thing has become clear—IT will continue to figure on the radars of global organisations.

According to McKinsey & Co., recession or no recession, corporate and IT leaders continue to see a key role for IT, especially in regard to capturing efficiencies across the enterprise. Many expect IT investments to grow soon.

Recognising that the economic tumult of the past 18 months had affected every facet of corporate operations, including IT, McKinsey in its fourth annual survey on information technology strategy and spending, sought the opinion of chief information officers (CIOs), chief technology officers (CTOs), other executives in the IT function, and additional C-level executives about their companies’ business technology agendas. In an online survey conducted between October 13 to 26, 2009,  the management and consulting firm received responses from 444 executives representing the full range of industries, regions, and company sizes on the impact of the recession on their organisations. McKinsey also attempted to understand the approaches of these companies to developing and executing IT strategies going forward.

The results of the McKinsey Survey affirm the continuing importance of IT to strategic success. CIOs have felt strong pressure to deliver ever greater levels of efficiency in the downturn, but overall satisfaction with IT organisations remains high. In addition, most respondents foresee an increase in IT investment, perhaps because companies are applying IT to solve problems across the business. Meanwhile, as technology-related disruptions continue to affect businesses, executives persist in pushing for closer integration between business units and IT.

IT’s response to the recession

The McKinsey Survey findings indicate that the value executives (both inside and outside the IT function) perceive IT as offering their companies has held up well since its previous study in October 2008.

Respondents say that IT has become more important to improving business efficiency and reducing costs across the enterprise than it was last year. Notably, a smaller share of respondents indicate that their primary focus is to achieve the lowest IT cost (Exhibit 1). This suggests that executives are realising better results from applying IT to solving problems across the business.

Running a tight IT organisation remains important, however McKinsey asked IT executives about the actions they have taken in the past year, as well as those they plan to take in the next 12 to 18 months in response to the crisis (Exhibit 2). Respondents indicated a strong preference for structural cost reductions: three of the top four actions discussed focus on reducing structural costs through efficiency improvements, including applications development, infrastructure consolidation, and contract renegotiation.

Looking ahead, two-thirds of the respondents report they plan to undertake structural cost reductions in the next 12 to 18 months. Green IT programmes, such as those that increase energy efficiency in data centres, have fared well despite the slowdown. At companies with a green IT agenda (almost half of those surveyed), more than 25 per cent of respondents indicate they are accelerating their plans, and about half say their plans will be unaffected by spending reductions. Cost savings and reputation enhancement are likely behind this strong push to protect green investments.

Spending in the right place

Looking forward to 2010, projections for operating budgets follow trends seen in last year’s survey. More than 60 per cent of respondents expect IT operating expenses to decline or hold steady (Exhibit 3), reflecting a continued focus on “resetting” operating costs for an uncertain future. The survey also shows the following

• Expectations for new investments, however, paint a different picture. More than 45 per cent of respondents expect to increase investments, while about 20 per cent see them holding steady.
• When there is a payback, it seems businesses are willing to invest; many of these investments are geared toward improving business operations, both to lower costs and improve effectiveness, echoing respondents views on where IT is offering value to the business.\
• Financial Services firms lead all sectors with their spending and investing plans, a finding that may reflect improving business conditions in that industry.
• 33 per cent of Financial Services respondents expect to increase operating expenses in 2010 (up from the 15 per cent who expected increases last year), and 61 per cent are considering an increase in new investments (up from 40 per cent last year).
• Spending plans for public and private companies diverge sharply. Only 31 per cent of respondents at public companies expect to maintain or increase their current IT spending in 2010, while 62 per cent of respondents at private companies say the same.
• For new investments, the pattern is similar: 60 per cent of public-company respondents expect to maintain or increase new investments, compared with 73 per cent at private companies.

IT’s effectiveness

The view from respondents who aren’t IT executives suggests that, by and large, they believe their IT functions are responding effectively to the crisis and adjusting well to their businesses’ changing needs and priorities. Among non-IT executives, 55 per cent say current performance in providing basic IT services is very or extremely effective—an increase from last year’s 50 per cent level. For higher-value activities, such as on-time/on-budget project delivery and proactive engagement from IT, the share of executives who say IT is very or extremely effective hovers in the 30s, with roughly another third of respondents indicating that IT’s performance is somewhat effective.

Significantly, these figures are largely unchanged from last year, despite all the economic turmoil. IT executives’ own view of their performance is less sanguine (Exhibit 4). Just under half of the IT executives surveyed say their management of IT infrastructure is extremely or very effective. Only 30 per cent say their IT governance is extremely or very effective, and only 21 per cent are happy with their ability to target places in their organisations where IT can add value (compared with 30 per cent of non-IT executives who say IT is very or extremely or very effective on a corresponding measure).
Measured against last year, IT executives’ satisfaction with their performance is down across the board, including several categories that show double-digit declines. It seems likely that this drop is driven by a continued sense of frustration among IT staff, who are being asked both to reduce their own costs and, at the same time, to help business units do more to improve their operations.

Shared vision for IT strategy

At the highest level, all executives remain concerned about information- and technology-based disruptions—albeit with some key differences from last year. These worries include competitors embedding IT in their products, executing strategies based on better analytics and information, and using IT to improve the effectiveness of their business processes. The degree of concern has eased, however: in this year’s survey, 50 per cent of respondents say their companies are very or extremely at risk given the potential effects of information- or technology-based disruptions on their companies, down from 65 per cent in 2008. At the same time, the share of respondents rating their companies as somewhat at risk has increased to 30 per cent, from 19 per cent last year. Seen in the light of the overall survey, this finding indicates that while core concerns about disruptions remain in the short-term, recession-related preoccupations have become more acute.

Nonetheless, companies remain exposed to the key unknowns they cited in 2008: shifts in customer expectations and bargaining power as a result of access to better information, and significant changes in the cost to deliver existing products or services (Exhibit 5).

While the recession has shifted some short-term priorities for IT, the longer-term vision for IT remains consistent with views expressed by respondents in prior surveys. Non-IT executives continue to say they want to forge a closer partnership with IT in order to improve performance and better manage the risks and disruptions that lie ahead. While only 16 per cent of respondents say they have put into place tightly coupled business and IT strategies (Exhibit 6), two-thirds of respondents indicate that this configuration would be their ideal. Significantly, the level of strategy integration is strongly correlated to the perceived effectiveness of IT: for both business and IT executives, effectiveness materially increases as the strategies become more tightly linked.

According to McKinsey, going forward, IT executives’ dissatisfaction with their job performance could eventually lead to deeper problems in morale and performance. Clear and effective communication by both IT and business executives will be critical to ensure that the IT organisation continues to understand how integral its efforts are to the success of the enterprise.

The survey shows that respondents are willing to increase IT investments that drive real returns to their companies. Delivering on this promise requires business and IT to partner in building a comprehensive view of the necessary process and system changes, as well as defining a clear, measurable, and achievable set of returns.

Despite the economic crisis, leaders need to continue improving the integration of their business and technology strategies. IT can help underwrite growth when the recovery comes, but only if executives begin laying the groundwork during lean times.

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