Report warns India IT sector of global and domestic risks

The just released Goldman Sachs Equity Research Report paints an optimistic picture and predicts a very high growth trajectory path; but it has also cautioned that in order to fully realize and cash in on this huge potential, as also build out cross-border IT services, Indian companies have to overcome major domestic and global risks, besides key valuation challenges.

The report says that while technical re-engineering and in-depth vertical organizational understanding would be key lifting factors in India's IT services game. India's service providers must scale the value chain to improve project scope, tap more diversified global markets, continue to attract the best people, and maintain globally respected positioning; it likewise adds India's domestic technology infrastructure, political risk perception, and high degree of civil bureaucracy should also improve significantly.

One of the major area of concern is the slowdown in the global IT spending, particularly in the US - as global markets constitute bulk of revenues for Indian Companies - the US being the largest contributor!

Report stressed the need for IT services providers to increase their global diversification - as Indian companies have not always had an easy time penetrating non-English speaking markets. (India has the largest pool of English speaking technical people outside the US!)

Another area highlighted was the problem of brain drain. Unless the Government provides Indians entrepreneurs with a favorable environment to implement their business plans - which includes not only better infrastructural facilities but also facilitation of IT business, they would leave for the shores of other countries like the US. Today over one-third of the Silicon Valley start-ups have Indians at the helm! This is one of the reasons why India has not evolved into a regional hub. What can be perceived from the above is that the difference between the hub and the skills-surplus nations are infrastructure and perceived risk. The Philippines, China and Indonesia have been successful in exporting skills but have not been as effective in building domestic infrastructure or improving the political perceptions needed to evolve into a regional hub.

The Report suggests Indian Companies should seriously take note of for safety and insulation is

  • High attrition rates

  • Effectively managing high expectations following hype

  • Potential distractions from ramping up into new business lines that require different core competencies, expertise and even capital structures

  • Moving into venture capital business models

  • International diversification

  • Global expansion

  • Acquisition risks

  • Integration issues