Decoding the Domestic IT Market
Opportunity
Mid sized IT companies have played an important role in the development of the domestic IT industry
that is estimated to be around INR 1200 Bn as of FY10. However the Indian market has its own evolution
path in terms of key services, customer segments, competition and operating model. Mid sized service
providers must take cognizance of these differences and make appropriate adjustments to their business
model to continue to profitably address the domestic opportunity, say Kaustav Ganguli & K. Raman
(Practice Head – Infocomm, Media & Education) of Tata Strategic Management Group.
The domestic Indian IT Market, estimated at INR 1200
Bn as of FY10, is expected to grow at a healthy rate of
18% per annum over the next 3 to 5 years. India’s IT
spend continues to be driven primarily by hardware
(40% of total spend), followed by services (39%) and
software (12%) (Refer Fig 1.). A developed market like
the U.S., on the other hand, has most of its spends
directed towards services (44%) and software (34%).
It would seem that India, at a macro level, is trying to
catch up first on creating the right kind of IT
infrastructure, even as it spends simultaneously on
software and services.
Under IT services the top spend areas for Indian
companies
are
System
Integration
(24%),
Infrastructure Management Services (36%) and
Application Management (20%). This is in stark
contrast with the export market where Custom
Application Development, with 51% share of the
export market IT services spend, and Application
Management, with 28% share, continue to be the
dominant service lines.
As organizations & institutions leapfrog levels of IT
maturity by procuring integrated solutions, combining
complex hardware, software & services, majority of
Indian enterprise & government customers are opting
for players capable of end-to-end play (hardware,
software & services) in turn-key system integration
projects.
In terms of customer segments, Banking, Financial
Services and Insurance (BFSI), Government and
Telecom are the top verticals in India accounting for
74% of overall spends. What is worth noting is that
even amongst top verticals in the Indian market there
are differing degrees of IT maturity & spend
behaviour.
The other key thing to note about the Indian market is
the increasing adoption of IT by the Small & Medium
Enterprise (SME) segment. The SME segment accounts
for almost 1/3rd of the total domestic IT spend (Refer
Fig 2.) and is expected to grow at a rate very similar
to the overall market growth rate (18% per annum for
2010 to 2013). Globally, however, the SME segment
accounts for a higher share (44% as of 2010) of the
total IT spend. This suggests that Indian SME segment
Figure 1 : Domestic IT – Market Size and Segments
Indian Domestic IT Market (Rs Bn)
Domestic IT Revenue Split (%)
18%
1044
1094
9%
1200
40%
729
39%
12%
Hardware
FY07
FY08
FY09
FY10
Software
Services
BPO
Total: Rs 1,200 Bn
Source: Nasscom Report
1
Tata Strategic Management Group
Figure 2 : Domestic IT Spend By Company Size
Share of Domestic IT Spend by company size
Total: Rs 1,200 Bn (2010)
Share of Domestic IT Spend (Rs Bn)
2010
755
445
19%
44%
SMB
37%
14%
8%
66%
48%
Large
63%
Large
Hardware
Software
SMB
Services
Source: Zinnov, Nasscom
spends on IT, while increasing at a fast clip, may still
have significant potential for further growth.
To sum up, the Indian market demands end to end
capabilities across various verticals and for different
levels of IT maturity. This offers a structural advantage
to large sized IT companies as they would typically
possess the breadth and depth of services to cater to
the different need types of verticals having differential
IT maturity.
However the Indian IT Market has traditionally not
been the focus of large Indian IT players. The top ten
listed IT players from India (in terms of annual
turnover) who account for 62% of industry’s exports
from India command only 23% of the domestic IT
market share. While the largest Indian IT companies
continue to focus on opportunities in foreign markets
the domestic market, at least in the immediate term,
offers an attractive opportunity to the small and midsized IT companies.
In order to address the opportunity effectively mid
sized companies need to develop capabilities to
address the unique needs of the Indian market.
Focus on Select Customer Segments
To get a higher return on resources deployed mid
sized companies need to have a sharp focus on the
customer segments they would like to cater to. The
customer segmentation may have to go beyond
traditional industry verticals and focus on specific subverticals or organization sizes (by employees or by
annual turnover) within such sub-verticals. This is
because different verticals and different sizes of
companies within such verticals are in different stages
of IT evolution and would have different needs to be
catered to. For example if a company wants to focus
on the government sector it may need to go further
and also make decisions on the type of projects, the
2
states it wants to focus on, the target agencies &
entities in the government and also the offerings for
the sector.
Alliance Strategy for Missing Capabilities
As majority organizations in the domestic market
prefer end-to-end solutions, mid sized companies in
the short term will need to create effective
partnerships to take care of missing capabilities. These
companies would also need to acknowledge and
accept that their roles could be varied depending on
the opportunity. For example, the mid sized companies
could play the role of service providers to other IT
companies in some cases and address the needs of the
end customer in others. Such complex relationships
would mean that companies must have a clear idea of
the alliance & partnership strategy they need to adopt.
Innovations on Delivery
In order to protect margins and ensure profitability
companies will need to innovate on delivery models.
The innovations need to ensure that common process,
platform, human resources and infrastructure are
leveraged for multiple customers. One of the best
examples of delivery innovation in Indian IT has been
in the Managed Services space. Here, companies have
leveraged their expertise in Remote Infrastructure
Management (RIM) to drive down delivery costs and
boost margins. The model banks on greater sweating
of centralized technology and human resources in a
shared services model for multiple customers. Given
the lower price points in the domestic market, service
providers will have to work on such innovative delivery
models for higher profitability.
Talent Management Strategy
The other factor that would decide the relative success
of companies in the domestic market is in the realms
Tata Strategic Management Group
of talent acquisition, management and retention. IT
companies are fast realizing the fact that value in
customer engagements get driven by employees
engaging with customers and not in back-offices.
Hence there is an increasing focus on developing a
holistic strategy towards attracting high-quality talent,
engaging & motivating them, and ensuring higher
returns on investment in such talent by retaining them.
Innovations on Pricing Models
In more cases than not, Indian Enterprise Customers,
especially those amongst SMEs, find it difficult to make
significant one-time investments in upgrading their IT
infrastructure or applications portfolio. Our analysis
shows that an average medium sized Indian enterprise
with an employee size of ~300 has an annual IT
budget in the vicinity of Rs. ~42 Lakhs – this obviously
places constraints on the extent of one time capital
investments that such a company can make towards
IT upgrades. This underlines the need for opex-based
or ‘pay per use’ pricing model in the Indian market.
Needless to say – such migrations in pricing models
need to go hand-in-hand with changes in the delivery
architecture as well. The other emerging trend in
pricing models is with regards to increasing usage of
performance-based or outcome-based pricing –
especially in the area of IT services. Service providers
need to be alive to such new customer requirements
with respect to pricing and effect appropriate changes
in offerings & delivery.
Learnings from Successful Companies
The success stories of the largest Indian IT companies
focused primarily on international markets are wellchronicled. However, in the domestic market we also
find examples of medium or small sized companies
that have grown successfully by making strategic
choices in some of the aforementioned factors. Apart
from clearly identifying and implementing a go-tomarket approach for select customer segments, many
of these companies have relied on effective
partnerships, innovations on delivery & pricing, and a
holistic talent management strategy for their growth.
For example, Allied Digital and Glodyne are two
examples of companies who have derived majority
(94%: Allied; 75%: Glodyne as of 2009) of their
revenues from the domestic market. One thing that
clearly marks out these companies is how they
effectively leveraged implementation partnerships with
other IT majors for initial entry and ramp-up in their
identified customer segments. As far as innovation in
delivery model is concerned, one of the most
3
successful examples is found in the Managed Services
space where leading service providers like HCL &
others like Allied Digital and Glodyne pioneered the
concept of Remote Infrastructure Management (RIM)
to cut down delivery costs and boost margins. The
other noteworthy example of delivery model innovation
is unfolding in the SME space in the domestic market.
Here, some mid sized companies like Ramco Systems
are offering cloud based services on a ‘pay per use’
model to its customers and others have started
offering services in cloud consulting & integration.
Though most IT companies in India are yet to adopt a
comprehensive talent management strategy, the seeds
of change in this area had perhaps been sown by HCL
in 2005 when it announced its ‘Employees First,
Customers Second’ (EFCS) policy. The EFCS is based
on the five pillars of employee empowerment,
transformation, recognition, knowledge & support and
endeavours to drive a unique employee organization
thriving on a value-driven culture.
Strategic Imperatives for Domestic Market Play
It is clearly evident that the domestic market has very
unique characteristics in its IT needs and spend
behaviour. Companies which are looking to serve this
fast-growing and attractive market have to make
strategic choices primarily in two aspects. These two
aspects are:
1. Where to compete: This would involve decisions on
offerings & market segments (verticals / subverticals, enterprise sizes, geographies, MNC /
Indian, public / private etc.)
2. How to compete: This would mean identifying
innovations in delivery & pricing models, entering
into effective partnerships, and adopting long-term
initiatives to ensure higher returns on talent.
Companies need to conduct critical analyses of the
strategic options under each of these two aspects and
institute an implementation program for the identified
strategic choices to maximize their chances of
sustainable growth in the domestic market. Firms that
do this quickly can seize the advantage and emerge as
the next generation of success stories in the Indian IT
sector.
© Tata Strategic Management Group. All rights reserved
Tata Strategic Management Group
About Tata Strategic:
Tata Strategic Management Group is the largest Indian Owned Management Consulting Firm. Set up in
1991, Tata Strategic has completed over 500 engagements with more than 100 Clients across countries
and industry sectors, addressing the business concerns of the top management. Today more than half
the revenue of Tata Strategic Management Group comes from working with companies outside the Tata
Group. We enhance client value by providing creative strategy advice, developing innovative solutions
and partnering effective implementation.
Our Offerings
Strategy
Set Direction
•
•
•
•
Organization Effectiveness
Drive Strategic
Initiatives
Support
Implementation
•
•
•
•
India Entry
Alliance & Acquisition Planning
Strategic due diligence
Scenario Planning
Marketing
Operations
Vision
Market insights : B2B, Urban, Rural
Competitive Strategy
Growth/Business Plans
• Organization Structure
Roles & Decision rules
• Workforce Productivity
• Performance Management
& Rewards
• Capability Assessment
• Talent Management
• Governance for family
businesses
• Delegation & MIS
•
•
•
•
•
•
Cust. Segmentation
Product Innovation
Market Share
Route-to-Market
Brand Strategy
Structured Sales &
Distribution
• Marketing Upgradation
•
•
•
•
•
•
•
Manufacturing Strategy
Service levels
Managing Complexity
Logistics & Supply Chain
Throughput enhancement
Capital Productivity
Strategic sourcing
• Program Management
• Refinements/Course Corrections
About the Author:
K. Raman is the Practice Head of the Infocomm, Media & Education Practice at Tata Strategic Management
Group. He has worked with various organizations in sectors undergoing rapid transformation like IT, Telecom
and Education, helping them identify key shifts in markets and dimensioning the impact of such changes. In
the IT sector he is involved with various mid-sized companies advising them on business model changes
required for sustaining and accelerating growth.
Kaustav Ganguli is the Engagement Manager with Tata Strategic Management Group’s Infocomm, Media &
Education practice. He has significant experience in providing advisory services on strategic issues to
organizations both in India and abroad. He has had functional and consulting experience in IT / ITeS sectors
and has provided strategic advice on issues related to growth, business model & profitability to several
organizations in the Indian IT & ITeS sectors.
Nirmal, 18th Floor, Nariman Point, Mumbai 400021, India
Tel 91-22-66376712 Fax 91-22-66376600
url: www.tsmg.com email: raman.kalyanakrishnan@tsmg.com