Information technology companies have always looked West. Their major markets and sources for the

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latest technologies was the US and Europe. They had a great time till recession hit the industrialised world with the force of an economic tsunami.

That’s when IT firms — Indian and multinational in the country started seriously looking at markets in their backyard. And the government sector has emerged as lucrative area for such companies. Although some attention has been paid to this sector for the last five years, it’s only recently that companies have looking at it as a lucrative market.

The government has become the cynosure of all eyes among Indian and multinational information technology firms. Even the Nasscom has decided to focus on it in its Leadership Forum 2010.

There are several figures being bandied about the market size of the government that is also being seen as a business sector. Analysts say the national e-governance programme (NeGP) driven by the ministry of IT and Communications has grown to be worth Rs 40,000-42,000 crore in five years. Of this, about Rs 20,000 crore projects have already been executed or are in the process.

According to estimates, there an addressable market of Rs 22,000 crore from the central government in next three to five years, apart from other projects by the central and state governments. This compares favourable with the total domestic IT market of Rs 66,200 crore in the present financial year.

New projects include setting up of state data centres, proposed contracts by agriculture ministry and rail ministry, municipality projects and those under the NeGP. Metro and monorail projects in several cities and weather department’s need to upgrade with the latest technologies.

The unique identification (UID) project is another big project that is drawing IT companies. Three requests for proposals (RFPs) in the area of consultancy, biometrics and application development have come out. A significant portion of the work scope is expected to be IT related.

“Government spending is increasing rapidly in India. The scale of opportunity to partner with the government is huge. IT firms need to think how can they help in areas like healthcare, education, land record and e-governance and `what can they do on UID or similar projects?” Pramod Bhasin, CEO, Genpact, told Financial Chronicle.

Apart from core IT projects around UID, companies also see opportunities from downstream projects linked to UID. For instance, software in banks might need to undergo a change. Ditto, software applications in state government application platforms.

“The process of bidding is different from what happens in corporate contracts. In the government, the officials are conscious that they are part of a public system. So they follow the process strictly and while doing so might ignore some technologies or bits, which may be better in the circumstances,” general manager, government, Wipro Infotech, Ranbir Singh said.

He said last minute changes happen in the corporate sector, not in government. Wipro has about 40 people on the front-end sales team for government sector in India and is building it up further. The technology team at the back-end supports it.

“In government process, there are no retakes. You put in a price offer, and if it is the lowest, the company wins it. You can’t change or give it again. Estimating and identifying the right price and working out our best solutions to fit into low budgets is also a challenge,” he added.

These are some challenges, which both. the customer and the companies are aware of. Its not only large companies, there are many mid-sized firms who are strong regionally and compete for these projects, especially at state level.

“Definitely, government IT sector is opening up at the central and state level. The maturity curve is improving over the last six years and government IT outcome is more than what IT companies’ inputs are. Real transformation is now taking place in the IT sector from the government,” vice president and head (government industry solutions unit) of TCS Tanmoy Chakrabarty said.

However, apart from the advantages of the brand, there are also disadvantages like the customer always expects a firm like Wipro to deliver a project whatever the circumstances. “Advantage is that we can be more aggressive on pricing since we are larger and can absorb costs, also equipment vendors like Cisco and Microsoft are our partners,” Singh said.

A senior official from another top IT firm said, on condition of anonymity, that undercutting on price does happen in some projects but not from large companies since they have policies and risk mitigation plans in place which don’t allow it.

“Some mid-sized firms cut corners, thinking that after they have won the contract, they can determine how to execute the project by working it around with partners and sub-contractors,” the official said.

However, he said the government has recognised this, and they try to put certain conditions and criteria in bidding to stop this. For instance, for a project running into thousands of crore, a company will have to be of a certain size and scale and should have capability to offer end-to-end solutions like SI, hardware equipment, software development and BPO.

Zinnov Management Consultancy engagement manager Karthik Ananth says, “There are major differences between government and corporate contracts. In the former, there are nodal agencies like National Institute for Smart Government (NISG) in Hyderabad that are in charge of procurement.”

He said companies have to be empanelled and approved by NISG to take part in government IT projects. They have to meet certain criteria like number of years of its existence, provide case studies and three-year balance sheets, among other things.

Because of low budgets and stringent need to control costs, companies decide a cost and work backwards – they set a price and then decide what technologies, systems and number of people based on it.

“Earlier, it was just a couple of companies like CMC, which went in for government projects. In last two years, firms like Wipro, TCS, IBM and Infosys are participating. They have been successful on the national level,” he said.

But on a state government level, several small companies like Comat Technologies in Karnataka for Bhoomi project have also been successful, he added.

In the words of senior vice-president and India business head of MindTree P K Gopalakrishnan there is no assessment of what happens in the IT area in a particular year. “The market is so big, it is difficult to assess since it comprises central, state governments, municipalities, defence and public sector units. This is unlike the structured situation in sectors like banking,” he said.

He said awarding of contracts take anywhere between 12 and 18 months. Also the delivery could be for a longer period, which means revenues will be staggered even if the contract size is big. For instance, it could be a Rs 100 crore contract for 10 years, which will mean Rs 10 crore per year — calculating that into company revenues is difficult.

As for MindTree, he said the company was looking at small and mid-sized deals both at state and central government level that are part of the national e-governance plan. “There are some programmes we don’t qualify for because of our size,” he added.

Most companies in the IT sector are betting on future government projects. Chakrabarty said TCS at present has miniscule revenues from the government in its overall business, but it targets double-digit growth in the next three years.

The CEO of NIIT Technologies Arvind Thakur says the company is waiting for details about the massive UID project. “We are interested in the UID programme and are waiting for the requests for proposals to come out.”

The firm is also looking at other central projects, especially in the areas of power, defence and internal security. “About 10 per cent of our revenue comes from domestic market. This year, we have stepped up our focus on India and in particular government programmes,’’ he said.

Although the business can be lucrative, the companies have to understand how to do business with the government. “The government is a different type of client. There are different rules and ways of business services. The standard way of selling doesn’t work with the government,” says joint CEO of Wipro Technologies Girish Paranjpe said.

As the government projects come within the focal points of companies too busy making from foreign contracts, the nature of doing IT business in India is set to change. The smart ones have already got a foothold in the sector. Others are making a beeline for it.